Economic Update

The release of data last week by the Union of Chambers and Commodity Exchanges (TOBB) concerning the size of Turkey’s current account deficit produced widespread jitters in Turkey’s financial community. With the figures showing year-end targets for the deficit already surpassed, the rosy picture of ever decreasing inflation and consistent growth presented by the government in recent months has begun to look a lot more questionable.

An 88% increase in the current account deficit from January to July y-o-y, is after all, nothing to shrug at. By the middle of this year, the current account deficit stood at $9.95bn, way above the $5.09bn it had stood at the year before.

No surprises then that the government has been forced to raise its year-end current account deficit — up from $7.6bn to $10.8bn. Yet even this seems highly optimistic, given the mid-year figure.

Vulnerability is likely to have intensified with oil prices soaring over the summer months. Turkish authorities have, however, been trying hard to allay fears that high international crude oil prices may force domestic prices up. Yet, while claiming that global oil prices do not at present threaten inflation targets, Economy Minister Ali Babacan conceded on August 26 that lowering inflation in the future would pose something of a challenge. Turkey imports much of its energy needs, with 66% of the country’s total energy requirements flowing in from abroad, according to 2001 official figures.

Government officials have also been pushing the line that while the current account deficit may have widened in the first half of the year, the summer months usually see this narrow, as receipts from tourism begin to flood into the economy, while harvests see agricultural produce step forward to boost the export market.

Yet, worryingly, exports have not picked up over the summer. In August, Turkish goods and services going abroad totalled some $4.7bn – the lowest level for the last six months, according to the Turkish Exporters Assembly (TIM.) This is not to deny consistent growth in external trade, with exports projected to inject over $1bn into the economy by the end of 2004. But the government is clearly unable to rely on trade as a relief to the budget deficit, with imports in automobiles, crude oil, iron-steel and machinery exacerbating the squeeze.

State Statistics Institute (DIE) figures released end of July showed the trade deficit widened by 73.6% to $19.4bn in the first seven months of the year, up from $11.1bn in the same period last year. Telling then that State Minister Kursat Tuzmen recently pointed to a possible trade deficit of $30bn by year-end.

Against this background, it comes as little surprise that optimism amongst Turkey’s small and medium size enterprises (SMEs) is waning. A survey conducted recently by Konsensus, a Turkish market research company, showed that 21% of participants believed that the Turkish economy is currently in bad shape — in stark contrast to the 10.1% who felt this back in January. Similarly, those from the sample who are pessimistic about the state of the economy over the coming six months rose to 29.9% in July, up from 10.7% in January.

Given these statistics, ratings agency Moody’s warned in July that the current account gap could lead to a lira devaluation – which would have a highly unpleasant effect on the country’s debt. Moody’s warned that such a slide in the lira could lead to Turkey’s debt rising above 100% of GDP.

With business confidence clearly at stake, the government has been quick to respond to rising concern and to downplay the severity of the deficit. In early September, Babacan claimed that the budget deficit was in line with market expectations and that “It is very wrong to talk about the current account deficit as a serious issue.”

Meanwhile, government authorities have suggested they will take measures to rein in the widening deficit – at least as far as they are able to. One sign of this has been government preparations to restrict the use of credit cards. Already the government has increased the rate of the Resource Utilization Support Fund (KKDF) for consumer credits from 10% to 15%. With the cost of credit cards increasing, usage should decrease – thereby reducing domestic demand and, most of all, domestic expenditure on imported goods.

In the meantime, the government has pointed to the booming level of tourist arrivals, with receipts helping to alleviate domestic debt. Already in the first half of 2004, tourism income reached $10bn, with over 11m tourists visiting Turkey during the first eight months of 2004. According to Basaran Ulusoy, President of the Turkey Travel Agents Association, total tourist arrivals may cap 16m by the year’s end. The trend should continue over the coming years too, though subject to regional and domestic stability. In line with such positive projections, local analysts hold that the sector could potentially earn $20-25bn annually – a mouth-watering prospect for Ankara.

At the same time, though the trade deficit continues to be thorn in the side of the government, many analysts point to such costs as a necessary consequence of growth and economic reform. Turkey is currently targeting GNP growth of 5%, with per capita income reaching $4000 for 2004. Meanwhile, with inflation presently officially down to single-digits, Turkey’s target of 12% inflation by the year’s end looks plausible.

Given these economic indicators — and thanks to praise from the IMF — international credit rating agency Fitch upgraded Turkey’s sovereign ratings on August 25. A boost in the long-term foreign and local currency ratings to positive from stable provided an immediate boost to the local market.

With the introduction of the new Turkish lira (YTL) scheduled for beginning of next year, the government is also hoping to shed the more visible sign of Turkey’s roller-coaster economic past – with six zeros struck off banknote denominations. With transactions no longer dealing in mind-boggling trillions or quadrillions, foreign and local investors will have less cause for confusion, whilst the move will also ease the accounting system.

Optimists therefore emphasise that stringent fiscal measures along with relative international stability might see any darker clouds in the economy gradually dissipate. By implication, not all businessmen are downhearted either. According to a recent survey by the Turkish Union of Chambers and Commodities Exchange (TOBB), a total of 42.8% of surveyed businessmen believed that the second half of the year will be bright. In a similar vein, 38% of respondents believed that domestic changes over the course of the first six months of 2004 had resulted positively. Conversely, 23% of respondents believed that the domestic economic climate had been negatively affected. This only testifies to what has been achieved since the 2001 crisis in terms of business confidence.

Yet businessmen will most likely be remaining at the edge of their seats for some time to come. Fundamental to economic health is balanced books, and no matter how positive other indicators may be, the deficit will remain a sticking point unless it is rapidly addressed.