Turkey: Experts Say Wider Current Account Gap Risky for Economy
Turkey’s current account deficit has reached a second record since 1984 in May, hitting $7.75 billion, according to official data published on Monday. The country’s new Economy Minister Zafer Çağlayan says the gap is not a big problem. Still, many economists disagree
Turkey’s growing foreign trade gap is playing a key role on country’s widening current account deficit, according to some experts and the Central Bank which revealed the fresh data on Monday. Hürriyet photoTurkey’s current account deficit continued to widen in May to $7.75 billion, posting a 163 percent increase compared with the same month in 2010.
Although economists’ opinions diverge regarding the source of the deficit and the real impact of measures taken to cool down the economy, they agree structural changes are essential to achieve improvement.
The deficit was slightly below the market consensus of $7.9 billion, according to Monday’s data revealed by the Central Bank.
The balance posted a net deficit of about $37.3 billion in the first five months of the year, indicating an increase by $20.4 billion over the same period in the previous year, according to official statistics.
“This development is mainly attributable to a $20.5 billion increase in foreign trade deficit,” Turkey’s Central Bank reckoned in its report published Monday.
May’s deficit marked the second-biggest gap since records began in 1984, after the record $9.8 billion in March this year.
“We can surely attribute the widening current account deficit to the country’s rapid growth,” Seyfettin Gürsel, the chairman of Bahçeşehir University’s Economic and Social Research Center, or BETAM, told the Hürriyet Daily News in a phone interview Monday.
A structural problem, however, exists in the economy and must be addressed as soon as possible by the authorities.
“It is not realistic to relate the deterioration in Turkey’s current account balance to rapid [economic] growth,” said Zafer Yükseler, an adviser at the country’s Central Bank, in his research on “Turkey’s comparative current account balance and competitive capacity performance.”
The widening of the deficit during the period between 2005 and 2010 was due to low saving rates, according to Yükseler. This is commonly seen in Greece, Spain, Italy and the U.S. that apply a domestic-demand-weighted growth strategy, he said, adding that such a trend “poses a risk for the country and may weaken Turkey’s position in international markets.”
The 12-month rolling current account gap reached a level of $68.2 billion in May, from $63.4 billion in April, which counts for 9 percent of the country’s estimated gross domestic product, or GDP, according to analysts.
This was “mainly due to strong growth momentum and higher energy and non-energy commodity prices including soaring gold imports,” BGC Partners’ chief economist Özgür Altuğ wrote in a note to investors Monday.
Capital inflows decreased from $9.2 billion to $6.4 billion in May compared to the previous month, due to a portfolio outflow of $0.8 billion.
The drop in portfolio flows reduces the coverage of the current account deficit and leaves Turkey exposed to risks of prolonged risk aversion, according to a short note by Cristian Maggio, an emerging markets strategist at London-based TD Securities on Monday.
“The Central Bank’s quantitative tightening measures seem to be ineffective for now and this adds to pressures on Turkey’s assets,” he said.
The deficit continued widening despite the 21 percent increase in tourism revenue during the first five months of the year, compared to the same period last year. Revenue coming from tourism and the “Net Errors and Omissions” item were the two key contributors to the financing of the current account deficit. The latter item was $4.5 billion in May, recording a figure of $8.4 billion in the first five months of the year.
Turkey managed to increase its foreign exchange reserves by $8.2 billion in the first five months thanks to the ongoing daily foreign exchange buying auctions of the Central Bank.
As most economists said they expected the gap to hit $75 billion by yearend, seeing it as the Turkey’s major economic concern, Economy Minister Zafer Çağlayan said it did not pose a risk for the country.
“Together with being an issue that requires special attention, the current account deficit does not pose a risk for Turkey for the time being,” Çağlayan told journalists on Monday, after a meeting he had with representatives from Ankara Chamber of Industry.
“Economic vulnerability due to the widening current account deficit is considerable, and needs urgent attention,” said Nurhan Toğuç, chief economist of Ata Investment, in a short note to investors Monday.
Oil prices are likely to calm down, given slower global growth expectations in the second half of the year, she said, adding that “the CBT’s measures on credit growth are likely to slow domestic demand, both reflecting positively on current account deficit.”
“The external deficit is a structural problem and requires extensive structural measures,” Oyak Securities said in a report Monday.
“Weakening the lira might not be an effective policy,” BETAM’s Gürsel said, adding that structural reforms to make the industry more competitive were a must.
July 11, 2011
SOURCE: Hürriyet Daily News
