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iShares MSCI Turkey (NYSEArca: TUR) was on top of the world earlier this year before hitting a brick wall. Does Turkey’s economy have what it takes to get the ETF back on track?

According to Today’s Zaman, there are five reasons why Turkey’s economy has been doing better in the past eight years:

  • After a successful currency reform, the Turkish lira is in a position to rival strong Western currencies.
  • The government implemented the Housing Development Administration of Turkey, which boosted the construction industry and cut back in the proliferation of shanty houses.
  • All registered workers in Turkey have social security and access to a health care system.
  • Greater government support for small- and medium-sized enterprises that account for 97% of the economy. Additionally, self-employed persons are get special tax treatment under Turkey’s tax-haven policies.
  • The country has also extended its foreign policy and struck favorable economic partnerships with Africa and Near Eastern countries.

Despite the positive aspects that have boosted Turkey’s economy, there might be a few roadblocks in the future, including:

  • Turkey’s income distribution is not all that even, with around 1% of the population earning 49% of the national income.
  • A majority of growth within the economy is only attributed to housing, automotive and textile sectors.
  • Livestock production is well below efficient. Turkey has 777,000 square kilometers of land that could be utilized for livestock.
  • While Turkey heavily invested in tourism back in the 90s, the country has not been keeping up with strategies to attract middle-class tourists.
  • The logistics and transportation sector is experiencing congestion as rival countries implement adverse policies, such as visa requirements.
  • With European countries posting slower growth, Turkey would do better to find trading partners from the East.

Fitch Ratings analyst Edward Parker stated that “one of the challenges the [Turkish] central bank faces is to reduce inflation and prevent the economy overheating in a challenging policy environment, including large capital inflows and low global interest rates,” reports Selcuk Gokoluk for Bloomberg. The concern is especially justified since Turkey has a “history of relatively high and volatile inflation.”

Inflation has dropped to 7.3% in November from 8.6% in October. The Central Bank’s inflation target is 6.5% this year and 5.5% for 2011, and that will be the economy’s biggest challenge.

Generally speaking, Turkey is well positioned to face down any challenges in the New Year. Despite the recent correction, TUR still remains 4% above its trend line, so if you’re mindful of the risks and still want to get in, the trend is up for now.

Max Chen contributed to this article.

Disclosure: None

Source: iShares Turkey ETF: Looking for a Turnaround