Turkey’s current account: in better shape – for now

That was quite a drop.

Turkey’s current account deficit, seemingly all but out of control in 2011, plunged in 2012. According to central bank statistics released on Wednesday, the total fell from $77.2bn in 2011, just about the highest in the world outside the US, to $48.9bn last year.

At $4.7bn, the figure for the month of December was well below market expectations of $5.4bn or so. Having previously reached 10 per cent of GDP, the deficit is now at the markedly more manageable level of around 6 per cent.

The Turkish central bank and finance ministry argue that it is all a sign of their success in rebalancing the economy from its unsustainable previous levels of growth (above 8 per cent in both 2010 and 2011). Indeed, at present levels, the deficit is wholly accounted for by the country’s $50bn plus energy import bill.

The fall is undoubtedly impressive, particularly in one short year. But many analysts expect the deficit to widen again later this year, if domestic demand revives. And although exports rose by 13.1 per cent last year compared with 2011, to $152bn, much of the rise was due to direct and indirect gold sales to Iran. That trade is now targeted by US sanctions and unlikely to continue at the pace it experienced last year, for much of which it exceeded $1.5bn a month. There is no mathematical doubt: if all else is equal, a halt in a trade of that scale will mean a bigger deficit.

Meanwhile, as further proof that soft landings are hard to pull off, economists are worrying that the economy may be proving slow to pick up – which is not bad news for the current account figures per se, but hardly welcome in general terms.

There is one last issue of concern, amid the news of a plummeting deficit. Institutions such as Moody’s, the rating agency, often argue that it is not just the size but the financing of Turkey’s deficit that is an issue. And here the news is not altogether good. In 2011, there was $16bn of foreign direct investment in Turkey and Turkish groups invested $2.3bn abroad. In 2012, the figures were, respectively, $12.3bn and $4bn.

That means net foreign direct investment in Turkey was $8.3bn last year, almost 40 per cent down on the previous year – leaving more than 80 per cent of the current account deficit to be financed by (relatively fickle) portfolio flows. In the current, extraordinary era of loose monetary policy in the west, that is not an immediate concern. But it is an enduring structural issue – and a potential point of vulnerability.

via Turkey’s current account: in better shape – for now | beyondbrics.