Country Report Turkey April 2011

Economic performance: Current-account deficit is still worryingly large in January

Concern persists about the potential for currency, macroeconomic and financial instability if global risk aversion rises and Turkey becomes unable to finance its growing current-account deficit. The deficit reached US$48.6bn, or 6.7% of estimated GDP, in 2010, as strong domestic demand, a strong currency during most of the year and high global commodity prices inflated the import bill. Although the lira has lost value since November, and the Central Bank has been trying to control the growth of credit, the current-account deficit continued to widen in January 2011 compared with the same month of 2010. The deficit for January was the third-largest monthly deficit on record (after November and December 2010) and raised the rolling 12-month deficit above US$50bn for the first time. The merchandise trade gap has accounted for most of the current-account deficit. In January, it was US$3.1bn more than a year earlier as import growth far outpaced solid export growth.

The current-account deficit was amply offset by strong capital inflows in 2010. In January 2011, net capital inflows (excluding official reserves) remained positive at US$3.1bn, according to the balance-of-payments data. The level of capital inflows recorded in January was nevertheless lower than in the preceding months, possibly reflecting, in part, the impact on financial sentiment of shifts in global expectations and political uncertainty in North Africa and the Middle East, but the figure for net errors and omissions, which includes inflows which could not be classified, was high, resulting in an increase in official foreign-exchange reserves of US$863m.

According to weekly Central Bank data, the official gross foreign-exchange reserves, which are sensitive to exchange-rate movements as well as balance-of-payments developments, rose from US$80.7bn at end-2010 to US$82.3bn at the end of January 2011 and US$83.4bn in the first week of March.

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