Turkey today posted better than expected current account deficit after naming the deficit as the second most important economic challenge after inflation in its Medium Term Plan. According to the posted official figures the deficit in August was $2.77 billion which is well below the market consensus of $3.2 billion. The country’s deficit for the January-August period also dropped by $16.2 billion to $29.5 billion. Leading economists covering Turkey expect the total deficit to hit $45 billion at year-end that would be approximately %5.7 of country’s total GDP that means a significant drop in country’s deficit but is still above the targeted current account deficit.
Lower than expected deficit is mainly due to sharp increase in services income that hit $6.4 billion in August. Turkey had averagely reported a services income of $5 billion in nine August months between 2005-13. This is suggesting that boosting tourism revenue helped the country to deal with its large deficit.
As discussed many times before the actual amount of the current account deficit is less important than the government’s means of funding it. Here, the Turkish government has been extremely lucky with the global liquidity situation. Unfortunately, Fed’s tightening its monetary policy will start a new turnaround whose balance sheet has been the best Turkish natural source so far. Still no weakness is observed in external funding as banks and companies in Turkey as they are reported collecting $5.1 billion from foreign lenders.
Given the components of income generated in country, it seems hard to narrow the deficit without undermining the fast growth in real consumption (see the chart below). At this stage declining oil prices would be supportive for the economy to grow at the desired pace with no obligation for soft-landing.