No country can sustain such a high current account deficit over GDP ratio for a decade.

Given the radically low domestic savings rate, current account deficit has to be assessed on the finance side. Of course this perspective ignores Turkey’s international competitiveness. For instance, it neglects productivity, production cost and exchange rate developments. Similarly, it leaves the economic outlook in the export markets (income growth) and domestic demand movements out off the analysis. Yet, it is obvious that the deficit finance-oriented perspective does not mean that other factors are insignificant. It is impossible to address all elements in a single commentary, though.

Figure 1: Net capital inflows minus current account deficit (financing surplus), January 2007 – December 2012 (billion $, three-month total)

Source: The Central Bank of Turkey

So, here is the current account deficit analyzed from the deficit-finance window: since April, Turkey has been able to finance the deficit unlike the late 2011 and the first quarter of 2012. Figure 1 shows the difference between the finance requirement for the current account deficit and the net capital inflow from 2007 to present. Positive values indicate that inflow was larger than finance requirement and vice versa. Also, the values for each month represent the total finance surplus for the previous three months.

In 2012, current account deficit was $48.9 billion while net capital inflow was $65.7 billion. The total GDP figure for 2012 is not announced yet, but current account deficit over GDP ratio will probably be slightly below 6.5 percent. This is a great success compared to the 10 percent in 2011.

On the other hand, when you take a snapshot rather than make a comparative assessment, 6.5 percent current account deficit over GDP ratio is still high. And it was recorded in a year where growth will be rather slow around 2.2 or 2.3 percent. In a nutshell, the snapshot implies that Turkey suffers from a bitter “slow growth-high current account deficit” phenomenon.

Given the current external conditions, Turkey can easily finance the current account deficit at this level or even higher. But only if the current circumstances prevail. Otherwise, a 6.5 percent current account deficit over GDP ratio definitely might become a nightmare for Turkey. For those who do not agree, I just want to remind that the ratio was never as high before the global crisis.

The picture is clear: neither the Central Bank governor Erdem Başçı’s 5x5x5 (5 percent inflation, 5 percent growth and 5 percent current account deficit), nor Kemal Derviş’s 6x6x6 are desirable targets for Turkey. These might have been declared as short-term targets, of course. But I am interested rather in the possible medium-term risks. No country can sustain a current account deficit over GDP ratio at 5 or 6 percent for a decade, for instance. It is important to raise GDP growth to 5 or 6 percent without recording 5 or 6 percent current account deficit over GDP ratio.

This commentary was published in Radikal daily on 14.02.2013