However January's CAD was $3.9 billion, and behind the monthly reading the 12-month rolling CAD deficit stands unchanged at $38.9 billion.How we can evaluate recent trends in CAD as we consider the recently worsening global and domestic economic situation? Is Turkey loosening its grip on the CAD?
The first observation regarding the CAD on a monthly basis is that it is becoming more stable in 2008. As a matter of fact, the monthly CAD fluctuated around $3 billion until July 2007. After that it began declining and fell to nearly $1.6 billion. As of August and September it stood at $2.2 billion. After that it gained new momentum and exceeded $3 billion. The record monthly CAD, however, as of December, was $5 billion.
At this juncture we must note that the gross domestic product (GDP) growth rate reached bottom in the second half of the year (just 3.4 percent). This polarization between the slowing economy and rising CAD is creating anxiety over the future of the economy in 2008.
There are two explanatory variables in this trend. First, despite the relative economic slowdown, a dramatic rise in major input prices of imported goods such as commodity prices has dominated the positive effect of economic slowdown. Second, a free fall in foreign exchange (particularly the weakening of the dollar) has been triggering imports. Maybe a third factor should be added here: For the last couple of years, overvaluation of the Turkish lira has led to severe erosion of the manufacturing industry, particularly those producing intermediate parts. If this observation is correct, this means that the Turkish economy's import dependency has become a permanent reality, implying that a temporary correction in the foreign exchange market would not reverse the aforementioned erosion.
Apart from this long term-oriented agenda reflecting structural inertia in import dependency, if we look at the CAD of the last two months in 2008, it is seen that the rise in foreign exchange and contraction pressures on economic activity would result in even further "correction" of the CAD. In fact, it is expected that under current conditions, that is to say, worsening domestic and external situations, the expected contribution of a flexible exchange regime would come and play a serious "insurance" role in fixing Turkey's fragile external deficit.
To summarize, the sources of expected correction of the CAD would result from the worsening 2008 slowdown in economic activity, the rise in foreign exchange and presumably from the coming reversals in commodity prices due to weakening global demand pressures. Among those factors, it seems that we will soon begin speaking and complaining of the cost of a severe economic contraction in 2008, as it has more dangerous implications on economic fundamentals.
