The September balance of payments figures have been released and we have seen once again that there is a very strong correlation between Turkey’s growth and its current account deficit. Turkey is a country that has to run a higher current account deficit in order to achieve higher growth rates. In other words, the higher the growth rate, the higher the current account deficit. In short, we have a growth model that can be summarized as “the more current account deficit the more growth”.
In September, the balance of payments posted a current account surplus of USD 1 billion 876 million after three months. This was the highest current account surplus in the last two years. With this figure, the cumulative current account deficit narrowed to USD 40.8 billion in the January-September period. The 12-month deficit, which exceeded USD 60 billion dollars in May, declined to USD 51.7 billion.
These were pleasing and expected figures. Although the contribution of tourism revenues, which reached USD 5 billion per month, to the improvement in the current account balance cannot be ignored, the efforts to suppress domestic demand since May seem to have been reflected in the current account balance. Therefore, the surplus in the current account balance and the cooling in domestic demand and the slowdown in economic activity are consistent with each other.
This leads us to the point of “the more current account deficit, the more growth”
Our model is clear, however unpalatable it may be: Since we do not have the intermediate goods, raw materials and capital goods we need to produce, we have to import them from abroad. Since our domestic savings are insufficient to pay for these imports, we have to turn to the savings of other economies to finance growth. Either through borrowing or through direct investments or portfolio flows, we use the external financing we obtain from abroad to import. Then, using the imported inputs, we produce, in other words, we grow. In the meantime, we export some of what we produce, generating foreign exchange income, but since this income is always less than imports, we run a deficit in foreign trade.
We finance more than 60% of the current account deficit with hot money
We run a deficit to the extent that we can finance the business. In other words, first we find the money and then we buy the inputs that we will use in production. Unfortunately, we are not where we want to be on this side, the financing side. We have to put up with more short-term and hot financing. Since we have been able to attract much less foreign direct investment in recent years, we have to resort to short-term portfolio investments to finance the current account deficit instead of more permanent direct investments. We finance more than 60 percent of the current account deficit with hot money. In recent years, we have had difficulties with that too; we have given up on the cold, we have started to say, “cold or hot, it doesn’t matter, as long as it comes”.
Improvement in current account balance depends on economic cooling
Because of this dependence on short-term borrowing, the amount of current account deficit we can run is largely determined by global market conditions and our borrowing capacity. If there are no doubts in the minds of fund holders about our economy, if global conditions are favorable for borrowing, and if Turkey is able to offer enough returns to attract this capital, we have the opportunity to run a larger deficit and achieve higher growth.
Treasury and Finance Minister Mehmet Simsek points to a USD 7.3 billion improvement in the current account balance in the last two months. “We expect this improvement to continue in line with our program projections,” he says.
As Simsek says, the improvement in the current account balance may continue in the coming months depending on the cooling in the economy. However, this improvement does not mean that we have solved the current account deficit problem. The current account balance is improving because the economy is cooling and we are settling for lower growth.
In short, less growth, less imports and less current account deficit…