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Surprise drop in Turkey trade gap points to slowdown

Source: Reuters - Tue, 31 Dec 2013 12:03 PM
Author: Reuters
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* Trade deficit falls in November vs year ago

* Deficit is far below analysts' forecasts

* Reduces pressure on foreign reserves from lira defence

* But current account deficit still huge

* Outflow of $764 million since scandal broke

By Ece Toksabay and Seda Sezer

ISTANBUL, Dec 31 (Reuters) - A surprise drop in Turkey's trade deficit in November added to signs that one of the world's recently most robust developing economies is slowing just as it faces fresh headwinds from a high-level corruption scandal.

The deficit shrank to $7.151 billion in November from $7.195 billion a year earlier, official data showed on Tuesday. The figure was far below a forecast for a deficit of $7.70 billion in a Reuters poll of analysts.

Exports rose a modest 3.6 percent to $14.25 billion but imports expanded just 2.2 percent to $21.4 billion.

That is modestly positive news for the balance of an economy whose dependence on imported oil makes it more exposed than most to next year's expected tightening of the flow of cheap dollars.

But it also underlines how much Turkey's growth prospects have worsened since it grew at a rate of more than 10 percent in the second quarter of 2011.

"(It is) another signal that domestic demand lost speed in the last quarter of the year on the back of tightened financial conditions and recent macro-prudential measures," analysts at Odeabank said in a research note.

"Excluding gold and energy, the growth rate of imports eased from 7.5 percent in the third quarter to 0.8 percent during the October-November period."

To reduce risks in the banking sector, the government has been pressing banks to cut growth in new lending, while the central bank has tightened money market liquidity to support the lira, down 16 percent against the dollar this year.

The economy grew 2.2 percent in 2012, down from 8.8 percent in 2011. Economic activity picked up earlier this year, with the government predicting growth of 3.6 percent for 2013, but the trade data suggests the expansion is already slowing again.

Business sentiment has been hit further this month by a corruption scandal which, if it persists, could usher in months of political instability. Last week three ministers resigned after their sons were among dozens of people detained on Dec. 17 as part of a probe into corrupt procurement practices.

Deniz Cicek, economist at Finansbank, said the trade deficit was likely to contract further early next year because of depreciation of the lira in the last few months.

"Moreover, the recovery of the global economy should support Turkey's exports, thereby also alleviating the trade deficit."

RESERVES

A lower trade deficit would probably be welcomed by the central bank for one key reason: it reduces the drain on Turkey's foreign exchange reserves, which have been under pressure as they are spent on the defence of the lira.

The central bank's foreign reserves totalled $135.068 billion on Dec. 20, but private sector analysts calculate that net reserves - resources which the central bank could access quickly - are only around $40 billion.

That figure is dwarfed by Turkey's current account deficit, which covers trade in goods and services; in the first ten months of this year, the deficit widened to $51.901 billion from $39.553 billion a year earlier.

Repayments of loans from the government's Eximbank by Turkish exporters this year have helped to compensate for the deficit; total foreign reserves are actually higher now than they were at the end of last year. But foreign exchange data released by a top government official on Tuesday illustrated the risks of any prolonged period of capital outflows.

Turkish Deputy Prime Minister Ali Babacan said $764 million had flowed out of the lira through the foreign exchange market since Dec. 17, although $110 million had flowed back as the market stabilised on Monday.

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