TEPAV: “Current Account Deficit Problem Now More Dangerous” TEPAV stated that the rapid deterioration in the current account deficit resulted from the buoyant economic growth driven by domestic demand and stressed that the characteristics of the current account deficit problem of Turkey have changed considerably.

ANKARA - TEPAV stated that the characteristics of the current account deficit problem of Turkey have changed considerably and said: "The rapid deterioration in the current account deficit resulted from the buoyant economic growth driven by domestic demand in the absence of export recovery. The economy heated up excessively in 2010. The main challenge for the economy management in 2011 seems to be cooling down the economy."

Evaluation note with the title "Current Account Deficit Dynamics: Different This Time?" by TEPAV Economic Policy Analyst Sarp Kalkan was published. The note underlined that along with the rapid economic recovery, current account deficit problem immediately became the top item on Turkey's agenda. The note drew attention to IMF's warning in the monitoring note that said: "Turkey's main challenge is determining the right policy mix in the face of vulnerabilities arising from excessive domestic demand and volatile short-term capital flows."

Quality of finance deteriorated

Seeking and answer to the question "What are the factors that make the recent current account deficit debates disparate and more dangerous?" the note said:

"We can talk about two new developments. First, current account deficit became to be financed increasingly via short-term funds. Second, the ratio of current account deficit to FX (foreign exchange) earning capacity reached to record-high levels.

Foreign fund use in Turkey, which was historically below US$20 billion, has increased steeply after 2005 reaching above US$50 billion per year. In the said period the majority of the funds used were long term. Out of the total amount of foreign funds used, 76 percent in 2006 and 95 percent in 2007 were long term funds. However, with the crisis, foreign fund inflows diminished sharply and fell to US$3.7 billion by the end of 2009. In 2010 fund inflows recovered rapidly and reached above US$50 billion again. Although foreign fund use recovered in quantitative terms, there appears a striking qualitative deterioration. 94% of the foreign funds used in 2010 were short term indicating this severe qualitative deterioration.

Composition of the short term fund inflows reveal that portfolio inflows called as hot money constitute an important share. US$19.6 billion out of the total short-term fund inflows came from the 'hot money' inflows. "

Accumulation of risks in the banking sector...

The evaluation maintained that detailed examination of the data reveals a remarkable risk accumulation in the banking sector and added: "Short term foreign credits used by banks in 2010 elevated by US$12.2 billion. Moreover, the deposits foreign banks held in Turkish banks increased by US$15.6 billion. This implies deterioration in the liability structure of the banking industry, which reaches approximately 5% of the banking assets."

Repayment capacity weakens

TEPAV's evaluation note underlined that repayment capacity is an important indicator with respect to the sustainability of the deficit. Maintaining that the change in the ratio of the current account deficit to FX generating transactions over the last two decades reveals vulnerabilities during the crises following rapid hikes in 1993 and 2000, the note added:

"The ratio stood around 30% at the outburst of both of the crises which might imply that the said is a critical threshold for Turkey. With the impact of the relative macroeconomic stability and rapid export growth in the aftermaths of the 2001 crisis, it took five years for the ratio to reach 30%.  Although the ratio dropped to 10% along with the global crisis, it then reached to a historic level in only one year. Here, weak recovery in export performance is as important as the rapid increase in the current account deficit. To put it differently, the problems regarding Turkey's export markets reiterate the severity of the current account deficit problem."

The economy heated up

The evaluation note emphasized that the characteristics of the current account deficit problem of Turkey have changed considerably and concluded:

"Turkey's main challenge in 2011 is implementing the measures necessary to slowdown domestic demand that intensifies current account deficit. The rapid deterioration in the current account deficit resulted from the buoyant economic growth driven by domestic demand in the absence of export recovery. The economy heated up excessively in 2010. The main challenge for the economy management in 2011 seems to be cooling down the economy. It, however, is a matter of debate whether this will be attempted on the eve of the general elections and a possible cabinet change."