Current account deficit and fragilities deriving from hot money flows

While the 2012 budget and macroeconomic equilibrium figures are being finalized, it is becoming apparent that there has not been too much of a change in the general dynamics of the economy. In short, as the Turkish economy is growing, the current account deficit is growing; when the growth rates fall then the current account deficit also decreases relatively.

In this context, it can be seen that the Turkish economy’s need for hot money to be able to grow is continuing as always. As a matter of fact, there are those who say that the need for this external source required for growth has become even bigger.

We saw, when looking at the balance of payments figures last week, that the figure for the current account deficit was a little lower than expected, at $4.5 billion. The current account deficit for 12 months at the end of October was $52.8 billion and the figure became $51.9 billion at the end of November.

The gold trade occupied a special place at the 2012 balance of payments table. While there were $4.8 billion of gold imported in the first 11 months of the previous year, last year, during the same period, imports reached $5.4 billion. Thus the current account deficit that fell, in the first 11 months of the year, 36 percent compared to the same period one year before, has actually fallen 23 percent when the effect of gold is excluded.

It was observed, though, that the net current account, minus energy and also excluding gold, had a deficit of $200 million in November, the first time since May 2012. Again, excluding seasonal effects and when viewed from three-month averages, it can also be strikingly seen that the recovery that occurred in the current account deficit the year before has now stopped.

Fragility continues
Based on this, markets can now see that the recovery in the current account deficit has stopped and they expect the current account deficit to grow together with the recovery of the economy.

Market experts who calculated that both economic recovery and domestic demand increases have started and that oil prices continue at their high levels under existing circumstances, have started to debate in advance – with the emergence of the equilibriums of 2012 – the current account deficit targets of 2013.

It is expected that the current account deficit figure at the end of this year will be $53 billion; with a 2.7 percent growth estimation, and that this deficit’s ratio to the Gross National Product (GNP) will be 6.5 percent. Market experts agree that in 2013 the ratio of growth to GNP will be 7.5 percent. Of course, this estimate is valid only if the growth rate of 4 percent is met. There are other analysts who estimate both the current account deficit figure and its ratio to the GNP as much higher figures. In other words, there is no change; as the growth rate grows, the current account deficit rate will also grow.

Besides that, it can also be observed that the current account deficit is increasingly being financed by portfolio investments, in other words with hot money, and that foreign borrowing from banks and the private sector increasingly continue.

This is also an indication that the fragility continues; moreover, it has increased.

Thus, protection of economic equilibriums depends on the abundance of global financing and, correspondingly, on the continuation of hot money flow.