A number of people argue that Turkey will grow by 3.5 to 5 percent in 2010. The lower threshold of this interval was defined by the Medium Term Program declared in September. To put it differently, analysts are more optimistic than the official estimates. In mid-November, I also provided a number of growth estimations and joined the group of optimistic analysts. Such analysis of mine estimated 3.8 to 3.9 percent growth for 2010.

When you hear similar estimations from a number of people, you get skeptic. After all you get influenced by what you read or hear. So maybe this interaction was quite strong for 2010 growth. Apart from this possible interaction, there are various factors that maintain 2010 growth estimations at high levels. The most emphasized one of these is surely the risk that the expected moderate recovery in developed economies does not take place. Such a possibility clearly affects Turkey's exports and thus growth adversely.

There also is another risk factor indigenous to Turkey, which is how the 'net errors and omissions' item under the balance of payments will be shaped in 2010. Let me open the issue up. As the estimates of Institute of International Finance (IIF) in June suggests, capital flows to countries like Turkey will just barely reach 2008 levels. In short, in 2010 capital abundance as was in 2006 and 2007, for instance, will not be enjoyed in 2010 though capital volume will almost be tripled compared to 2009.

Turkey was highly affected by this adverse development in 2009. In 2007 and 2008, net capital inflow to Turkey was $45 billion and $35 billion, respectively whereas the net capital inflow for the first 10 months of 2009 is below $2 billion. Non-bank private sector, particularly, was highly affected by this situation. The sector, which accessed $30 billion foreign funds in 2007 and 2008, transferred net $11.4 billion funds abroad over the first 10 months of this year.

One of the reasons why this sharp 'U' curve did not further the rise in exchange rate and the fall in growth rate stems from the changes in the 'net errors and omissions' item under the balance of payments. Net errors and omissions item for the first three quarters of 2008 is recorded at minus $1.6 billion. However, over the period covering the last quarter of 2008 and the first half of 2009, $13.6 billion foreign exchange inflow from an 'undefined source' is recorded.

2010 growth will be affected considerably by the volume of international capital inflows. It is already hard to make estimations about the item itself. However, you also have to estimate net errors and omissions. The basis scenario for 2010, as I suggested in November made the following assumption: "Over the period covering the last quarter of 2009 and the first half of 2010, both banking and corporate sector will be net foreign debt re-payers. However, volume of funds transferred abroad will drop moderately. The situation will be neutralized in the second half of 2010; i.e. net foreign debt usage will be zero."

This assumption indicates a significant recovery compared to 2009 and is in parallel with the IIF estimates. The rise in the net errors and omissions in 2009 probably stems from the foreign exchange injection into the system out of 'mattress savings' in the context of the 'capital repatriation'. If this injection is to stop in 2010, the positive impact of my assumption for banking and corporate sectors on capital and finance account will disappear as a result of the drop in net errors and omissions item.

However, realization of the growth estimates given at the beginning of the commentary implies higher exports and higher foreign exchange requirement. Also given that developed countries and China will enjoy higher growth rates then 2009, it is a considerably probability that energy prices will rise. Therefore, current account deficit of Turkey will rise. In that case, problems regarding the finance of current account might appear. To put it more correctly, we cannot have such a large current account deficit if we are not able to finance it; and thus we cannot grow at the estimated level.

This commentary was published in Radikal daily on 17.12.2009