Number one in the world

Number one in the world

There is no need to deny it. As Turks we like to be on top of charts. What kind of chart doesn’t really matter - Turkey is number one, and that’s what counts. So here is the good news: we are number one in the share of current account deficit to the GDP. There is no need for in depth research, just pick up a copy of the Economist and take a look at the economic and financial indicators section. It’s right there.

This February, the Central Bank announced its latest figures for the current account deficit. The year-on-year increase in the deficit was about 65 percent. The figure now has reached an all time high if you consider the Republican era as a whole. So here is a piece on Turkey’s record performance in current account deficits. 

The high current account deficit in Turkey is similar to the high government debt in developed countries. They are both problems of a similar nature and very much interrelated. Here is how: 

First of all, both are economic imbalances. Imbalance brings vulnerabilities to the forefront. Turkey’s high current account deficit is a symptom of periods of high growth. If you want to control the economic imbalance, you need to control the growth rate of the economy. Reckless or uncontrolled growth in the output recovery process right after the first phase of the global crisis has led to a severe economic imbalance. Why? The government had a referendum and an election coming up. They won both.

Secondly, both the current account deficit and the high public debt need a continuous flow of funds from the global and local market. A sudden stop will lead to disastrous consequences in both cases. As Greek public debt needs refinancing at every maturity date, so does Turkey’s current account deficit. In Greece, the risk is government default. In Turkey, it is the exchange rate. Both are collective action problems with structural underpinnings. Refinancing is the source of the vulnerability in both cases, for which you need to convince bondholders. In both cases bondholders ask for higher returns. 

Thirdly, in today’s cases of high public debts or high current account deficits, the culprit is the global financial crisis. If there was no global crisis, Greece, Italy, Portugal and Spain would not have had public debts this high because banks would not be this risk-averse. Similarly, if there was no global financial crisis, Turkey would not have a current account deficit this high. The deficit has historically always floated at about 6 percent.

We are at about 10 percent now. The surprising thing, however, is not Turkey’s record-setting current account deficit in itself. What truly surprises me, and we have the financial crisis to thank for this, is that Turkey sustains these untenable rates without a sudden stop. 
The global crisis has led to a relative saving surplus in Europe and the United States that is sustaining the unsustainable. For now, of course.