Turkey’s external vulnerabilities back under the microscope

Turkey’s recent diplomatic spat with the US – and the subsequent sell-off in financial markets – has refocussed attention on the economy’s external vulnerabilities. We have two areas of concern: the increasing reliance of Turkish banks on wholesale funding and the recent rise in the share of the current account deficit being financed by portfolio inflows. Both make Turkey’s economy more exposed to a sudden rise in investor risk aversion.