Gross Domestic Product
Turkey GDP grew by more than expected (2.3% versus 1.6%) in the first three months of 2015, data from Turkstats showed on Wednesday. Despite the fact that the reported figure signaled a below par growth in the country, we saw the pressure on Turkish assets easing for a while following the economic data. However, a rethinking about the country’s growth regime is needed given that for the last thirteen quarters it has been posting growth numbers below historical levels.
The strongest component of GDP was consumption in 1Q15 which was up 4.5%. The positive impact of boosted consumption was offset by the decline in net exports. The below is a visualized form of contribution of each components to GDP that shows consumption in Turkey has a strong (reverse) correlation with imports (net exports). At industry level, financial services sector appeared to the best performer in 1Q15.
Current Account Balance
From Dogan News Agency:
Turkey’s current account deficit fell by $1.52 billion to $3.41 billion in April, yet exceeded the expectations of $3 billion.
The unaccredited inflow of foreign currency rose to USD 2.89 billion in the same period, more than 10 times the USD 258 million registered a month prior, rising to USD 6.98 billion in the first four months of the year.
Other important reason that limited the rise in the current account deficit in April was gold exports of USD 1.82 billion, compared to USD 307 million of net imports in the same month of last year.
The 12-month rolling deficit fell to USD 44.26 billion at the end of April, down from USD 45.78 billion at the same period of last year. Current account stood at USD 2.0 billion in January, at USD 3.2 billion in February and USD 4.96 billion in March.
Another reason was direct investment outflows involving distributed profits under primary income item increased by USD 595 million to USD 892 million in April.
Portfolio investment recorded a net inflow of USD 755 million as an increase in net liabilities. As regards to sub items through liabilities, non-residents’ equity security transactions recorded net purchases of USD 652 million, as government domestic debt securities recorded net sales of USD 1.02 billion.
The country just printed another bad current account deficit which was 5.7% of the country’s total GDP. The following chart shows the ratio by countries where Turkey is shown red.
Ultimately, macro data shows that the structural reforms are needed for the future of Turkish economy. As the country is headed to a change in politics, we may also see a shift in economic
Turkey is running a large current account deficit and is a big borrower from abroad as the deficit roughly accounts for 6% of the country’s total GDP and short-term foreign debt stock hits $130 billion. Under such circumstances foreign capital would suppress the rising concerns around the country’s debt. However, Turkey seems to be less attractive to consistently high foreign direct investments leaving the country less able to deal with the stress on its financial system.
The sharp decline in oil prices will ultimately help Turkey to narrow its deficit but in the long-term Turkey needs sustainable tools to finance it, and that sustainability requires the financing quality. What is more lower oil prices could lead the deficit above 5% of GDP which means the country may still have some substantial headwinds to face arising out of its deficit.
As it is well known, foreign direct investments is the solution to this monstrous problem. The question then arises as to how successful Turkey is to attract these investments (see the chart below). At first glance, it may appear unsuccessful to do so, but looking again, the main reason that causes such huge differences in inflows to country is the weakness in Europe. Many European countries have had their own problems since the financial crisis and many businesses as well as banks in the region are struggling with the slowdown. Therefore the current economic situation in the continent is not conducing Europeans to look at investing in emerging countries.
When it comes to make a peer comparison, Turkey cumulatively is the worst performer with regard to attract foreign direct investment inflows alongside with Indonesia among major emerging countries since 2005. According to the data compiled by the OECD, a total amount of $131 billion is invested in Turkey by foreigners, while the foreign direct inflows to other member of BIITS is averagely $275 billion during the same period.
Despite the above-mentioned gloomy developments, Turkey still has the ability to offer important value to many investors across the globe. For instance, Turkish ministry of energy recently started offering healthy incentives for power generation from renewables which is an area with high potential. Additionally, the near future hold some remarkable privatizations in store, including Borsa Istanbul, Halk Sigorta and Halk Emeklilik, the insurance and private pensions companies; Igdas, the natural gas distribution company; Botas, the petroleum and natural gas pipeline and trading company; toll roads and bridges; horseracing and Spor Toto, a lotto company.
Turkey needs to tip the scales in its favor in foreign investments to be able to overcome the financing issue. Turkey has valuable resources to ease the problem, but also is facing headwinds mostly due to rising global risk aversion.
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.