Different than 2008 and 2009, current account deficit was financed through short term fund inflows in 2010.

Now it is time to answer the question on the most distinguishing feature of the year 2010 considering Turkey's economy. It is actually quite an easy question to answer: In 2010, the channel of financing current account deficit changed radically. And unfortunately this change is in the adverse direction and highly dangerous.

The data on the finance of current account deficit is available for the first ten months of the year. The figure below gives the level of current account deficit over the said period and the data on finance. The change in the official FX reserves was not considered in the finance column. So if you are interested that figure can be calculated as the difference between the current account deficit and the column on the left. I explain below which items are recorded under short term capital flows. The values with a plus sign corresponding to the current account raw indicate that the current accounts had a deficit. And the values with a minus sign in the finance column reveal that the capital outflow was observed. 

Current account financed by short term funds

Here goes the first striking point: In 2006 and 2007 high current account deficit was witnessed but short term foreign funds were not used to finance the deficit (last column in the figure). On the contrary, both in 2006 and 2007 net capital outflow was observed; that is Turkey paid an amount above the amount of new short term loans. In 2010 current account deficit is again high. But this time substantial proportion of the deficit was financed through short term capital inflows (US$31 million).

Second, short term capital inflows have elevated substantially over the last two years which is obviously associated with the global crisis. Aside from the measures Turkey failed to implement, this is particularly the result of the economic policies implemented by developed countries as also criticized by the economic administration recently. To put it differently, if we do not take any preventive measures, we will live with this phenomenon for some longer.

Short term capital inflows below include net short term borrowing and short term commercial loans by the banking and corporate sector, change in deposits and net errors and omissions. When you go deeper in the analysis, you came across other distinguishing features of the year 2010: first, foreign funds that flew in form of deposits have increased substantially. Second, the rise in the short term borrowing by the banking sector was unprecedentedly high (net borrowing was US$7.1 billion in 2010). In fact, the sector was net shot term foreign debt re-payer in 2006-2007 and 2009 apart from the rise in borrowing.

Under these circumstances, one question appears in my mind: Will the measures implemented by the Central Bank and Bank Regulation and Supervision Agency serve to slow down the hike in credit supply? I will answer it on Thursday.

This commentary was published in Radikal daily on 03.01.2011