Turkey’s economy: warning signs
Delphine Strauss
Success brings its own problems. In Turkey, the strength of domestic demand is fuelling one of the fastest recoveries from recession among emerging economies. But it is also fuelling rapid expansion in the current account deficit, highlighting the return of a persistent imbalance in the Turkish economy.
But investors have more or less resigned themselves to a pre-election spending spree. A bigger worry for many is the speed with which Turkey’s trade and current account deficits are swelling as imports recover from last year’s slump.
The foreign trade deficit rose from $5.6bn in June to $6.4bn in July, the highest level since August 2008. Illustrating the divergence of Turkish and European growth, auto sector exports fell in July, with overall export growth slowing to 6 per cent year on year, while imports of motor vehicles surged, fuelling a 24.6 per cent surge in overall imports.
Ozgur Altug, economist at BCG Partners in Istanbul, says this latest data suggests the current account deficit could reach $38bn in 2010, more than double last year’s level, and predicts it could balloon to more than $50bn, above 7 per cent of GDP, in 2011.
This is nothing new: Turkey’s current account deficit has persisted throughout the last decade of growth because of a very low savings rate, a dependence on imported energy, and because manufacturers and
exporters rely heavily on imported materials.
But a note published last week by Nouriel Roubini’s Global Economics analysis firm warned: “While the rapid expansion of the deficit is a concern, the real issue is the deterioration in the quality of its financing.”
In recent years, the deficit has been financed largely by foreign direct investment and by Turkish companies overseas borrowing, but now an increasing proportion is plugged by more volatile portfolio investment inflows.
“For the first time in ten years, the figures don’t add up…The risk of Turkish lira depreciation in 2011 has increased significantly,” Altug says.
Turkey’s central bank is alert to the issue, warning in the minutes of its latest monetary policy committee meeting that if Turkey’s robust growth prospects attract further capital inflows, it could “exacerbate the divergence between the pace of recovery in the domestic demand and external demand.” If concerns grew over the financing of the current account deficit, it could “utilize other policy instruments such as reserve requirement ratios and liquidity tools more effectively,” the minutes said.
Ahmet Akarli, an economist at Goldman Sachs whose forecast for Turkish growth is above the average, expects capital inflows to continue, saying: “I don’t think the current account will be a problem any time soon… there is ample liquidity globally.”
But Turkey remains vulnerable to swings in global risk appetite. As Neil Shearing at Capital Economics underlines, the current account deficit “is now at the limits of what might be deemed to be sustainable and the quality of external funding is deteriorating.”
Politicians are unlikely to tackle the reforms needed to address the issue before next year’s elections - but it should be high on the list of priorities for the next government.
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