European banks in deficit should not choose to close the capital gap by cutting credit supply steeply for Turkey to enjoy easy access to foreign funds.

There is a common anticipation that the Turkish economy will grow at a significantly lower in 2012 compared to 2011. The main reason for such an anticipation, which actually does not match with the latest data, is that fund inflows will slow down due to the European crisis. Yesterday, balance of payments data for November 2011 was announced. So, to what extent the data and the mentioned anticipation are in harmony?

Table 1 shows the standard components of balance of payments for the first three quarters of 2011, October-November (average) and November 2011. The table is composed of three main components: financing, financing requirement and change in reserve assets. The first component has two sub-components: net capital inflows and net errors and omissions. Financing requirement refers to the current account deficit. The difference between financing and financing requirement corresponds to the change in reserve assets where negative sign means a fall in reserve assets and vice versa. 

Capital inflows
There are indicators that the current account balance has been healing to some extent. However, a more detailed analysis is needed to be done. I am willing to address this with another commentary if the economic agenda allows. The contribution of net errors and omissions to current account deficit decreased slightly during the second half of the year. Opposed to the trend observed between July and October 2011, reserve assets increased in November. But let me remind that these refer to official reserves. Due to the reserve requirement policy, some proportion of bank foreign exchange (FX) reserves was transferred to the Central Bank during November and thus became official reserves.

Like many other analysts, I stressed before that net capital inflows to Turkey started to decrease by the second half of 2011. Data for the first three quarters and the October-November average verified this trend. In November, however, capital inflows picked up significantly contrary to the trend observed between July and October but in line with that observed during the first half of the year. If this trend prevails, the dreadful weak growth scenario for 2012 will not come true. 

Which scenario?

So, will this trend prevail? The answer to this question depends again on some possible scenarios. Will the European Central Bank issue significantly more money to gain time to take the steps Europe actually needs? Will it use some proportion of the money to purchase sovereign bonds of troubled countries? Will some part flow to Turkey and its peer countries to earn higher returns? If the answer to the above questions is yes, our fears about 2012 will prove and Turkey could easily access foreign funds. Otherwise, fears might most likely come true. The answer, without a doubt, is “uncertain.” We must note however that for the first option to come true, European banks in deficit should not choose to close the gap by cutting credit supply steeply.

This commentary was published in Radikal daily on 12.01.2012