The snowball-effect of the current account deficit stands in the way of recovery
The Turkish economy is a chronic current account deficit economy. Foreign exchange receipts earned from goods and services exports is usually less than the amount of foreign exchange spent on goods and services imports. That leads to a chronic deficit on foreign payments. It’s possible to finance this deficit with foreign exchanges originating from foreign direct investments and/or bonds sold abroad, or other foreign exchange inflows originating from similar portfolio investments. As long as there is a payment deficit, there will be the need to finance it and those two sources are preferable, because they don’t involve extra borrowing. If you are short on foreign direct investments and portfolio investments, you have to start borrowing. Lastly, when all this doesn’t work, the deficit is paid inevitably by using foreign exchange reserves. After that, there is nothing left to do; you simply go bankrupt. The consequences can be painful, resulting in exclusion from international markets for extended periods.
Our chronic trade deficit also creates a chronic payment deficit. It’s been like this since the weakened periods of Ottoman Empire. When we enjoy a high standing with relative lower risks, real or perceived, we finance most of the deficit with means that don’t lead to borrowing. But when we lose our reputation, the faucet of resources is eventually turned off.
Under these circumstances we have to compensate the foreign payment deficit with borrowing. Borrowing is a costly and progressively debilitating process. It kind of feeds itself, and makes the payment deficit bigger and bigger, and eventually brings the country to the edge of catastrophe. It’s nothing new for us. We all know that the young Turkish Republic helped to clear the Ottoman Empire’s debt and then later, found itself in similar trouble a couple of times.
So far, we have not faced major problems financing the deficit. That’s a good story. But I guess that period is coming to an end. As of November 2017, data regarding payment balances indicates two alarming issues. The first is the accelerating upward trend of the current account deficit. Between January and November 2016, it was $28.6 billion, but ballooned to $39.4 billion for the same period this year. Secondly, it seems we have already turned to the foreign exchange reserves to finance this deficit: of the $4.2 billion financed in November, $3.9 billion came from the reserves. Requiring such a huge amount for only one month of deficit financing indicates a serious problem. That affects your reputation, cause the risks to skyrocket and deteriorates the perception of risk. History tells us that such developments stand in the way of economic recovery.