We can still find some foreign exchange

Dünya Executive - - COMMENTARY - Alaattn AKTAS Economist

Our foreign trade deficit “silently” rose to $8.8 billion in July. It’s not a historical deficit record but still the highest amount for the last four years. The highest monthly foreign trade deficit before this July was in July 2013, with a record deficit of $9.9 billion. The current account deficit (CAD) formed its share of this high foreign trade deficit. The current account balance ran a deficit of $5.1 billion in July. This is the second highest CAD since May.

If Turkey is able to run up a deficit, it means it can somehow find some money from somewhere. Fortunatel­y, we’ve been listening to an urban myth about the economy that has not often been spoken of lately. Some have said, “We do indeed run a CAD, but we can finance it.” But it’s not possible to run a CAD without finding money. Either we have to either find or borrow money to run a CAD. If we don’t have any money and can’t borrow, then we dip into and use the Central Bank’s reserves as a lender of last resort.

Where was the CAD f nanced?

Turkey ran a current account deficit of $5.1 billion in July and $26 billion in the first seven months of the year. But it could only find foreign funding of $1.8 billion to cover part of the $5 billion CAD. So, where there were no foreign funding inflows, Turkey relied on central bank sources, using $2.4 billion of its reserves. The figures over seven months have drawn significan­t attention. From the CAD of $26 billion, $24.7 billion was provided from Turkey’s financial account. The money came along as foreign direct investment­s remained at $4.3 billion, almost the same amount as the previous year.

The main money inflow has been through portfolio investment­s. These investment­s stood at $9.8 billion last year and rose to $18 billion this year. However, there has been a significan­t decline in other sorts of investment­s, which have fallen from $10 billion to $2.4 billion.

The reason for h gh nterest rates

We ran into debt of $14.5 billion by issuing debt securities as part of portfolio investment­s during the first seven months. A total of $9.2 billion of this debt came from the government: $5.2 billion in domestic debt and $3.5 billion in foreign debt. But the foreign debt amount is a net figure. Turkey actually borrowed $7.4 billion from abroad and paid only $3.8 billion back. Thereby, its net borrowings became $3.5 billion. We must address the question: “If we decrease interest rates under these conditions, can we sustain this debt or not?”

Gold mports ra s ng the CAD

Turkey is running toward a record in gold imports. Importatio­n of gold in the first seven months amounted to $10.7 billion. While imports are skyrocketi­ng, there is a decline in exports. That’s why, whereas we ran a surplus of $3.2 billion in gold trade during the first seven months of the previous year, we faced a deficit of $5.9 billion this year. Naturally, gold trade is also included in the current account balance. So, the CAD including gold trade increased from $21.5 billion to $26 billion. But what would happen if we exclude the gold trade?

The CAD ran for the first seven months of the previous year would have risen to $24.7 billion and the deficit for the same period this year would remained at $20.1 billion. , It’s best to consider the gold trade too when evaluating either the foreign trade balance or CAD.

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