$20 billion of “hot domestic money” flew abroad in 5 months
The rapid outflow of “hot domestic money” in August, continued in September, according to balance of payments data released by the Turkish Central Bank. The outflow trend started just before the elections in May and gained significant strength during June. It exploded in August and continued in September.
“Hot domestic money”, consisting of residents’ stock and bond purchases overseas and resources they take abroad as deposits, was in an inflow trend before May. This trend reversed in May.
Over five months, the outflow of “hot domestic money” reached $20.11 billion. $1.67 billion of this went in overseas stocks and bonds investments. $18.43 billion went to deposit accounts abroad. That this outflow maintained its strength for five months is a result and sign of a loss of economic confidence.
The reverse of foreign credits is another sign of confidence loss. There was a net increase of $2.11 billion in foreign loans in the May-September period last year, indicating a net resource inflow. This year there, was a net loan repayment of $8.44 billion dollars for credits, indicating a net outflow of resources.
The main reason for this is the willingness of banks to reduce their foreign liabilities during increased economic vulnerability. Secondly, foreign creditors avoid issuing credit for Turkey and raise their interest rates. Lastly, the sharp increase in foreign exchange rates pushes this instability to a higher risk for foreign exchange loans.
In short, the funds outflow through net repayments in foreign credits is another result and sign of a deterioration in economic confidence. The resource flight of residents through hot money, direct investments and credit transactions reached $29.77 billion over five months, whereas there was a net inflow of $2.79 billion over the same period last year.
While hot domestic money was flowing out, hot foreign funds continued despite a sharp slowdown. One billion dollars of hot foreign funds has entered Turkish economy over five months. Combined with direct investments, the net funds brought by non-residents reached $6.18 billion.
During the same period there was a significant foreign exchange inflow from undefined sources of around $12.58 billion. The current account deficit, on the other hand, fell sharply by 58.55 percent, down to $7.96 billion, due to surpluses for the last two months. During the May-September period, the current account deficit decreased by $11.24 billion and foreign exchange inflow from undefined sources rose by $7.45 billion. Despite this, foreign exchange reserves declined by $18.94 billion whereas they rose by $7.35 billion during the same period last year. The main reason behind this is the “hot domestic money” fleeing abroad.
Loss of confidence accelerates the slowdown in growth by drying up the resources in the economy and paving the way for high unemployment and inflation.