Turkey’s Balance of Payment Outlook

118 reserves are kept for the bad days of the country and when it decreases the country cannot protect itself from the external shocks in the next periods.

According to the data of IMF, with the 451 billion dollars, USA is the first country in the current account deficit quantity in 2013. USA is followed by India, Brazil, England and Turkey with the 77.6, 74.0, 69.0 and 65 billion dollars deficit respectively. Although Turkey was the 5^th country in the quantity, its deficit share to GDP is 7.9 % and very high compared to other countries and this situation creates very big risk for the sustainability of the deficit.

119 Table 40: Foreign Trade Data

Years Export Import Export/Import

1923 50.790 86.872 58,5

1925 102.700 128.953 79,6

1930 71.380 69.540 102,6

1935 76.232 70.635 107,9

1940 80.904 50.035 161,7

1945 168.264 96.969 173,5

1950 263.424 285.664 92,2

1955 313.346 497.637 63,0

1960 320.731 468.186 68,5

1965 463.738 571.953 81,1

1970 588.476 947.604 62,1

1975 1.401.075 4.738.558 29,6

1980 2.910.122 7.909.443 36,8

1985 7.958.008 11.343.375 70,2 1990 12.959.288 22.302.126 58,1 1995 21.637.041 35.709.011 60,6 2000 27.774.906 54.502.821 51,0 2005 73 476 408 116 774 151 62,9 2010 113 883 219 185 544 332 61,4 2011 134 906 869 240 841 676 56,0 2012 152 461 737 236 545 141 64,5 2013 151 802 637 251 661 250 60,3

Resource: TurkStat, Statistical Indicators, 2014

The ratio of foreign trade volume to gross domestic product was 30.9 % between the 1990-1999, and it reached to 39.4 % between the 2000-2008. At the same time, the ratio of the current account deficit to GDP was 1 % between the 1990-1999, and it increased to 4,1%

between the 2000-2008. All these development shows that while the foreign trade volume was expending, the current account deficit was also increased (Karabulut and Danışoğlu, 2006:48, Şahin, 2011:50). Certainly, Turkey has to think and take precautions about the reasons and results of this situation. Because this picture shows us that Turkeys’ economy meets difficulty in compliance with the requirement of international competition (Yılmaz and Karataş, 2009:82).

The coverage ratio of export to import is around the 60 % and the total export of Turkey decreased slightly and realized as 151.8 billion dollars in 2013. The first five countries in export were Germany, Iraq, UK, Russia and Italy (Table 41). The highest export has been made to Germany, but, because of the technological import, Turkey gives deficit in the

120 trade with Germany. Iraq is the second market of Turkish company and trade relation has been developing especially with the North Iraq Region since the 2005.

Table 41: The Top Five Countries in Export of Turkey

Country 2013 2012 2011 2010

Total export 151.802.637 152.461.737 134.906.869 113.883.219 1 Germany 13.702.577 13.124.375 13.950.825 11.479.066 2 Iraq 11.948.905 10.822.144 8.310.130 6.036.362 3 UK 8.785.124 8.693.599 8.151.430 7.235.861 4 Russia 6.964.209 6.680.777 5.992.633 4.628.153 5 Italy 6.718.355 6.373.080 7.851.480 6.505.277

Resource: TurkStat, Statistical Indicators, 2014

The import of Turkey was 251.66 billion dollars and the first five countries in import were China, Russia, Germany, Italy and USA in the same year. The biggest trade deficit was given against the China, because Chinese goods have price advantage not only against Turkey but also for all world countries. Because of this advantage, China increased its export significantly especially after the admission to the World Trade Organization in 2001. Due to the energy import Turkey has been giving trade deficit against Russia and Iran.

Table 42: The Five Ten Countries in Import of Turkey

Country 2013 2012 2011 2010

Total Import 251.661.250 236.545.141 240.841.676 185.544.332 1 Russia 25.064.214 26.625.286 23.952.914 21.600.641 2 China 24.685.885 21.295.242 21.693.336 17.180.806 3 Germany 24.182.422 21.400.614 22.985.567 17.549.112 4 Italy 12.884.864 13.344.468 13.449.861 10.139.888 5 USA 12.596.170 14.130.546 16.034.121 12.318.745

Resource: TurkStat, Statistical Indicators, 2014

Lack of domestic saving is another reason of the current account deficit. There is a very big correlation between the economic growth and current account deficit of Turkey.

Because of the lack of domestic saving, the economic growth was supported by the foreign resources. The economy was financed by capital flow or foreign credits taken either by private and public sector. These funds are generally used to finance the private consumption.

121 Turkey’s growth policy in recent years depends on the domestic demand. Therefore, with the increasing income level, the demand for consumption rose rapidly and the saving ratio decreased from 23 % in 1990 to 12.8 % in 2011. In the same period, the share of investment to GDP was 23.1 % (IMF, 2011). Since the domestic saving cannot finance the investment, in order to make investment Turkey has to borrow or attract the foreign capital from the rest of the world. However, to borrow or attract the foreign capital flow, the interest rates must be higher than world average and the high interest rate is also increased the current account deficit.

In 1990s, public sectors’ saving deficiency was financed by the private sectors and foreign resources. However, after 2001 economic crisis this table was changed. In this period, because of the cyclical effect, the liquidity abundance was lived in world economy and Turkey has achieved a high economic growth rate based on external debt and capital flow (Subaşat ve Yetkiner, 2010). In accordance with the economic program of Turkey, public sectors’ borrowing needs and foreign debt was lessened but private sectors’ debt was increased.

The fight with the inflation was the priority of the economy administration and with the help of tight fiscal, monetary and exchange rate policy, public sector generally succeeds its targets. Since the relatively overvalued TL contributed to inflation and economy policy targets of the government, the private sectors’ excess borrowing was tolerated in this period. However, implemented policy augmented the dependency on foreign resources and caused the current account deficit. It was argued that this policy increased the fragility of economy against the foreign shocks and it could not be survived in the mid and long term.

In other words, while the implemented policy, which was depended on private sector’s borrowing, was contributing the economic growth and inflation, it created new fragility about the current account deficit (Yılmaz and Karataş, 2009:75-80).

Another important factor that increases the foreign trade and current account deficit is the energy imports of Turkey. As mentioned in above chapters, Turkey’s known fossil based energy resources cannot meet its needs. Therefore, nearly 91 % of oil and 98,5 % of natural gas are imported from abroad. Today, energy import covers more than 20 % of the total import of Turkey. When the energy prices increase, the cost of energy bill and

122 production cost of manufacturing sector also increase and this situation decreases the competition power of the country. Hence, the portion of current account deficit caused by oil or energy import creates rigidities in the economy of the country (Karabulut and Danışoğlu, 2006; 49, Şahin, 2011, 52). When the energy import is excluded, the current account deficit was minimized in most of the years and sometimes current account balance gave significant amount of surplus.

Since the demand elasticity of energy is very low, it is very difficult to eliminate the pressure of the energy on import in the short term. Because, today nearly 48 % of electricity was produced by using the imported natural gas and transportation sector is depended on oil import at a ratio of 91 %. Therefore, in order to decrease the weight of energy import on the current account deficit, the domestic resources; coal, renewables, and nuclear power should be evaluated immediately. It has a vital importance for the security of Turkish economy and balance of payment.

The increase observed in the current account deficit in recent years, especially since 2004, is directly related with the oil, energy, commodities and base metal prices. There was a substantial increase in the price of those commodities after 2002. However, the high rate of dependence on imports of intermediate goods production and export structure of Turkey's economy is another important factor of the deficit. Therefore, while the economy is expanding, the current account balance deteriorated as a result of the rapid increase in the price of imported goods in this period. In other words, increased import accelerates the growth and growth is stimulating import. This situation increases the current account deficit (Türeli, 2008;14).

In order to ensure high economic growth, the governments have been implementing expansionary monetary and fiscal policies. Since these policies increase the domestic demand, the current account deficit may be affected negatively. Implementation of expansionary monetary and fiscal policies increases the aggregate demand in markets and brings changes in the internal and external balance (Uğur and Karatay, 2009). When the expansionary fiscal policy is implemented, the budget deficit and interest rates increase.

Increase in interest rate attracts more capital flow from abroad and appreciate the currency of the country. However, because of the appreciation of currency, the export of country

123 decrease and import increases. As a result, the current deficit of the country increased (Marinheiro, 2006). Therefore, expansionary fiscal and monetary policies are accepted one of important reason of the high deficit in Turkey. In order to eliminate the effects of the 2008 global economic crisis as soon as possible and to increase the employment level, the government implemented expansionary fiscal and monetary policy and increase the domestic demand. As a result, the current account deficit increased to 9.7 % of GDP in 2011.

In the economy literature, when the current account deficit exceeds the 5 %, it is accepted that this situation cannot be sustainable and economy will meet high devaluation and crisis.

However, Turkey's current account deficit in recent decades has broken the record and reached to 9.7 % of its GDP. While the deficit was 7.5 billion in 2003, it reached to 65 billion dollars in 2013. The import was increased with the help of high domestic demand, but the export could not be increased as expected because of the global economic crisis and political situation living in middle-east countries (Kalkan 2011:1, Şahin, 2011, 52).

Therefore, it is expected that the current deficit of Turkey cannot be decreased at least in the short run.

Until now Turkey can succeed to close its current account deficit generally by using high interest rate and the short term capital flow. Although the short term capital flow plays an important role in the closing of the current account deficit, it overvalued the TL and made the import attractive for both producers and consumers. They indirectly increased the import and deteriorate the current account balance. Therefore, this kind of financing is not healthy and increases the country’s debt and amount of the speculative capital flow. It is very likely that, as being in South-East Asia, it may cause the serious economic crisis.

Instead of short term capital flow, direct foreign investment should be selected and structural and permanent reforms have to be done to prevent the unsustainable deficit level.

One of the positive developments that lived after 2002 was the increase in the share of long term capital flow and direct foreign investment in the financing of the current account deficit. However, one should be emphasized in here that direct investment increase was the result of privatization and asset sales, rather than contributing to the capital stock of foreign investment (Türeli, 2008; 16).

124 Because of the international competition and with the effect of the money and exchange policy, the composition of the manufacturing sector was changed dramatically and even the traditional sector started to use import input in their production. As a result, while these traditional sectors were contributing the current account balance before the 2000, their contribution decreased and the deficit reached to the record level (Yılmaz and Karataş, 2009:89-90).

The share of manufacturing sector’s import to the total imports reached to 74,3 % in 2008 and today this ratio is still more than 70 %. While import dependency of manufacturing sector was 32 % in 1997, it reached to 65 % in 2007 and 72,4 % in 2013. In other words, while Turkey was importing the 1/3 of its total production in 1990s, today this ratio reached to 72.4 % of its total production. Because of the overvalued TL, the foreign goods became relatively cheaper. To compete with both domestic and foreign rivals, Turkish manufacturing sector used the foreign inputs in their production. In order to produce and make export, Turkish economy needs to import. Hence, while the economy was growing the deficit was also growing (Yılmaz and Karataş, 2009:71-76). As a result, domestic contribution of manufacturing sector has been decreasing steadily.