But we have to note that we still have the CAD at around 8 percent of the country's gross domestic product (GDP), which is above the level that caused the previous crisis in Turkey. And the cost of this is slower economic growth, forecast to be around 3.5-4 percent, and higher inflation for the last couple of quarters. Eventually, inflation will die out if we don't have too much exchange rate volatility, and we are hoping that the trade balance will further be improved.
The financing of the CAD was becoming problematic in 2011 as short-term portfolio investments in bonds and stocks were becoming the main financing tool of the deficit together with the international loans of the commercial banks. These are quite volatile methods for two reasons. One is “short-term outflow is as easy as inflow” and once they see the profit, they can flee overseas, leaving significant pressure on exchange rates, and hence inflation and the cost of domestic production rises. Secondly, commercial banks often get short-term financing from abroad and sell it as long-term credit, which causes a maturity mismatch and banks become vulnerable to unexpected volatilities. These have both declined by around 6 percent while direct investments modestly increased.
There is another positive note, which is inflow exceeding outflow by $7.5 billion. This is added to the central bank reserves, and the reserves exceeded $103 billion this week. However, the government does not deserve much credit here since this is purely the result of the independent central bank policies
An 8 percent CAD level is still unsustainable in the long term. So these staggering growth numbers will continue together with tight monetary and fiscal policy.
However, the industry is not happy with these developments, and people have already started to voice their concerns. Lower growth numbers will eventually raise question marks and cause a substantial decline in consumer confidence and spending. This may positively contribute to low savings, and the performance may be better. But the business sector would suffer. We saw this in the last annualized industrial production increase, which happened to be around 2.7 percent. This is sluggish growth, which will not contribute to the success story. Should this situation not improve, it will certainly be unbearable for the government in an election year in the future. That's why there will be enormous pressure on the central bank from the business sector. “How will the government respond?” is the million-dollar question.
On the other hand, developments in Syria and the European debt crisis are also major concerns. If the volatile situation continues until winter, with the refugees on the border together with terrorist activities, there may be warning signs for investors in those regions. Any European turmoil that dries out the liquidity from the markets is also another burden that is being monitored closely.