Posted by meb at January 10th, 2008

Turkey’s year-to-date current account deficit widened by 11.6 percent to $32.758 billion in November 2007, as the January-October data was revised upward to $29.48 billion from $29.06 billion. At this rate, the deficit constitutes 6.4 percent of Gross Domestic Product, still higher than the IMF/World Bank-determined “threshold” of 6 percent. A figure above 6 percent means a risk of devaluation. Still, the figure is an improvement over last year, as in June 2006, the ratio was 7.5 percent. Additionally, the 12-month trailing current account deficit rose to $35.74 billion in November from $35.16 billion in October 2007, Türkiye Ekonomi Bankası (TEB) reported Tuesday. However, the November data came in $3.27 billion less than the market consensus estimate of $3.61 billion and TEB’s conservative estimate of $3.75 billion.

Key drivers of deficit:  Sertan Kargın, chief economist at TEB, said the development as such is not a cause of concern. “We are not concerned about the current account deficit thanks to robust Foreign Direct Investment (FDI) stock, record high foreign exchange reserves, and solid non-debt creating capital inflows,” he told the Turkish Daily News yesterday.

TEB listed the key factors driving the current account deficit as the trade gap and profit transfers abroad, which create a new risk criterion in the long term. “The widening trade gap was mainly due to higher import substitution in intermediate goods, the overvaluation of the Turkish lira, record high oil and commodity prices, private sector capital investments, and the spillover impact of fiscal loosening on domestic demand.”

FDI may set a new record in 2008:

Kargın believes that non-debt creating capital inflows to Turkey will continue this year. “In 2008, we expect Turkey to raise an additional $20 billion to $25 billion through FDI, and $4 billion to $5 billion via global investors’ equity and Turkish lira (YTL) debt instrument purchases,” he said. Global growth conditions are the key risk for Turkey’s current account outlook, according to Kargın. “In our view, a consumption-led global slowdown is creating a risk on the current account balance as Turkey’s foreign demand sensitive export industries account for 60 percent of total exports,” Kargın said. ”Furthermore, exports are highly sensitive to foreign demand rather than the exchange rate.

Thus the potential weakness of the YTL appears not to insulate Turkey’s external balances and manufacturing output from adverse impacts of a global slowdown,” he added. Meanhile, Turkey may attract a record level of foreign direct investment (FDI) this year, helping to finance a current account deficit that is set to widen as oil prices rise, read a Raymond James Securities report. Turkey will probably get $23 billion of FDI in 2008, Özgür AltuÄŸ, chief economist at Raymond James in Istanbul, said in the report published earlier this week. That will finance less than half of a current account gap that’s likely to swell to more than $50 billion, also a record, reported Bloomberg, citing AltuÄŸ. Almost two-thirds of foreign investment is likely to come from the sale of government assets, such as lender Halkbank and power generation and distribution companies, he added.

Turkey attracted almost $20 billion of direct investment in 2006, and about $16 billion in the first 10 months of last year, according to Central Bank figures. It needs the money to finance a trade gap that has widened as Turkey, which imports almost all its energy requirements, paid more for oil and natural gas. Threats to Turkey’s ability to attract investment include the lack of global liquidity and the lira’s appreciation against the dollar and euro, AltuÄŸ said.

source: Turkish Daily News