Turkey has been consistently running current account deficits since 2002. According to the Bloomberg median forecast, the current account deficit is likely to average -6.5% for the next three years. Usually, the primary action to reduce a substantial current account deficit by a country involves increasing exports or decreasing imports. While there is some evidence that Turkish Central Bank is trying to weaken its currency through lowering interest rates, this approach is not likely to deliver any solid results.
Historically, Turkey has financed its external deficit through short-term and mid-term borrowing. Turkish bonds were preferred by international investors thanks to their attractive yields and Turkey’s consistent track record of honouring its obligations. In the recent years, the Central Bank cut benchmark borrowing costs, taking advantage of global economic context. While this might help bring down the borrowing costs, this rendered Turkish bonds less attractive compared to others, such as Brazilian bonds.
For the time being, Turkey’s ability to attract foreign capital is less than what it used to be. Moreover, this move does not reconcile with the fact that Turkey requires foreign funds to finance its deficit. Given the fact that as a net oil importer, Turkey ’s import costs are likely to increase significantly in the coming quarters with the oil price above $100, attracting foreign funds becomes even more essential. Logically, the increasing oil prices are also likely to push up the headline inflation. The combination of all these factors puts the Turkish Central Bank’s moves under question. They are likely to increase interest rates, which would allow them at best to win a Pyrrhic victory.
Turkey’s problems are structural in nature and short-term monetary and fiscal policies are not very likely to make a difference. Long term policies are needed. However the current trends are not pointing in a positive direction. In my opinion, some of these trends are worth mentioning, and they are likely to have long term repercussions for the country’s future:
- Ability of Turkish state to influence its economy is highly reduced: Following the privatizations in the last 8 years, the share of the public sector is less than 25% in Turkey. Compared to the EU average of 50.7%, this is significantly lower. While some might view privatization as a way to streamline the economic infrastructure, it might also hamper the state’s ability to tackle structural issues. In this sense, the Hungarian situation is instructive. Following the inability of previous governments to resolve the economic issues due to their reduced economic power and the resulting frustration, Hungary is still in a deep economic crisis. A similar situation could also occur in Turkey
- Turkey’s labour force participation is not improving: According to the World Bank Report :
While the share of women participating in the labour force has risen since the 1980s in countries with a similar starting point, it has fallen considerably in Turkey – from 34.3 percent in 1988 to 21.6 per cent in 2008. By 2006, Turkey had fewer women participating in its economy than any other country in the OECD or the Europe and Central Asia region.
- Lack of a key economic sector in which Turkey has Competitive Advantage: From a long-term perspective, Turkey does not seem to have a strong export sector that could drive its economic growth. In the 1980’s, Turkey had developed a competence in the textiles sector, which had important contribution to its exports. The 1990’s saw the rise of auto parts sector and ship-building, however these are not margin rich enough to be key driving sectors. Turkey does not have a strong presence in research and capital intensive sectors such as IT, Pharma, Auto and Machinery.
On the whole, Turkish economic situation is starting to look worrying.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
