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Turkey's balancing act continues

Turkey's current account deficit is continuing to get better, but it's questionable how much longer that will continue.

While Turkey may still be seething at its credit outlook being cut from positive to stable by Standard and Poor’s, it may be able to take some comfort from the support it has received in recent weeks from the sell-side. RBS’s Tim Ash has bemoaned the ratings agencies apparent dislike of the country, and now Capital Economics has put out a report taking a look at the drop in Turkey’s most publicised weakness: its current account deficit.

“It now looks like the economy is around half way through the rebalancing needed to bring the external deficit down to a sustainable level – but there are also signs that this process will become more difficult from now on.”

So while things may be trickier in the coming months, at least Turkey can take solace from the fact that it has won half of the battle.

“There are three reasons behind the reduction in the current account deficit. First, Turkish exports have held up well. Second, tighter monetary policy has caused domestic demand to weaken, in turn resulting in falling imports. And third, the deficit in March 2011 was particularly sizeable due to an unusually large deficit on the income account (profits being remitted out of Turkey).”

At any rate, while the current account deficit may be on the decline at the moment, Capital Economics are far from confident that this positive trend can continue at its current rate. 

“For a start, Turkish exports may be running out of steam. Robust export growth in recent months has come on the back of strong demand from other emerging markets, namely in the Middle East and Asia. However, the most recent activity data from Asia has been softer. Meanwhile, the Turkish Exporters Assembly released figures that point towards a 2.9% y/y contraction in exports in April.”

It added:

“In addition, whereas previously it appeared that rebalancing was coming via reduced imports of capital and consumer goods (a result of weaker domestic demand), intermediate goods are also now falling outright. These are key inputs into Turkey’s manufacturing sector, which has been behind the mini boom in exports. However, it now seems that industry is stagnating at best and could already be in recession. And finally, the acceleration in credit growth since March points towards a rebound in domestic demand (which is consistent with a renewed rise in imports).”

Still, a change in Turkey''s outlook will, at least in the near-term, have little impact on how fixed-income investors view Turkish hard-currency sovereign debt given the issuer''s already well-established yield curve and faithful investor base.

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