Konjonktur

CURRENT ACCOUNT DEFICIT IN 2005

Turkey’s current account posted a deficit of $15.6 billion in 2004, a new record. It was the first time Turkey had ever recorded such a high deficit. It is likely that 2004 also represented a new record in terms of the current account as a proportion of national income, which is a more important indicator from the perspective of sustainability. The data for national income in 2004 have yet to be announced, so it is impossible to say anything for certain, but the current account deficit is estimated to be equivalent to 5.3 percent of national income. This is the highest ever level for the current account deficit as a proportion of national income since data began to be recorded in 1950. The highest previous rate was in 1977 when it stood at 5.1 percent.

Given that in Turkey each record for the current account deficit has been followed by a crisis, the increase in 2004 is a matter for considerable concern. The rapid rise in the current account deficit in the first half of the year in particular meant that our hearts were in our mouths. The volatility on the financial markets in spring played an important part in this increase.

However, the fact that it was still possible to find sufficient – even more than sufficient -- foreign resources to finance the current account deficit meant that our fears were not realized in 2004. With the beginning of an economic slowdown in the second half of the year the fears gradually began to dissipate.

But after the year-end figures for 2004 were announced, last month we again witnessed discussions about the current account deficit. Some economists have transferred their concerns for 2004 to 2005. These economists insist that the result of this process will be a crisis like in 2001. On the other hand, there are those who argue that the structure of the economy has now changed and that the problem of the current account deficit will be solved with a soft landing.

As this topic is of such vital important to the health of the economy and thus also to business etc. it should be examined in greater detail.

The forecasts are for a fall

The government’s target for the current account deficit in 2005 represents a significant decline on 2004. According to the data contained in the 2005 Program, the current account deficit this year will be $10.6 billion. This would mean that the current account deficit would be 3.6 percent of the target for national income.

If everything goes according to the government’s targets, we won’t have any problems with the current account this year. But it is a fact that the Turkish economy does not usually meet the targets set by the government. For example, the target for the current account deficit in 2004 was $7.6 billion, but it actually turned out to be twice as much.

In order to have an idea of what the current account deficit will be in 2001, one needs to look at the forecasts by local and foreign institutions.

You can see some of the forecasts that we have been able to collect in the table on the second page. What is noticeable in this table is that the forecast of the International Monetary Fund (IMF) is very close to that of the government. But it is possible to attribute this similarity to the fact that the government is applying an economic program in cooperation with the IMF. For this reason, it is worth giving greater attention to the other forecasts.

When we look at the other forecasts, with the exception of Yapı Kredi Bankası, we do not see any institution which is predicting a rise compared with 2004. The forecasts predict a slight fall compared with 2004. For example, the Organization for Economic Cooperation and Development (OECD) expects the current account deficit to be $14.3 billion in 2005. While the Turkish Industrialists’ and Businessmen’s Association (TÜSİAD) is predicting $15 billion.

The impact of a slowdown

We think the forecasts of a fall in the current account in 2005 are reasonable. In fact, this is why our own prediction is that the deficit will be $14 billion.

The basic reason for both our and the other institutions’ prediction of a decline in the current account deficit in 2005 is the expectation of an economic slowdown compared with 2004. When the economy slows down, less imported raw materials and semi-finished goods are needed for production. Of course, this will also reduce imports and, as a result, the current account deficit.

There also appears to be a correlation between the forecasts for the current account deficit and those for the growth rate. Those who expect the rate of economic slowdown to be less, predict a high current account deficit, while those who expect a higher rate of slowdown forecast a lower deficit. For example, TÜSİAD, which predicts a growth rate of 6.5 percent in 2005, down from 8.5 percent in 2004, forecasts a current account deficit of $15 billion, while the Economist Intelligence Unit (EIU) foresees a growth rate of 5.3 percent in 2005 and a current account deficit of $14 billion.

Of course, at this point it is necessary to go into a little more detail on how the economy is going to slow down in 2005.

The most important reason is that domestic demand is not going to be as strong as it was last year. In automotives and consumer durables the realization of demand which had been postponed since the crisis of 2001, boosted production last year and resulted in a very high growth rate. But that postponed demand is now exhausted. There has been no increase in the purchasing power of the public, which could have created a new demand. Wages and salaries are still set according to the target for inflation and this prevents the return of the purchasing power that was lost in the 2001 crisis.

Imports will fall

Other factors which helped fuel the growth in 2004 were an increase in exports and modernization investments. The rapid rate of increase in exports over the last two years is expected to continue this year. The increasing confidence in the future of Turkey is forecast to boost new investments. It is thought that these factors will soften the impact of the decline in domestic demand and enable the economy to grow by 5-6 percent.

The fact that postponed demand has been exhausted will slow economic growth and both directly and indirectly curb imports. The money expended on imported cars alone last year fuelled an increase of $2 billion in the current account deficit. When one looks at all consumer goods, then this figure is nearly $6 billion. The removal of the postponed demand will be beneficial in reducing the current account deficit.

Another factor which had an impact on the rise in the foreign trade gap last year was the rise in the bill for crude oil as a result of the extraordinary increase in the price of oil. In 2003 Turkey spent $4.8 billion on imports of crude oil, rising to $6.1 billion in 2004. The price of crude oil is expected to fall a little in 2005 to under $40 a barrel. If this expectation is realized then it will have a positive impact on the foreign trade balance.

Financing is still important

As far as we can tell, the predictions of a slight fall in the current account deficit in 2005 compared with 2004 appear reasonable. But despite this decline, the current account deficit will still be high in 2005. It looks as though it will be more than the equivalent of 4 percent of national income. In such a situation, even if it is not higher than in 2004, the financing of the current account deficit will still be an important issue.

In 2004 we were able to find the foreign resources to finance the current account deficit because of the increase in foreign confidence in Turkey. As a result of the stabilization program that was implemented with the IMF, over a period of three years, inflation was reduced from over 60 percent to single figures, which is no mean achievement. Moreover, we managed this in an environment in which the economy was growing rapidly. These developments were secured as the result of discipline in monetary and fiscal policies, and raised Turkey’s international prestige. In addition, at the end of the year we really became the focus of foreign attention when the European Union (EU) opened its doors to Turkey.

If there is a new standby agreement with the IMF and the accession process towards EU membership continues without any hitches, then Turkey will preserve its international prestige in 2005. This is what is expected to happen and there will be an increase in direct foreign investment this year. This will ensure that, once again, there is no problem with financing the current account deficit.

In fact, the delay in signing a new standby agreement and the recent friction with the IMF over the investment incentives law are a little worrying. But we have seen such behavior from the government in the past and most people expect them to sign an agreement with the IMF at the last moment. For this reason, there is still no development which looks as if it can change the expectations for 2005.

The recent elections in the Turkish Republic of Northern Cyprus (TRNC) and the continuation of the process towards EU membership were concluded positively. It is well known that the opening of membership negotiations on 3 October has been linked to a solution to the Cyprus problem. From this perspective, the victory in the TRNC elections of the coalition partners in the current government, who favor a solution, is reassuring. There will now first be the election for the presidency and then from spring onwards the government is expected to take measures to try to solve the Cyprus problem,

POSITIVE DEVIATIONS IN BUDGETARY TARGETS

Indeed, as we were preparing the Conjuncture section, the Ministry of Finance announced the budgetary figures for January. But, as their late publication meant that we were unable to include them in our issue last month, we would like first to evaluate the performance of the budget in 2004.

The realized budgetary figures for 2004 diverged considerably from the targets set at the beginning of the year but the deviation was positive.

The budget deficit, which had been targeted at YTL 45.8 billion, was realized as YTL 30.3 billion. The budget deficit was even lower than the prediction of YTL 34 billion, which was announced in the fall as the targets were being formulated for 2005.

One of the reasons for the positive deviation from the budgetary deficit target was the realization of lower than expected interest payments. The decline in interest rates meant that interest payments were YTL 9.6 billion less than the original targets in the 2004 budget.

The second reason for the positive deviation from the budgetary deficit target was that revenue was YTL 5.8 billion higher than targeted. The faster than expected rate of growth in the economy was positively reflected in tax revenue. Profit transfers by state-owned banks and repayments by the Savings Deposit Insurance Fund (SDIF) to the Treasury resulted in an increase in non-tax revenue.

Of course, the developments which produced a lower than expected budget deficit meant that the primary surplus was higher than expected. The primary surplus, which had been targeted as YTL 20.2 billion, was realized as YTL 26.2 billion. The primary surplus was thus equivalent to 6.2 percent of national income, compared with an original target of 4.8 percent.

Coming to the results for the budget in January… The successful performance of the fiscal policies appear to have spilled over into this year. In January the budget deficit was YTL 1 billion. In the same month last year it was YTL 5.3 billion. The primary surplus in January was YTL 4.2 billion. In the same month last year it was YTL 677 million.