We are about to arrive at the point where fund inflows towards Turkey will be influenced. After that point, there will be no turning back.

I am frequently exposed to the above question nowadays. The answers to the question are diverse. On the one hand are those who say, "There is nothing to worry about. I will do some hocus-pocus and all the pain will go away." On the other hand are those who gaze sententiously with a slightly sarcastic attitude. Today let us analyze what actually will happen, and where this record high current account deficit will drag Turkey. Is it wise to be concerned? Let us proceed from the tail to the head: It is definitely wise to be concerned about the recent movements in the current account deficit. The most concrete evidence of this is the unprecedented monetary policy decisions the Central Bank of Turkey (CBT) took in December 2010. On December 21, I argued that the CBT's decision must be considered as a signal that "the situation is more dangerous than you think." I still am of that opinion. In fact, now the situation is much more dangerous than it was in December. The ratio of the current account deficit to foreign exchange (FX) generating transactions shows the capacity of a country to pay its FX debts. As of the first quarter of 2011, Turkey's capacity to pay its FX debts is worse than it was before the 1994 and 2001 crises. This is what the historic record implies. And this definitely is bad. Let this be the first point. 

Disequilibrium moves
But why did the ratio of the current account deficit to FX generating transactions reach this high? How can Turkey's economy still bear such a huge disequilibrium? There are two reasons why Turkey can still finance such a high level of current account deficit. First, the financial crisis across the European Union countries makes it possible for Turkey to finance a high current account deficit with extremely short-term funds. The savings surplus caused by the disequilibrium there feeds the disequilibrium in Turkey. Second, Turkey is a good basis for the savings surplus caused by the Arab revolts. The Arab revolts also feed the disequilibrium in Turkey's economy. The cause of the tremendous growth in 2010 following the tremendous economic contraction in 2009 is a disequilibrium. And the indicator of this is the tremendous hike in the current account deficit. This is the second point to state. 

The savings problem

Then, where will this record high current account deficit drag Turkey? The current account deficit corresponds to the disequilibrium between domestic investments and domestic savings. If the latter were higher, Turkey would have a current account surplus. What we have now is a current account deficit. Turkey needs foreign savings to offset the domestic savings deficit. This is an ancient problem for Turkey. The reason for the "start-stop syndrome" of Turkey's economy that we are about to forget is actually the same savings problem. What to do, then? There are two options: The government does or does not intervene. If the government decides to intervene, we do not have any problem. In that case, we have three options: to increase tax rates and reduce expenditures, to push up further the credit interest rates, or to intervene with a combination of the two. If the government will not intervene, there is only one alternative to follow: The markets will eliminate the disequilibrium via price adjustment. In that case, all prices will move towards the equilibrium. This is the third point.

So, the issue is as follows: Turkey "unintentionally" exceeded the speed limit in 2010. Is it possible that you pay less for unintentional mistakes? How should I know! This is an issue about yesterday. Today's question must be the following: Does the government still have time to introduce measures against the current account deficit? Yes, it does. We are about to arrive at the point where fund inflows towards Turkey will be influenced. After that point, there is no turning back. I have spoken and saved my soul.

This commentary was published in Radikal daily on 20.05.2011