Turkey’s rebalancing process enters a more difficult phase

The latest data out of Turkey have reinforced our view that the rebalancing process is becoming more challenging. At the heart of the problem is excessively strong domestic demand and the tension between deploying an exchange rate strategy intended to curb inflation while also needing to maintain external competitiveness. There are reasons to expect that domestic demand will soften in the coming quarters, but rebalancing is likely to be uneven and drawn out from here on.