The Current Account Debate

The current account deficit closed 2004 at record levels. At the beginning of 2005 the government set a target of reducing the deficit a little. Economists were less optimistic but were expecting the current account deficit at least to remain at the same level as 2004 because they believed that the economic slowdown during the second half of 2004 would stem the rapid increase in the current account deficit.

But during the first half of 2005 neither the government’s target nor the economists forecasts were realised. Despite the economic slowdown the current account deficit continued to widen. This meant that the current account deficit, which had come onto the agenda from time to time over the previous two years, once again became the most hotly debated topic.

As far as we can tell, this debate has two main parts. The first is how the current account deficit is still continuing to widen so rapidly despite the economic slowdown. This again raises the question, which was much discussed at this time last year, of whether the current account deficit is mainly the product of economic growth or the appreciation of the New Turkish Lira (YTL).

The second part of the current account debate is how the debate is financed. On the one side are those who are worried that the current account deficit is financed by inflows of hot money and on the other those who argue that it is financed by inflows of foreign capital and an increase in banks’ long-term loans, which would represent a high quality of financing. Attention has also been drawn to item in the list of financing resources referred to as ‘net errors and deficiencies’.

The results of a study

The August 2005 issue of the academic research journal İktisat, İşletme ve Finans contains a study addressing just this question. Adnan Kasman, Evrim Turgutlu and Gonca Konyalı from Dokuz Eylül University in Izmir have written an article entitled “Is the current account deficit the result of an excessive appreciation in the Turkish Lira?” In the article the authors attempt to find an answer to this question by using econometric methodologies to analyse quarterly data for the period 1980 Q1 to 2004 Q3.

In the conclusion to their study, Kasman and his colleagues state that the increase in the current account deficit is the result of both growth and the excessive appreciation of the Turkish Lira but that the appreciation of the Turkish Lira plays a more influential role. In models in which the two variables are taken together, a one percent increase in the growth rate results in a $2.3 billion widening in the current account deficit, while a 1 percent appreciation in the Turkish Lira produces a growth of $3.7 billion in the current account deficit. In models in which the two variables are taken separately, a one percent increase in the growth rate results in an increase of $3.8 billion in the current account deficit, while a one percent appreciation in the Turkish Lira produces an increase of $6.6 billion in the current account deficit.

The results of this study shed some light on the situation in which we currently find ourselves. There has been a slowdown in the economy over the last year but the YTL remains at historical highs. Despite the economic slowdown the rate of growth in the current account deficit has not slowed. The reason for this appears to be that the overvalued YTL has meant that imports of intermediary goods have continued to be attractive.

The results of this survey show that it is not possible to control the problems of the current account deficit solely through an economic slowdown. In addition to an economic slowdown, the YTL also needs to fall in value. But it is unclear how, under the floating exchange rate regime, the Central Bank can bring this about by interfering with the exchange rates.

Interest from foreign capital

Coming to the second part of the debate… We saw and experienced the effects of movements of short-term capital, known as hot money, in 1994 and 2001. For this reason, last year economists were very concerned by the fact that hot money appeared to be playing the leading role in financing the current account deficit.

The healthiest way to finance the current account deficit is direct foreign capital investments. For this reason, the news that there had been an increase in foreign investor interest in Turkey during the first half of the year was greeted with pleasure and relief.

But when we look at the balance of payments data we see that this interest has yet to be sufficiently reflected in the statistics. There has been an increase in the level of direct investment inflow into Turkey (from $1.500 billion in January-June 2004 to $1.839 billion in January-June 2005) but when we factor in the capital that has left Turkey then there is no significant change. During the first six months of the year new investment inflow into Turkey was $931 million. During the first six months of last year this figure was slightly higher at $960 million.

On the financing side, it is only banks’ use of long-term credits that provides any relief. During the first six months of last year banks secured $1.312 billion in long term credits. In the first six months of this year the figure rose to $4.488 billion. Long-term credit utilisation is as firm a source of financing as direct investment and, unlike hot money, there is no danger of it suddenly leaving the country.

The debate will continue

In 2004 the current account deficit stood at $15.5 billion, which was equivalent to 5.2 percent of national income. Before the 1994 crisis this rate stood at 3.5 percent, while before the 2001 crisis it was 4.9 percent. The government target for the current account deficit in 2005 was $10.6 billion, while the general expectation was for around $15-16 billion. If the current account deficit comes in at the government target, or even the general expectation, then the rate of the current account deficit to national income will be less than last year, which will go some way to relieving the current concerns.

But at the end of June the current account deficit stood at $19.3 billion. The forecast for the end of the year is for up to $22 billion. If this happens, then the rate of the current account deficit to national income will be more than last year at the equivalent of around 6 percent.

If, in the months ahead, the increase in foreign investor interest in Turkey begins to be reflected in the balance of payments then such a growth will not trigger too many concerns. But, if this does not happen, then tensions will rise. In such a situation the government will have to take new measures to reduce the current account deficit. In order to do this it will have to either allow the economy to cool or find a way to manipulate the exchange rates. Even if tourism revenue brings some relief to the balance of payments over the next couple of months, it looks as if, as winter approaches, this topic will be at the top of the agenda.

THE OIL BILL WILL BE NEARLY 9 BILLION DOLLARS

According to data from the State Planning Organisation (SPO), during the first five months of the year Turkey imported 70.1 million barrels of crude oil, for which it paid $3.072 billion. The average price of oil during this period was $43.8 per barrel.

In fact, the global price of oil is currently very high and in the last few days has risen over $60. But Turkey uses Arab oil, which is cheaper, and buys oil for less than the prevailing price under agreements concluded before it was imported. But it cannot avoid the price it pays rising in parallel with the increase in the global cost of oil. This means that it looks as though by the end of the year the average import cost of a barrel of oil will be around $50.

Last year Turkey imported 176.5 million barrels of oil, for which it paid a bill of $6.091 billion. In years when the price of oil has risen Turkey has reduced imports by turning to its stocks and domestic resources. As a result, we can expect total imports of oil to fall to around 175 million barrels this year. It looks as if these imports may cost close to $9 billion.