Economy is not rebalancing, it is in crisis
March balance of payments figures were released. The monthly current account deficit (CAD) is $589 million. The current account deficit for 12 months is $12.83 billion. These figures are low in our economic history when compared to current economic size. Erdogan’s government is trying to present these figures as a “rebalancing in the economy” and a “success”. Let’s take a closer look at the data and see whether we can talk about an ‘economic rebalancing ”.
Why is the CAD declining?
As of March, the total current account deficit has decreased by $42.77 billion and by 76.76 percent over the last 12 months to $12.83 billion. There is a “recovery’ of $42.34 billion in our ‘chronic’ account deficit problem. The main actor is neither the increase in exports or tourism receipts. It is the decline in imports.
Net tourism receipts increased by 13.81 percent to $2.53 billion. The increase in exports was only $7.69 billion. Considering the 12-month average dollar rate increased by 41.85 percent in March, the increase in exports was only 4.55 percent despite such a huge exchange rate support. This indicates how suffocated the economy is.
Imports on the other hand contracted to $32.28 billion, or 13.64 percent. 76.19 percent of the $42.36 billion decline in the current account balance comes from imports. While the increase in exports is limited, the rapid decline in imports reflects the contraction in the economy, not the increase in domestic production.
Does economic confidence increase despite the growing deficit?
Despite the decline in the current account deficit, figures claim that confidence in the economy has increased. Foreign exchange reserves are expected to increase when there is a decrease of $42.37 billion in the current account deficit. However, the foreign exchange reserves have decreased, and this has happened after a year with a much higher deficit. The total decline in foreign exchange reserves was $4.92 billion in March 2018. The decline in reserves this year skyrocketed by 83.6 percent to $9.03 billion.
Net capital inflows collapsed – by 92.45 percent to $46.48 billion. The annual net capital inflow to the country in March 2018 was $50.28 billion; it fell to $3.8 billion this year.
Domestic investors lost their confidence
Capital movements show that the loss of confidence in the economy and economic management has not only affected foreign investors. 12-month total foreign capital inflows decreased by 22.40 percent to $7.84 billion. The main decline was due to a 42.96 percent decrease in hot money down to $10.35 billion.
There was a rapid wave of escape seen in local hot money. $1.93 billion of domestic hot money flew abroad in March 2018.
This year, $19.81 billion of domestic hot money deposits and portfolio investments fled. The increase in exchange rates, contraction in imports and the economy played an important role in the loss of confidence among domestic investors.