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Turkish economy showing signs of overheating: Analysts

It may boast world-beating growth figures but analysts say Turkey's widening current account deficit could be its Achilles heel

AFP, Sunday 1 Apr 2012
Turkey bazaar
A shoe-shiner waits for customers in the border city of Kilis, southeastern Turkey (Photo: Reuters)
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The stellar growth Turkey has enjoyed over the past two years may soon come to a swift end, analysts warn, as the country's economy shows signs of overheating.

Turkish government officials still paint a rosy picture about the state of economy, but the country's widening current account deficit is an Achilles heel that leaves it vulnerable to global financial turbulence.

At the crossroads of Europe and the Middle East, Turkey has benefitted from a boom in foreign investment and trade, and has been one of the engines of global growth over the last two years.

It posted 8.9 per cent growth in 2010 -- one of the highest in the world -- and the OECD expects it to have grown by 7.4 last year.

And it's setting sights high to join the ranks of the world's top 10 economies by 2023, from 17th place currently.

But analysts warn the current growth rate is unlikely to last.

"What GDP growth rates don't reveal is that the Turkish economy is now overheating," said Neil Shearing, economist at Capital Economics, in a recent research note.

The fast economic growth of the past two years "was accompanied by a rapid widening of the current account deficit," Inan Demir, an Istanbul-based chief economist at Finansbank, told AFP.

Turkey's current account deficit -- the broadest measure of trade with the rest of the world -- has jumped to 10 per cent of overall economic output. At this level it is worse than several eurozone countries struck by the debt crisis, sparking concerns among economists and analysts.

"What is more, over the past two years, the current account deficit has mostly been financed with short term borrowing, which means Turkey is facing a heavy external debt service burden (to the tune of $135 billion) over the next 12 months," warned Demir.

Turkey's current account deficit, which surged from just over 2 percent of GDP in 2009, is partially due to the rise in oil prices, according to William Jackson, emerging markets economist at Capital Economics.


"Since Turkey is a large net oil importer, it is clearly worse off from higher oil prices," he said in a research note.
Turkey's net energy imports were equivalent to around 6 percent of GDP in 2011 -- accounting for over half of the total current account deficit of 10 percent of GDP.

But there is more to Turkey's current account shortfall than simply the high cost of energy imports, according to Jackson.

The economist said the deficit has also widened due to rapidly rising domestic demand, suggesting that "a period of weaker domestic demand is needed to put the current account on a sustainable footing."

Standard and Poor's ratings agency warned recently the high current account deficit makes it "vulnerable to sudden financial account outflows and external refinancing risks."

While global markets rebounded in the first couple of months of 2012 amid a lull in the eurozone debt crisis, shares have slumped in recent weeks on concerns about global growth prospects.

Capital Economics said "signs that investor risk appetite is starting to weaken have raised fresh concerns about the difficulty of attracting capital inflows to fund the current account deficit."

Turkey is not alone as the other emerging markets which have driven growth in past years are also slowing down -- another worrying sign for the global economy.

China, the second-biggest economy in the world, has cut its 2012 growth target to 7.5 per cent from a previous estimate of 8.0 per cent, as it swung into a trade deficit of $31.48 billion in February.

The Turkish government forecasts 4.0 per cent growth in 2012 owing to the effects of the eurozone crisis, but is confident that the predicted slowdown will be short-term.

But BNP Paribas said despite Turkey's hopes for a soft landing, the imbalances inherited from 2011 including double-digit inflation and current account deficit limit the authorities' room for manoeuvre in 2012.

"Thus Turkey will remain vulnerable to changes in global risk sentiment," it warned in its Global Outlook report 2012.

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