Turkey’s gaping current account deficit has long marred the country's economic credibility, but new figures suggest that time may be passing. In the government’s midterm economic program, the 2014 year-end current account deficit was projected at $55 billion, or 6.4% of gross national product (GNP), but the results so far are even better, indicating that that target will be surpassed. Optimism is rising that the year-end current account deficit will be around $50 billion or even lower, or less than 6% of GNP.
Last year, the deficit reached $65 billion, or 7.8% of GNP, far above the levels in other emerging economies: 6.7% in South Africa, 4.3% in India, 3.9% in Chile and 3.5% in Brazil. As a result, tackling the gap became an urgent concern. In remarks in March, Deputy Prime Minister Ali Babacan, who oversees the economy, declared that “reducing the current account deficit is the number one priority,” stressing that Turkey's manageable current account deficit/GNP ratio was 4-5%.
The May current account deficit stood at $3.4 billion, well below the market's expectation of $4 billion, according to Central Bank figures revealed July 11. Thus, the current account deficit for the first five months of the year reached $19.8 billion, down $12.4 billion from the same period last year. On a 12-month basis, the deficit fell from $65 billion to $52.6 billion, indicating that the government’s year-end target of $55 billion has already been surpassed. The reduction of the current account deficit owes much to a similar improvement in the foreign trade deficit, which decreased by $10.8 billion to $22.7 billion in May thanks to rising exports.
According to the Central Bank, Turkey exported $719 million worth of gold in the first five months of the year, in contrast with gold imports worth $5.23 billion during the same period last year. The shift from imports to exports in gold has emerged as a major factor in narrowing the current account deficit.
Revenues from the tourism sector were also on the rise, standing at $8.58 billion, up by $342 million over the same period last year. Tourism spending, meanwhile, rose by $242 million to $2.12 billion.
Deficit reduction plus growth achieved
The optimism that Turkey is “working a miracle” in the current account deficit is backed by a few economic indicators, primarily the simultaneous continuation of economic growth. Narrowing the deficit without maintaining growth would have been an easy task, as a contracting economy means a contracting current account deficit. Reducing the deficit while the economy keeps expanding, however, allows one to speak of success.
Fears that Turkey might fail to achieve its target of 4% growth in 2014 have also eased. Last week, the Organization for Economic Cooperation and Development (OECD) revised upward its growth projection for Turkey, from 2.8% to 3.3%. The OECD report predicted the growth rate will further accelerate in the next two years because Turkey’s short-term macroeconomic outlook had improved, helped along by the global recovery. It stressed, however, that long-term progress required sustained structural reforms to strengthen competition in the economy. According to the OECD, the Turkish economy is overly reliant on externally funded domestic consumption. Hence, economic growth needs to be balanced with monetary and financial policies that will keep inflation, foreign exchange rates and the loan volume at sustainable levels. The OECD projected that the current account deficit would fall to 6.4% of GNP this year.
The falling current account deficit sent the stock market rallying. On July 11, the day the figures were announced, the Istanbul stock exchange’s main index rose 1%, to 79,364 points. On July 14, the first trading day after the weekend, the rally continued, with the index rising another 1.58%, to reach 80,622 points. The resolution of the banking problem in Portugal contributed to the positive mood, both on the Turkish and European stock markets.
Gold, energy and capital inflow
Turkey’s 12-month current account deficit when calculated minus gold amounts to $46.8 billion. This means that Turkey would have had a current account surplus had it not imported large amounts of gold and did not rely on foreign energy supplies. According to Akbank’s economic research department, Turkey would have recorded a $2.6 billion account surplus in May had it not imported gold and energy products.
The foreign capital flows — referred to as “hot money” or the “interest rate lobby” as Prime Minister Recep Tayyip Erdogan calls them — also played a role in decreasing the current account deficit and boosting growth.
In May alone, foreign investors put $1.2 billion in Turkish bonds and $624 million in stock market shares. In addition, there was a $948 million inflow of unknown sources. In the first five months of the year, foreign investment reached $2.7 billion in bonds and $1.6 billion in stock market shares, in addition to direct foreign investments of $3.8 billion. Turkish banks’ debt stock in the same period reached $3.9 billion, including a striking $2.7 billion accumulated in May alone.
According to an Anatolia news agency survey of 17 economists, the highest current account expectation for the year end is $51 billion and the lowest $42 billion.
Turkey’s current account deficit stood at $45.4 billion in 2010, $75 billion in 2011, $48.9 billion in 2012 and $65 billion in 2013. So, a current account deficit of less than $45.4 billion at the end of 2014 would represent its best performance in five years. Today, this prospect is real. Yet, the narrowing of the deficit this year owes much to the increase in exports, which is driven by rising foreign demand amid global recovery. If Turkey manages to sustain the decrease in its current account deficit through next year, it will have a very good reason to be optimistic about overcoming this chronic problem.