Tag: current account deficit

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.

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.

Turkey Current Account Gap Narrows for 12th Month on Imports

By David Neylan – Dec 11, 2012 11:41 AM GMT+0100

Turkey’s current-account deficit narrowed for the 12th straight month in October as slowing economic growth curbed demand for imported goods and gold sales to Iran and the U.A.E. boosted exports.

The gap shrank to $2 billion from $4.5 billion a year earlier, the central bank in Ankara said on its website today. It was forecast at $2 billion according to the median estimate of 11 economists surveyed by Bloomberg.

Turkey’s current-account deficit has dropped to about a fifth of the March 2011 high of $9.5 billion. As shipments of precious metals abroad slow and the central bank seeks to spur growth, the narrowing of the gap may soon bottom out, or reverse, analysts said.

“I think the narrowing trend in the current account deficit has come, or is coming to an end,” Inan Demir, chief economist at Finansbank AS in Istanbul, said in a telephone interview. “I would be much more confident of this in the absence of the gold exports.”

Turkey’s gold trade with neighboring Iran has helped shrink its trade deficit over the past year, with precious metals accounting for about half of the almost $21 billion decline. That’s calmed investor concern over the current-account gap, and helped persuade Fitch Ratings to give Turkey its first investment-grade rating since 1994. Two-year note yields slid 524 basis points this year, the most worldwide.

Gold Exports

Turkey exported $11.9 billion of gold in the first 10 months of the year, with 85 percent of it going to Iran and the United Arab Emirates.

The current-account deficit may fall to $57.3 billion by year-end, according to the central bank’s latest bi-weekly survey of economists. That compares with $77.1 billion last year, when Turkey had the second-biggest deficit in the world, behind the U.S.

Turkey’s economy grew at a pace of 1.6 percent in the third quarter, according to figures released yesterday. It was the slowest rate since the third quarter of 2009.

The deficit “should be bottoming out if we think economic activity will pick up,” Sengul Dagdeviren, chief economist of ING Bank AS in Istanbul, said in a phone interview. “If we see a narrowing in the current account, it won’t be a good sign as it will mean weaker growth is continuing.”

Lower Inflation

Turkey’s inflation rate declined to 6.4 percent in November, the lowest in 14 months, freeing central bank Governor Erdem Basci to reduce his benchmark 5.75 percent interest rate and stimulate growth in the economy of almost $800 billion. Inflation was 10.5 percent at the end of last year.

Basci last cut his benchmark policy rate to 5.75 percent in August 2011, extending a boom in lending that helped swell the current-account deficit to about 10 percent of gross domestic product by year-end.

The lira strengthened 0.2 percent to 1.7866 per dollar at 11:46 a.m. in Istanbul today. Yields on benchmark two year bonds declined 1 basis point, or 0.1 percentage point, to 5.76 percent.

via Turkey Current Account Gap Narrows for 12th Month on Imports – Bloomberg.