Turkey’s Trade Deficit Spotlights Risks

By JOE PARKINSON

ISTANBUL—Turkey’s trade deficit widened sharply in October, official data showed Tuesday, underlining the emerging economy’s growth but spotlighting an imbalance that analysts say leaves it exposed to external shocks.

According to the Turkish statistics institute, or Turkstat, the October trade deficit expanded to $6.3 billion from $2.7 billion a year earlier, exceeding market expectations of a $5.8 billion deficit.

Driving that expansion was a 35.5% year-to-year rise in imports, to $17.3 billion. Export growth moderated 8.8%, to $11.0 billion, Turkstat said.

The news sent Turkish bonds and the lira lower, extending losses generated by euro-zone debt worries, although shares held firm after sharp declines a day earlier.

Economists said the widening deficit reflected Turkey’s strong consumer-fueled economic growth, but cautioned that with export growth moderating and imports still surging, the trade deficit and, critically, the current-account deficit, were likely to widen further.

“Disappointingly, the data show export growth slowing with imports continuing to boom,” said Timothy Ash, an emerging markets economist at RBS in London. But the figures, he added, are “consistent with a 5% current-account deficit for the full year in 2010.”

Turkey’s economy has recovered rapidly from the economic crisis, posting 10.3% growth in the second quarter, tying China for the fastest growth in the G-20.

But some policy makers and economists are starting to worry that the heavy dependence on imports and domestic demand is magnifying a potentially fatal flaw in its impressive rebound from economic crisis: a blossoming current-account deficit financed by volatile hot money, or speculative investments.

Turkey’s Central Bank Governor Durmus Yilmaz recently warned that the quality of the Turkey’s deficit financing was “a concern,” which may require policy to place “restrictions on demand.”

In September, Finance Minister Mehmet Simsek also expressed doubts about the “quality of financing” entering the country.

For some economists, the starring role that hot money plays in funding Turkey’s yawning current-account deficit is a red flag that could cause problems if another bout of risk-aversion were to drive investors away from emerging markets and into safe havens, such as the U.S. dollar or gold.

“We’re talking about a $40 billion current-account deficit in Turkey this year, which needs financing. The big problem is that the moment the global environment changes and there is a drop in risk appetite, then the money may leave, and then we’re in trouble,” said Murat Ucer, an Istanbul-based analyst at Global Source Partners, an economics-research consulting firm.

Write to Joe Parkinson at joe.parkinson@dowjones.com

via Turkey’s Trade Deficit Spotlights Risks – WSJ.com.