Crucial gap narrows due to slower economy, strong FDI

Crucial gap narrows due to slower economy, strong FDI

ANKARA - Hürriyet Daily News
Crucial gap narrows due to slower economy, strong FDI

Carpet exporters in southeast Turkey contribute to the country’s robust export growth, which in turn help narrow Turkey’s Achilles heel, the current account deficit. The government announced last week that the current account deficit would fall to 7 percent of GDP by the end of this year from 10 percent of GDP in 2011. AA photo

Turkey’s current account deficit, one of the main sources of concern about the economy, narrowed significantly in June to $4.25 billion, basically due to the improvement in foreign investments, as the Economy Ministry puts it, and a soft landing in activity.

The figure announced by the Central Bank yesterday is way below the $5.71 billion in May and the $7.72 billion in June 2011.

In the first six months of the year the shortfall stood at $31.08 billion, around a third lower than in the same period of 2011.

Foreign direct investment (FDI) in the first half of the year reached $8.2 billion, the Economy Ministry said in a press release on the Central Bank figure. “The increase [in FDI] is above 20 percent. This year we are heading for [an annual] $20 billion,” the ministry said, praising the contribution of a newly released incentives code.

Strong foreign demand

“Despite faster-than-expected growth in the first half of the year, the contribution of strong foreign demand made the narrowing trend in the current account deficit significant,” Garanti Bank said in a note to investors yesterday. The lender’s forecast for the year-end gap stood at around $64 billion, which is not that far from projections by many other leading lenders in the country.

“We expect to see further improvement in the deficit, albeit at a slower pace compared to May and June, in the coming months thanks to the overall slowdown in economic activity and relatively lower petroleum price,” said Özgur Altuğ at BGC partners in Istanbul.

“The narrowing in the current account deficit was strong in June, thanks to the improvement in seasonally adjusted deficit and the favorable base effects. However, leading data hints a slowdown in exports in July, and as a result, the narrowing in the 12-month cumulative current account deficit could almost stall in the coming months,” read a note by TEB economists Tuba Talınlı and Emre Tekmen.

“The pickup in oil prices would also limit further narrowing in the current account deficit during the remainder of the year. Therefore, we expect current account deficit at $61 billion, or 7.4 percent of GDP by year-end,” it said.

Akbank, another private lender forecasted the year-end gap at a more optimistic $62 billion, agreeing that oil prices would play a key role.

Finance Minister Mehmet Şimşek said the economy was experiencing a soft landing – economists’ phrase for a relatively gradual slowdown in growth that does not lead to a collapse into recession.
Imports to Turkey – which has to buy almost all its own oil and gas externally – were down 1.7 percent on the year in the first half of 2012 but any drag on the economy has been made up by a robust growth of exports, helped by one-off sales of gold to Iran this year, according to Reuters figures.

The government said last week the current account deficit would fall to around 7 percent of GDP this year from 10 percent in 2011 and would better the forecast in its medium-term economic program for a shortfall of 8 percent of GDP.