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Turkey's Rate Conundrum
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At the current rate of reducing the 10% current account deficit by the central bank, it will be the end of 2013 when it could be brought down to 6%. This may not be fast enough as Turkey could face an external shock if sentiment of foreign investors changes before that. As Turkey partly depends on foreign investors for short term funding of the deficit, this is critical for Turkey's economy. Only one quarter of capital inflows are in the form of long term direct investment. As the situation in the eurozone worsens in 2012-2013, Turkey is in serious danger of a sharp downturn in the economy after years of growth. The IMF has cited Turkey in the list of countries where the credit growth to GDP has increased to the level of a warning light indicator. Other countries cited by the IMF are China, Vietnam, S. Africa and Brazil.
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The IMF and the year to year growth of a country's outstanding Credit to GDP Ratio as a Warning Light Indicator for Country Economies
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The outstanding credit of a country to its GDP ratio and its year to year growth is a warning light indicator is used by the IMF. If the year to year growth in this ratio is over 5 percentage points for a country in a particular year it indicates a warning light. Using this indicator Brazil, China, Turkey are in anticipatory crisis conditions. Use of this indicator would have predicted the crisis in the U.S. in 2008, and the crisis in Ireland, Portugal and Greece, ahead of time so that action could be taken.
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Question for Turkey- can it reduce its current account deficit of 10% in March 2011 to 6% before a sharp swing in capital inflows leads to a crisis?
09/21/2011
Only 25% of capital inflows to Turkey are direct foreign investment. The current account deficit of 10% is partly financed by foreign capital inflows. Any swings in consumer sentiment- especially as the eurozone crisis continues in 2012-2013- could mean rapid capital outflows leading to a crisis. The IMF's Warning Light Indicator in 2011 for countries with excessive credit growth to GDP ratios covers Turkey.
Linked Articles
Wall Street Journal 04/13/2012
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New York Times 09/21/2011
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