It is quite pleasing that current account deficit has been decreasing and the quality of finance has been improving.

Balance of payments figures for May were announced. Since 2010, high current account deficit and the large share of short term funds in deficit finance have been the major vulnerabilities of the Turkish economy. In October 2011, two-month cumulative current account deficit reached a record high $78.3 billion. Since then, the rate has been decreasing. Current account deficit in May was $67 billion, indicating a fall by $11.3 billion since October. Also, non-energy current account deficit decreased considerably. One of Turkey’s major vulnerabilities has been easing.

Capital inflows pick up

The second striking point was that the finance requirement stemming from current account deficit was not met with “normal” sources, but with official reserves and net errors and omissions accounts. In other words, net capital inflows stood below the amount required to finance the current account deficit. In February and March, finance requirement and the amount of normal finance were at par. Finally in April and May, net capital inflows were substantially above the finance requirement: $8.1 billion compared to $5.8 billion. In addition, the share of short term funds in finance requirement has been decreasing.

The third point relates to gold exports. As signaled by previous figures on foreign trade, Turkey sustained its position as a net gold importer, recorded under the non-monetary exports component. In the 1985-2011 period, it was only in 2009 that Turkey was a net gold exporter. During the global crisis, gold imports almost halted while exports boomed. This obviously had to do with the global crisis. However, Turkey was a net gold exporter each month since the beginning of the year. According to comments and articles highlighted by the media, the main reason is that payments to Iran are made with gold. As I stressed on Saturday, this temporary trend has contributed to Turkey’s GDP growth in the first quarter by almost 0.6 points.

The role of gold exports

As the Union of Turkish Exporters data that exclude bar gold exports suggest, in the second quarter exports increased year-on-year by 2.5 percent while the rate was 9 percent in the first quarter. Therefore, the contribution of non-gold exports to growth was much lower in the second quarter than it was in the first quarter. Yet, the positive contribution of bar gold exports in the second quarter will offset this to a certain extent.

It is quite pleasing that current account deficit has been decreasing and the quality of finance has been improving. But we need to keep the focus on the driving factors. In the first quarter of 2012, domestic demand picked up only by 0.9 percent year-on-year. Therefore, import requirement decreased. That domestic demand almost halted in the second quarter had a major role in the easing of the current account deficit. In the second quarter, the rise in domestic demand will be relatively stronger. Yet, the outcome will not change much. Concerning exports, the role of gold exports must be kept in mind.

This commentary was published in Radikal daily on 12.07.2012