Eye on the Books

Turkey

Economic News

22 Jul 2010
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Whilst the ruling Justice and Development Party (AKP) enjoys an impressive record in terms of prudential fiscal management, economists still sweat over an old thorn in the economy's side - the mounting current account deficit.



Yet while menacing in size, officials deny that this poses a serious or unexpected problem, but global or domestic market jitters could nevertheless prove problematic for the deficit's management.



Indicative of the risk is the extent to which government coffers remain in the red. Turkey's current account deficit rose to $13.7bn in the first half of 2005, marking a 38.3% increase over the same period in 2004. Some economists therefore scoff at the prospect of the government hitting its target of $15bn by the year's end. Keeping the lid on a figure in excess of $20bn may be closer to the mark, they assert, though some see $23bn as more realistic still. This is all thanks to a swelling trade deficit, projected to reach $40bn by the end of 2005.



The high price of oil is a particular headache for a net-importer such as Turkey, with the country's oil import bill rising by 24.8% in July compared to June. This marked a 66.3% increase since July 2004, according to the State Institute of Statistics (DIE).



The occurrence of such natural disasters as Hurricane Katrina in the US, or a jolt in global confidence following increased instability in the OPEC region, could place further pressure on oil prices, with Turkey amongst the first to feel the brunt of the current record-busting hikes.



Then there is also the strength of the New Turkish Lira (TRY), which many regard as something of a double-edged sword. Although representative of Turkey's newfound economic strength, the value of the TRY has dented Turkish exports. A depreciation of the TRY could become necessary in the medium term to alleviate the current account deficit and right the balance of payments, according to recent analysis by the Japan Credit Rating Agency (JCR).



If the current account deficit continues increasing at the current rate, its ratio to GDP could cap 6%. The ratio after all rose to 5.1% in 2004 from 3.4% in 2003, with a further spike expected for 2005.



All the more concerning is the fact that the current account deficit is being financed largely by short-term financial capital and foreign currency in cash. Notable were recent projections by Erhan Ozmen, chairman of Turkey's Young Businessmen Confederation, that for 2005, tourism incomes should amount to $18bn-20bn, contracting services $7bn and foreign currencies brought in by labour $3.5bn. But such revenue is volatile and could quickly leave the country should an overall drop in business confidence occur. Political events such as the continuing tension over Cyprus and consequent uncertainty over Turkey's EU membership drive, or any upscale in the activities of ethnic Kurdish separatists in the south-east, could be concerns in this regard.



Nevertheless, the government has convinced many economists and businessmen that the current account deficit is in fact under control. State Minister and Chief Negotiator for EU Accession Talks Ali Babacan has on numerous occasions pointed out that a slowdown in exports and national income was expected under the government's programme, while a portion of the current account deficit would be offset by a record inflow of foreign direct investment (FDI) this year - an amount that would be registered in the balance of payments only in the second half of 2005. The government is thus sticking to a target deficit of $15bn by the year's end.



There is no denying that the rate of privatisation in Turkey has been particularly impressive this year, either. Since the beginning of 2005, Turkey has succeeded in selling $9bn worth of state assets, according to a recent statement by Turkey's minister of trade and industry, Ali Coskun. If all goes to plan, 2005 should close with $15bn worth of private revenue channelled into state coffers via sell offs.



The government has remained consistent in its commitment to a tight fiscal policy in the past, suggesting that it will do as much as it can to prevent economic imbalances from getting out of hand in the future. Maintaining a positive economic track record in line with EU requirements is also a top priority.



The government also points to positive economic indicators over the TRY. Contrary to fears prior to its introduction, the new currency has not accelerated inflation. Babacan therefore claims that he has no intention of devaluing the currency, with inflation hovering between 7 and 8%. The fact that the TRY has been accepted by world financial markets is also indicative of the level of successful economic reform at home and the government's commitment to growth and stability.



Still, the current account deficit remains a concern for economists and policy makers alike. Whilst the government claims that the economy is on track, domestic and international uncertainties - whether in the form of a natural disaster, a surge in violence or setback in negotiations with Brussels - could herald a rude awakening, with the current account deficit then becoming far less containable than it appears at present. This however is not a prospect that is likely to have been overlooked by the Turkish government, let alone the International Monetary Fund (IMF), with which it is working closely.

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