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In its most recent assessment of Turkey’s economic balances, the International Monetary Fund says the current account deficit will continue to rise but economic growth will slow down to around 4.5 percent by the end of this year. Short-term capital inflows, which Turkey’s robust economic growth rests upon, have ‘increased exposure to capital flow reversal and associated risks,’ says the IMF



Citizens are seen forming queues to buy the latest electronic gadgets at an electronics superstore in Istanbul in this file photo. Turkey's potentially destabilizing current account deficit is fueled by strong demand for imported goods. Hürriyet photo

“Hot money” inflows remain a potentially destabilizing factor for Turkey, the International Monetary Fund has warned while predicting that the country’s current account deficit will continue to rise in its most recent assessment of the economy.

The IMF’s executive board concluded its second post-program monitoring discussions with Turkey on Feb. 11 and released an analysis on the Turkish economy late Wednesday.

The Washington-based IMF raised its economic growth estimate for 2010 to a robust 8.2 percent. However, it predicted only 4.5 percent growth for the whole of 2011, while also noting the problem caused by a gaping current account deficit, which is predicted to be near 7 percent of gross domestic product in 2010.

The IMF expects inflation to accelerate to 6.5 percent by the end of 2011 due to “increasing demand and cost pressures.” The figure is 1 percentage point above the Central Bank’s target.

According to data released Feb. 11, the current account gap rose to $7.5 billion in December, while it surged to $48.6 billion for the whole of 2010. The figures are the worst since the Central Bank started making the data public in 1984.

A current account deficit occurs when a country's total imports of goods, services and transfers are greater than its total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world. The gap is generally financed either by long-term foreign investments, or by short-term portfolio investments, which are called “hot money.” As short-term investment leaves an economy – generally after making a profit – it may cause serious disruptions in financial markets.

Vulnerabilities highlighted

“Wide interest rate differentials, relatively healthy public- and private-sector balance sheets, strong near-term growth prospects, increased political certainty, and the prospect of a possible upgrade to investment status have all supported inflows,” the IMF said.

But the process has also highlighted Turkey’s vulnerabilities, according to the fund. The rising current account gap “reveals the high import content of domestic and external demand and growth’s dependence on capital inflows, which are symptomatic of weak external competitiveness,” said the fund. “Short-term capital inflows have increased exposure to capital flow reversal and associated re-pricing risks.”

The IMF preferred to look at the “dark side of the coin” regarding the government’s budget, which posted a surplus of 1 billion Turkish Liras ($630 million) in January. According to the IMF statement, this bright performance rests on “buoyant – but partially transient – tax revenue derived from the import boom” that has also increased the current account deficit. “Excluding such revenue, the underlying fiscal balance declined,” said the IMF.

“There did seem to be some sympathy for the Central Bank’s adoption of a ‘mixed’ policy bag, a reflection of the problems of managing significant ‘hot’ short-term capital inflows, but the reliance on these flows just reinforces concern over the widening current account deficit,” said Timothy Ash, an emerging markets economist at the Royal Bank of Scotland, in a note to investors Thursday.

The IMF predicts a significant slowdown in 2011 growth, but it still expects the deficit to continue to widen, Ash pointed out, finding this “a little difficult to figure [out.]”

“The IMF clearly sends a warning to the authorities in Turkey that they need to be mindful of overheating risks and that perhaps more policy action – tightening fiscal and monetary policy – is required,” Ash said.

According to estimates, after the Turkish Central Bank raised reserve requirements for banks while cutting the one-week repo rate to 6.25 percent, over $10 billion of “hot money” left Turkey. The exit was also partly triggered by investor worries over the unrest in North Africa.

“Thus, we can say the Central Bank is on the right path. We predict that the interest rate cuts have ended,” said Banu Kıvcı Tokalı, deputy CEO at Destek Securities. “On the other hand, the desired correction in loan growth has yet to happen. Thus, reserve requirements may be raised again.”

Source : Hurriyet Daily News