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Turkish economy suffers blow to 'Achilles' Heel'

ISTANBUL - Daily News with wires | 5/11/2011 12:00:00 AM |

Turkey’s current account deficit, which in past decades has triggered violent financial crises, is booming once again. The gap reached an all-time high of $9.8 billion in March, while the cumulative annual figure surpassed $60 billion. However, the figure owes much to a repatriation of $1.8 billion in profits by foreign companies’ operations in Turkey

Turkey’s current account deficit, regarded as the Achilles’ Heel of its economy, surged to an unprecedented level in March, boosted by an exceptionally high level of profit transfer by foreign operations to their parent companies abroad. The $9.8 billion monthly figure, which was above market expectations of $8.2 billion, more than doubled from $4.3 billion in March last year.

It was the biggest deficit since the Turkish Central Bank began releasing monthly figures in 1984, Bloomberg News reported.

A current account deficit occurs when a country's total imports of goods, services and transfers is greater than its total export of goods, services and transfers. The gap makes the country a net debtor to the rest of the world. When the deficit is financed by short-term capital inflows, such as investments in stocks and bonds, financial stability hangs in the balance – and a sudden exit of that capital or failure to attract more of it could trigger a crisis. Indeed, many crises that Turkey has gone through in the past five decades were preceded by a booming current account deficit.

The gap exceeded estimates because of a larger-than-usual repatriation of $1.8 billion in profits by foreign companies based in Turkey, said Tevfik Aksoy, London-based head of emerging-market economics for the region at Morgan Stanley. “This will be a one-off issue and we should not see a surprise like this for a long time,” Bloomberg quoted him as saying.

[HH] Unrest hits construction revenues

Wednesday’s figures also showed the negative effects of the turmoil in the Middle East and North Africa on Turkey. Construction revenues fell by 52 percent in the first quarter to $100 million. “This trend will probably continue because of Turkish contractors’ business in [the] region, mostly Libya,” said Özgür Altuğ, the chief economist at BGC Partners, in a note to investors.

Turkey’s average annual income from construction work abroad stood at $900 million in the 2006-2010 period. Nearly half of this income is from activities in the Middle East and North Africa.

On the other side of the instability coin is the tourism revenues, which rose by 34 percent in the first quarter. According to a note to investors from Akbank economists led by Fatma Melek, this rise could be attributed to regional instability, as tourists flock to Turkey from elsewhere in the region.

The cumulative deficit for the 12 months including March was $60.5 billion, or about 7.7 percent of forecast gross domestic product, or GDP, for 2011. In contrast, the government foresees a gap of $39.3 billion and predicts a deficit of 5.4 percent of GDP this year.

Net foreign direct investment was $2.8 billion in March, bringing the total for the first three months of the year to $4 billion. The figure compares to $1.5 billion in 2010. According to Akbank economists, the figure owes much to the sale of liquor company Mey İçki to Britain’s Diageo for 3.3 billion Turkish Liras ($2.1 billion). However, Altuğ of BGC said the main reason is the “kicking in” of Doğuş Group’s sale of 6.3 percent of Garanti Bank to Spain’s BBVA for $2.06 billion.

* Taylan Bilgiç from Istanbul contributed to this report.

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