It was a privilege for Al-Monitor to discuss the latest economic developments in Turkey with Kemal Dervis, vice president and director of the Brookings Institution's Global Economy and Development program and former head of the United Nations Development Programme. As a former minister of economic affairs for Turkey, Dervis is respected as an authority on that country's economy. He, in fact, is known as the savior of the Turkish economy for the extensive, successful reform program that he introduced while minister of economic affairs — in response to the disastrous 2001 economic crisis — and to which subsequent Justice and Development Party (AKP) governments remained loyal. He shared his thoughts with Al-Monitor in an interview in Istanbul on Feb. 1.

Al-Monitor:  Last week, the Turkish Central Bank's interest rates hike increased concern over financial stability in the country. The responses varied, from divided reactions in the business community to the main opposition party [faulting] Prime Minister [Recep Tayyip Erdogan]. Pessimistic analysts claim, “The good times are over," while optimistic analyses recommend not panicking. Is it right to blame any single actor or factor in this situation?

Dervis:  I don’t think there is a single factor … First of all, I don’t think that Turkey in this moment is in a very serious economic and financial crisis. I think it is in social and political turmoil. The economy is not what it was in 2001, when I first came many years ago, because many factors have changed. First of all, the public debt to GDP [gross domestic product] ratio has declined a lot, and that is a very important factor, though you can’t just rely on that. Second, the banks are highly capitalized, and that of course means that they are quite solid, and they can withstand a lot of turmoil. Now, having said that, the situation is difficult and challenging. It is so partly because of international factors. There is a general loss of appetite toward emerging market financial assets — which is to some degree linked to the Federal Reserve tapering policy — but I think that can be exaggerated, as there are such waves. Now, of course those countries that are most vulnerable in such situations are those that are in greatest need of short-term financial capital or, which is the same thing, that have very large current account deficits that are not financed by long-term flows. Unfortunately, Turkey is one of these countries and through that it is vulnerable.

The structural issue in the Turkish economy has been for many years that when the growth rate goes up, the current account deficit goes up, and it goes up to unsustainable levels. It went up almost to 10% some years ago. Policies try to control it, but then the growth rate is lower. And even though with a growth rate that is only in the 3-4% range, the current account deficit is not 10%, but it is 6-7%, which is very high. So, Turkey has a current account problem and too much need for foreign capital and not enough domestic savings.