We must see the easing of current account deficit, that is, the fall in foreign fund requirement, as an “improvement.”

Balance of payments figures for June were announced. As expected, the fall in current account deficit continues. Cumulative deficit over the last twelve months was $63.5 billion, implying a drop of more than $10 billion year-on-year. The most remarkable development was that the non-energy current account balance, which had a deficit consecutively for the last 27 months, recorded a slight surplus in June. Therefore, non-energy current account deficit for the last twelve months decreased to $12 billion, almost $22 billion lower compared to the same period last year.

Wheels of the economy turn slowly

Please note that I reported the changes in current account balance with words like “fall” or “decrease” and intentionally avoided using the word “improvement.” The latter rather refers to a qualitative change and implies a judgment. Whether or not you will consider the fall in current account deficit an “improvement” depends on which perspective you embrace. So, let’s take a look from both today.

The first one is the growth perspective. In the first half of the year exports showed an increase, though at a rate significantly below that in 2011. On the other hand, over the same period imports stood below the level recorded in 2011. This trend is more apparent for non-energy imports. Therefore, we know that the fall in current account deficit resulted to a large extent from stagnant imports. And what this means is even clearer: the wheels of the economy turn slowly. Growth rate in the first half was 3.4 percent (3.2 percent in the first quarter), which is below Turkey’s potential growth rate. At the end of 2012 growth will be below the potential while current account deficit in proportion to GDP will be around 7-8 percent the lowest. In the past, we wouldn’t interpret this scene favorably. So, from this perspective, it is absolutely impossible to see the drop in current account deficit as an improvement.

Europe in a chaos

The second one is the financing perspective. Europe is in turmoil and near future is uncertain. If Germany goes on with its obstinacy and the European Central Bank fails to take the steps long awaited by many economists, financial markets might be dragged into a major chaos. For Turkey and its peers, this means that international capital inflow will halt and capital will rush towards safe havens. By the way, let me state that net capital inflows to Turkey in the first half of the year was $9.3 billion lower compared to the same period in 2011. If Europe will be drifted into a storm (or hurricane?) Turkey had better not be caught with a high foreign fund requirement (high current account deficit). Otherwise, we will face sharp exchange rate and interest rate movements, followed by sudden drops in output. There is nothing Turkey can do regarding the current state in Europe. Yet, it is possible to take action in advance to mitigate negative outcomes. So, from this perspective, the easing of current account deficit, that is, the fall in foreign fund requirement marks an “improvement.”

This commentary was published in Radikal daily on 14.08.2012