Balance of payments’ condition precludes Turkish interest rate cut

Dünya Executive - - COMMENTARY - Alaatt n AKTAS Economist

Turkey’s current account deficit (CAD) in the 12 months to September 2017 reached $39.3 billion. The comparativ­e annual deficit was $32.1 billion to September 2016. The annual deficit is around the level anticipate­d in the medium-term program for 2018-20, which predicts the CAD for this year as $39.2 billion. Record levels of gold imports led to upward pressure on the trade deficit and therefore the CAD. When gold trade is excluded from the first nine months’ realizatio­n, there is even a decline in the CAD – and no increase.

On the financial front only short-term transactio­ns stand out. Excluding reserve flows, a foreign exchange inflow of $3.8 billion was realized in September from the finance account, $3.4 billion of which was generated by portfolio investment­s. Last year, the net flow was an outflow both in total and portfolio investment­s.

Let’s assume that one month alone is not so significan­t and analyze the first nine months in total. A total inflow of $23.5 billion came through portfolio investment­s in the first nine months of 2017. The inflows for the same period in 2016 amounted to $8.8 billion.

Let’s analyze these portfolio investment­s in detail and try to figure out through which items our liabilitie­s increased most and by how much? The increase in liabilitie­s – in other words borrowings – worth $8.3 billion for the first nine months last year, climbed to $22.4 billion this year for the same period, $3 billion of which came from stocks (compared with $738 million last year). The real increase in liabilitie­s originated from Turkey’s bill of debt. Our liabilitie­s originatin­g from the bill of debt – in other words the capital inflow amounted to $19.4 billion. It was only $7.5 billion last year, $12.8 billion of which came from sovereign borrowing.

To conclude, firstly, this money will leave Turkey if the country doesn’t provide a good interest rate. Secondly, if we create anxiety over a new stagger among the country’s economy and politics, money either won’t come or will demand much higher interest rates than now. The wheels of the economy can’t turn without this inflow. And as we depend on this inflow, interest rates can’t be cut.

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