Turkey's Current Account Deficit Narrows to $4.2 Billion in June

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Researched by Industrial Info Resources (Sugar Land, Texas)--Turkey's current account deficit narrowed sharply to $4.2 billion in June 2012, with foreign direct investment flows, resilient export performance, and a rise in tourism revenues.

A narrower current account deficit and strong capital inflows resulted in a sharp increase in official reserves, which rose to more than $100 billion in June 2012. The sudden pickup in tourism revenues was the main factor behind the positive surprise. After contracting 3.7% in the first five months of the year, tourism revenues expanded 6.2% in June.

As of June 2012, the deficit was significantly below the $7.7 billion deficit posted in June 2011. The 12-month trailing current account deficit fell sharply to $63.5 billion, or 8.3% of gross domestic product (GDP), in June 2012 from $66.9 billion. Excluding energy imports, the current account deficit fell to 0.7% of GDP in June 2012 from 1.2% in May 2012. This figure marked the lowest level in the last 20 months.

"We see the current account deficit narrowing to $60.2 billion (7.6% of GDP) by the end of this year," said Yarkin Cebeci, an economist from JP Morgan Chase based in Istanbul. "Given the strong export performance to date, the continued weakness in oil prices and the recovery in tourism revenues, the risks to this forecast are skewed to the downside."

The success of the Turkish exporters in diversifying their markets away from the slow-growing European Union (EU) countries has been the main factor behind the resilience of Turkish exports. While exports to the EU were down 10% over the year, exports to other countries jumped 42% in June 2012. As a result, the EU's share in Turkish exports declined sharply to 37% from 48% within the last 12 months. The EU had a 55% share in Turkish exports only a few years ago. Turkish exporters are doing a fine job in penetrating into the Middle East and African market.

Total deposit inflows were $8.4 billion, financing 27% of the current account deficit in first half of this year. In the same period, cumulative inflows into the bond and equity markets were $3.9 billion and $1.7 billion, respectively.

A net foreign direct investment flow rose to $1.9 billion and the Treasury's $1 billion net Eurobond issuance pulled the net long-term financing up to $3.3 billion in June 2012, with the long-term financing coverage of deficit up to 77%. This was the highest level since March 2011.

The Central Bank of Turkey is using an interest rate corridor for funding banks, which gives flexibility to them to tame inflation and rein in the current account deficit, while keeping economic growth intact. The bank has been fighting to narrow the current account deficit, which ballooned in October 2011 to a record of $78.3 billion. The government is targeting 4% GDP growth this year. The Turkish economy expanded 8.5% last year.

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