Mainly the result of the foreign trade deficit, the CAD has become a structural problem for Turkey. An anticipated slowdown in economic growth and a narrowing foreign trade deficit is expected to tame the country's CAD this year. Observers argued Friday's data signaled a soft landing for the economy through the end of the year. These comments follow earlier speculation that the country -- one of the world's fastest growing economies in 2011 -- could find its markets hitting the ground hard. Almost all indicators in the first quarter, however, defy claims that markets could ebb. A better and more likely scenario than this is that the Turkish economy experiences a “controlled slowdown,” as most market experts put it.
The central bank's balance of payments report released on Friday shows the CAD between January and March at $16.17 billion. The CAD in the month of March recorded an even better recovery with a 35.9 percent decline compared to March 2011. The CAD in the third month was $3.43 billion lower than in the same four weeks of 2011, at $6.1 billion. The figures come as a direct result of cooling domestic markets, observers argue. Turkey's foreign trade deficit -- the major factor responsible for high CAD -- declined $3.9 billion in the first quarter over the same months of 2011, while net revenue from services increased by $609 million, and net spending declined by $857 million in the same period. All of these developments serve to strengthen the authorities' hands in keeping the CAD under control.
By the month of March Turkey's year-on-year CAD amounted to $71.8 billion, compared to $75.2 billion in the same month of 2011. The central bank's Monetary Policy Committee (PPK) meeting in April concluded that the decline in the CAD would continue in the months to follow. The bank said a recently introduced government incentive package could help minimize the CAD. Meanwhile the first Survey of Expectations in May has shown that the markets anticipate the year-end CAD to be around $65.6 billion. This is $200 million higher than the government estimated in their Medium-term Economic Program (OVP). The main sub-items under investment income, namely direct investment, portfolio investments and other investment consisting of interest income and expenditures, recorded a net outflow of $1.9 billion in January-March, a $872 million decline over the same months of 2011.
Evaluating the latest figures in a report on Friday, the Bahçeşehir University Center for Economic and Social Research (BETAM) noted that Turkey's industrial production index in the first quarter declined by 1.5 percent over the same period of 2011 and said: “Also, the speed of growth in exports was higher than in imports in the same period. Turkey's foreign trade deficit in March declined to $7.4 billion.” The center estimated the annual growth in the first quarter over the same quarter of 2011 at 3.5 percent. The CAD in Turkey last year was 9.9 percent of gross domestic product (GDP), among the highest in the world. BETAM estimates this figure to be around 9.3 percent in the first quarter.
Meanwhile, in what was regarded as a “reserve lifebuoy,” the central bank report said a total amount of $3.84 billion in “hot money” entered Turkish markets in the first quarter, with $2.2 billion of this arriving in March. The bank said the source of the money was not known. Some observers speculated this could be Gulf capital. What business circles refer to as a “mysterious” hot money inflow reached a total of $11.9 billion in 2011.
Fitch sees Turkey soft landing; trade gap a worry
Fitch Ratings sees evidence that Turkey is on track for a soft landing but wants to see more progress on inflation and sustainable growth before raising the country's rating to investment grade, a senior official said on Friday.
Ed Parker, head of EMEA ratings, told a conference: "Evidence suggests Turkey is on track for a soft landing, there are encouraging trends in current account adjustments and import and export dynamics."
But he added: "We are concerned about the high level of current account deficit and external financing needs in the current global environment." Parker, speaking at a banking conference organized by Mitsubishi-UFJ Securities, said global uncertainties would weigh on Turkey given its deficit, deleveraging by eurozone banks and the central bank's poor track record on inflation. Annual price growth is running at 11 percent, data showed in April, more than double the central bank's 5 percent target for 2012. Economic growth is also expected to slow sharply from last year's 8.5 percent, with the IMF predicting 2.3 percent. "If we see further progress on achieving a soft landing and see inflation heading to the central bank's target and see Turkey getting back to its potential growth rate then the chances of an upgrade will increase," Parker added. Fitch rates Turkey BB+, just a notch under investment grade. Moody's and Standard & Poor's rate it a rung lower and S&P recently caused a furor by cutting the country's sovereign rating outlook to stable from negative. Parker indicated that Turkey's elevation to investment grade is unlikely to be very soon. "Turkey has potential to get to investment grade within the next two to three years," he added. London Reuters