Let’s assume that until today not even a dime has left and will leave Turkey. Is this enough for a relief?

“Fund outflow from Turkey was rather limited.” they say. They give figures and evaluate those on news shows. They breathe a sigh of relief claiming that what we feared did not happen. Then they get a bit confused about increases in exchange rate and interest rate.

Let’s assume that until today not even a dime has left and will leave Turkey. Is this enough for a relief?

Far from it. There are two reasons. First, there is a considerable gap between FX liabilities and FX earnings of Turkey, in favor of the former. In other words, current account deficit is rather high. It was $48 billion in 2012 and $36 billion in the first half of 2013. Assume that in the twelve months ahead the deficit will be $60 billion, indicating Turkey’s foreign finance requirement, that is, the volume of new FX inflow Turkey needs.

The second reason is about our “past sins.” Assume that Turkey will have zero current account deficit in the period ahead so that FX revenues from exportation of goods and services will meet the FX liabilities resulting from the imports. How about the liabilities we have undertaken to meet previous years’ deficits? Some part will eventually become due, right? Will not we have to pay them back when they become due! Under normal conditions, this is not an issue if you are borrowing as much as the debt due. What if FX inflows halt?

Long story short, even if no outflow is witnessed, Turkey is in need of new FX inflows in order to meet the current account deficit and pay due debts. The outflows referred to in official statements are about foreign investors disposing of the stocks of domestic companies and treasury bills, converting liras to FX and going back to their home country. Such escape was indeed limited, which is what we should expect unless a major crisis erupts.

It’s quite simple why: if all the foreign investors tried to sell in a short time period all the Turkish stocks they held, stock prices would decrease sharply and they would suffer large losses. Same would happen if they tried to sell treasury bonds. And there is more, there is a second stage. They will buy FX with the liras they obtained from the sale of stocks and bonds. This will push exchange rates up, which will lower the amount of FX they could have had otherwise. This is another source of loss for foreign investors.

In short, unless financial tensions turn into severe crises, we should expect limited outflows spread over time. Therefore, the emphasis of the official remarks on the fact that outflows were limited is but natural. There is no reason for a relief here.

Given the current circumstances, what matters is whether or not Turkey can meet its finance requirement with new FX inflows. If it cannot, it will have to reduce its finance requirements, that is, importation of investment goods for infrastructure and factories, less intermediate goods for domestic production, and of energy. What this means at the end of the day is slower growth and lower employment.

This commentary was published in Radikal daily on 07.09.2013