Mustafa SÖNMEZ – Hürriyet Daily News, March 24/2014


Turkey has been witnessing radical changes in its vitally important foreign capital inflow and economic turbulence corresponding to that in the past few months, when the economic contraction is coupled with political crisis. The transition is primarily observed in the payment balance. While the current deficit, which could also be called foreign exchange deficit, remains crucial, the new foreign resources that are necessary in financing the deficit is not the way it used to be. This leads the country to turn to resources in its own “pocket,” to spend from reserves and appeal to foreign currencies with unknown sources.

The levels that the deficit can soar up to and how long this new financing method can be sustained cannot be predicted.

It was found normal when the current account deficit remained at $5 billion in January when the economy slowed down. The deficit was $8.2 billion in December 2013 and the 12-month gap – between January 2013 and 2014 – has risen to $64 billion. This is the highest current account deficit among developing countries and its ratio to the national income is almost 8 percent.

When the sources used to fill foreign exchange deficit nearing $5 billion were examined, it was seen that financing was not provided by foreign capital, but rather from the “pocket,” meaning foreign exchange reserves and the “net errors and omissions.”

January faced capital outflow instead of inflow and no new loans could be secured to pay due loan debts. This situation obliged spending from foreign exchange reserves.

While the reserves melted by $5.8 billion in January, $2.2 billion was provided by the “net errors and omissions,” also known as “under the pillow,” revealing the deficit was financed through $8 billion worth of “internal” resources.

In January, $1 billion foreign direct investment entered the country, but investment drawn to the portfolios – stock exchange and government bonds – have fallen instead of rising, according to Central Bank data.

More importantly, the debtors failed to find new loans to pay due foreign loan debts and the deficit on loan payments have surpassed $4 billion.

Therefore, when the capital decrease that reached $3.1 billion was combined with the almost $5 billion of the current account deficit, the amount of funds needed to be secured totaled over $8 billion. Almost three-quarters of this was supplied by reserves and nearly a quarter from “under the pillow.”
Dec 17 impact

The practice of meeting the foreign exchange deficit from the “pocket” began in December. When the current account gap was $8.2 billion, the capital entrance remained at $3.1 billion, causing $3.7 billion to be spent from reserves and $1.4 billion from net omission and errors.

Therefore, the total current account deficit reached $13.1 billion in the December-January period that also includes the Dec. 17, 2013 corruption operations, while the net capital entrance scored zero in two months.

Analysts foresee the lack of foreign resources entering the country persisting throughout April and May. Looking at the decline in reserves, it is predicted that the capital outflow may even increase the current account deficit.

This situation also causes the foreign exchange rate to remain high despite the hiked interest rate. The U.S. dollar’s rate’s constantly testing the 2.25 level is associated with the drop in foreign money entering the country and a failure in the payment of due debts with new resources.

The foreign exchange position, also defined as disposable foreign exchange stock, consists of the “net foreign exchange assets” and “internal liabilities.” Foreign exchange reserves expect gold to be the most important item within new foreign exchange assets. Internal foreign exchange liabilities, meanwhile, are mostly made of foreign exchange accounts of individuals and institutions. The difference between the two creates the disposable foreign exchange stock, or foreign exchange position.

The foreign exchange position dropped $33 billion as of February and had soared up to $50 billion in 2010. The forex position was recorded $44 billion in mid-2013 and has embarked on a downward trend in Turkey after the U.S. Federal Reserve opted for monetary tightening and the foreign resource inflow into developing countries started to decline.

The currency ratio ascend that started in June has escalated as the Central Bank moved to save the Turkish Lira’s rapid devaluation with forex sales from the reserve instead of raising interest rates, causing a weakening of the reserves. After the Dec. 17 operations, the reserve melt-down rose along with a rush to foreign exchange and reached $40 billion as of the end of December.

The forex position that retreated down to $33 billion until the dollar touched 2.40 liras on Jan. 28 hasn’t recovered yet, despite the 6-percentage point interest rate hike.

Low reserves, weakness of the lira

Turkey’s total debt is around $380 billion. Around one-third of this belongs to the public sector and the total debt that should be paid within 12 months is near $170 billion. This means even the current account deficit will remain at $50 billion, unless there is a significant demand for foreign exchange.

In the case that direct foreign capital and foreign capital inflow in the shape of foreign loans cannot be secured, the forex demands’ lira provision will hover high. The forex position at $33 billion shows that an important weapon in the Central Bank’s hands has become inoperable. The interest rate hike has remained the only tool to lure money from abroad, but even this will not work considering the ongoing political crisis.


Written by Mustafa Sönmez