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Great Graphic: Visualizing Turkey's Short Term Capital Inflows

People that follow me here know that I like to post graphics that help one to visualize some of the complex topics one reads about. With Turkey in the news so much over the last couple of weeks, and especially yesterday with their huge interest rate hike, its important to drill down to what is at the core of the problem for Turkey.

Mainly, that is the fact that it has gotten very used to foreign capital inflows, which has helped it to run large capital account deficits. The problem with this strategy is that markets participants are fickle, and short term capital inflows can become outflows if the economic (or political) situation gets murky. That is what has happened with Turkey.

The image above does a very good job of showing us Turkey's dependance on short-term flows and why the central bank is trying to make it more attractive for foreigners to park their funds in the country by raising interest rates. However, that doesn't always work out that way.