So is this where Turkey ends up? Balance of payments figures out on Tuesday show that the country had a $5.6bn current account deficit for the month of January.

While broadly in line with expectations that seems to confirms a pattern some may find unsettling: a year of big falls in the deficit has come to an end, and the still hefty monthly total is overwhelmingly financed by portfolio funds rather than foreign direct investment.

The January figure brought the 12 month rolling deficit to $46.8bn from $46.9bn in December. That change is very small potatoes when compared to the vertiginous drop in the full year total of $75bn, or almost 10 per cent of GDP, in 2011. (The numbers have been revised to account for higher tourism revenues than previously included.)

Most analysts expect the deficit to widen again this year, though not to the levels of 2011, as domestic demands cranks up again. William Jackson of Capital Economics in London noted that on a 12-month rolling basis imports already rose by $1.3bn in January from December.

But what adds to his concern are financing issues. “Foreign direct investment has fallen back, which is exactly the opposite of what you would want to happen,” he said, comparing the $13.7bn net FDI inflow in 2011 with $8.3bn in 2012 and highlighting that the rolling 12 month figure edged down further in January, to $8bn.

That leaves the lion’s share of the $46.8bn deficit underwritten by portfolio funds – moreover the effect on FDI has yet to be seen of the government’s recent decision to scrap a showpiece $5.7bn privatisation, won by, among others, Malaysia’s sovereign wealth fund.

Jackson wrote: “The upshot is that the economy appears to be accelerating, but this is coming at the cost of rising external vulnerabilities… The prospect of a hard landing further down the line continues to linger in the background.”

And yet the allure of Turkey remains, deficit and financing problems notwithstanding. In a separate report on the new “Growth Stars”, Capital Economics enthused about the prospects for sub-Saharan Africa and southeast Asia, but also emphasises that Turkey, together with Poland and Mexico, should experience “strong rates of growth”.

via Turkey current account: a little lacking in the FDI department | beyondbrics.

By Yeliz Candemir

ISTANBUL—Back in November, it seemed like only a matter of time.

Turkish assets were leaping to record highs after Fitch Ratings awarded Turkey its first investment grade credit rating for nearly two decades. With Turkey’s economy rebalancing more rapidly than expected, market analysts confidently predicted Standard and Poor’s and Moody’s Investors Service would also upgrade Turkey in 2013, a move that promised to send waves of fresh foreign investment to the Turkish economy.

But in recent weeks, confidence over fresh ratings upgrades has been replaced by uncertainty.

As Turkey’s economy has picked up since January following a sharp slowdown last year, ratings firms have again highlighted the resurgent risk of Turkey’s key economic weakness: an expanding current-account deficit.

Fitch Ratings said on Thursday that although economic developments in Turkey have been favorable since they awarded Ankara an upgrade, the economy would remain “volatile” and “vulnerable to shocks.” The remarks, made in a conference in London, appeared to signal a negative shift in tone from the rater which until recently had been overwhelmingly positive.

Analysts said the caution would effectively scupper the prospect of other ratings firms bumping Turkey to investment grade.

“Given Fitch’s comments, I guess it is now very unlikely that either Moody’s or S&P will give Turkey that much sought-after second investment grade rating any time soon,” said Tim Ash, head of emerging markets research with Standard Bank and long-time advocate of a Turkey upgrade. “Indeed, I no longer expect it this year, unless we see the Turkish economy re-accelerate on the growth front this year but with no widening in the current-account deficit, which I think is unlikely.”

Turkey’s current-account deficit, or short-term international funding needs, narrowed to 6.1% of gross domestic product last year from a massive 10% of GDP in 2011, after a sharp slowdown of the economy reduced booming consumer demand which had fueled the finance gap. That rebalancing was faster than expected, lauded by markets as evidence that Turkey’s economy was on a more secure path.

But expectations that the economy will grow 4% this year after an estimated growth rate of 2.5% in 2012 is feeding investor nerves that rising consumption may again widen the current-account gap to around 7% of GDP.

Latest data showed that Turkey’s trade gap widened in January for the first time since October 2011 signaling that, for some economists, the rebalancing had come to an end. “The best is behind us as far as the external adjustment is concerned… A salutary external adjustment story won’t be there to support the lira this year,” Ilker Domac of Citigroup C +1.97% wrote in a research note.

Aggravating those concerns is central bank’s move to finance the deficit mainly through flows from foreign funds, leaving the economy vulnerable to the whims of international investors. In a bid to reassure investors, the central bank has repeatedly voiced its commitment to keep loan growth around 15% this year and rein in speculative capital inflow to avoid appreciation of the lira and widening of the deficit.

The upshot is that markets appear again to be eyeing the resurfacing of vulnerabilities (bad) rather than the continued rebalancing (good).

Moody’s said in January it kept the country’s Ba1 rating with a positive outlook in a credit opinion and it still emphasized “substantial external vulnerabilities” and said the government would snatch an upgrade to investment status by reducing its current-account deficit, cutting private borrowing abroad and building foreign-exchange reserves. Standard & Poor’s cautious ratings on Turkey’s economy have so irked Ankara that Turkey’s government refused to renew the rating agency’s license in January.

Fitch is betting Turkey’s current account deficit will be 6.5% of GDP this year, higher than the maximum 5% of GDP that most economists say is sustainable. Meanwhile, most analysts expect the deficit to remain elevated around 7% in 2013 as domestic demand is expected to rebound.

“We expect the current account deficit to be between 7.5% and 8% of GDP this year, indicating a significant deterioration… I think a rating upgrade window for either a Moody’s or S&P upgrade is gradually closing,” said Inan Demir, an economist with Finansbank, said in a phone interview.

via Investment Grade Prospects Fading for Turkey? – Emerging Europe Real Time – WSJ.