Contraction in current account deficit and production

Turkey’s current account balance that posted a significant deficit in September last year produced a surplus of $1.8 billion in the same month of 2018. 

The current account balance that produced a surplus in two consecutive months is expected to post an even larger surplus in October. The rebalancing in the external balance is good for the overall economic rebalancing but it also poses other risks.

The country’s current account balance, which produced a deficit of $4.4 billion in September 2017, had been forecast to post a surplus of $2.6 billion in the same month of this year. Even though it remained below expectations, the current account surplus exceeded $1.8 billion in the month.

With the latest figures, the 12-month trailing current account deficit declined to $46.6 billion as of the end of September versus a deficit of $523 billion a year ago.

Those figures also suggest that the pressure on exchange rates have eased as demand for foreign currencies declined. Improved relations with the United States, combined with the measures taken by the government, definitely contributed to this better FX outlook, but the most important reason behind the decline in foreign exchange rates was the fact that the need for foreign currencies to finance the current account deficit lessened. The impact of the current account balance is observed with a lag.

Those figures at the same time are indicators for the overall economic growth and unemployment statistics that are yet to be announced.

In the face of those data, analysts are now discussing whether they should revise their GDP growth forecast. We are seeing that analysts are revising downward the GDP growth estimate for 2018 which the government forecast to be 3.8 percent in the New Economic Program. The latest estimates released on Nov. 12 showed that economists are now forecasting a growth rate of around 2.5 percent for 2018. Thus, the 2019 forecasts will inevitably be revised downward.

Inevitable consequences

In a nutshell, a shrinking current account deficit is good news but in the context of a broader macroeconomic balance it is definitely losing its significance. Production in Turkey is dependent on imports, thus if imports decline, it only means production is falling as well. The most important reason behind the problems that the Turkish economy faces right now is this import-dependent production. It has always been argued that in order to resolve those problems, this production model should be changed. But this has not happened.

That is why whenever the Turkish economy’s growth rate exceeds 5 percent we have this current account deficit problem. As the current account deficit increased, the need for external financing only grew. Thus, the interest and foreign exchange rates hit levels that distorted the macroeconomic balances.

For years, high growth rates that were achieved through this production structure resulted in current account deficit. Now the declining current account deficit will produce weaker growth.

This strikingly manifests that the management of the economy should be balanced and kept away from political interference.

Turkey holds consecutive elections very often and, thus, the economy sees excessive growth rates because of politically-motivated decisions. But then the economic contraction becomes inevitable.

You need a strike balance here. But if you keep making politically-motivated decisions, the economy only ends up facing shocks.

For the time being it appears that the pressure on the currency rates eases because the current account balance posted a surplus. But then you have to accept the fact that the growth rate will decline. One of the potential dangers lying ahead is that if measures are taken to ignite the engine of economic growth once again, this will upset the balances even on a larger scale.