Turkey Posts Record Trade Gap at $10.2 Billion

Turkey’s trade deficit widened to the biggest on record in June, signalling that central bank efforts to rein in a surge in imports aren’t working.

The deficit was $10.2 billion in the month, up from $5.6 billion a year earlier, the statistics office in Ankara said on its website today. The figure exceeded last month’s then-record deficit of $10.1 billion and the median estimate of $9.5 billion from eight analysts in a Bloomberg survey.

Central bank Governor Erdem Basci said yesterday that the limits on bank lending he has imposed this year will help narrow the imbalance between imports and exports that’s threatening Turkey’s financial stability. The current-account balance, the widest measure of trade in goods and services, will improve in the last quarter of the year, he said.

“A new record trade deficit is not what we wanted at all,” Levent Durusoy, chief economist at Yatirim Finansman Securities in Istanbul, said in a telephone interview. “The measures taken so far will take some more time to work and for the impact of the shift in the exchange rate to be seen.”

Basci has held the benchmark one-week repo lending rate unchanged at a historic low of 6.25 percent since January, helping to weaken the lira about 8 percent against the dollar this year, the most of 25 emerging market currencies tracked by Bloomberg. The currency is no longer overvalued, Basci said yesterday.

Over the past few days, Deputy Prime Minister Ali Babacan, who is in overall control of economic policy for the government, also has invited Turkish and foreign analysts to talks. "He said they were in listening mode," said one investor who met Mr. Babacan. At the same time, the economy minister gave nothing away on whether the government will tighten fiscal policy when it eventually publishes a new economic program, probably in September, the investor said.

Mr. Babacan had been vocal before Turkey's June 12 elections in reassuring markets that reducing the current-account deficit would be the new government's top priority. That led investors to assume the government would come forward with a program of fiscal tightening once the election campaign was over and that the central bank too was likely to begin a tighter monetary policy.

Since the election, however, Mr. Babacan has been silent and the government appears to have opted for a wait-and-see approach to what happens in the global economy. With the U.S. in particular on the brink of important decisions on its debt ceiling, a fresh global downturn could take the heat out of Turkey's economy without any need for raising interest rates, analysts said.

"I guess the impetus both in terms of fiscal and monetary policy when so much domestically and globally in terms of the economic outlook is so unclear is to buy more time, to get a few more data inputs," said Tim Ash, emerging-markets economist at Royal Bank of Scotland, in a research note Thursday. "Is the global economy set to stay in stall mode, and is the Turkish economy slowing down under its own steam? The jury seems to be out on both cases."

In the meantime, however, Prime Minister Recep Tayyip Erdogan and a new economy minister, former Trade Minister Zafer Caglayan, have said repeatedly that there was no cause for concern over the current-account deficit, triggering market nervousness.

Turkey's current-account deficit is a chronic weakness for the economy, primarily because the country's manufacturing sector—the key engine for export growth—relies on large quantities of imported raw materials and semi-finished products in order to produce. According to the statistic institute's breakdown of June trade figures Friday, 71% of the $10.2 billion deficit was attributable to intermediary goods, 15.7% to capital goods and 12. 8% to consumption goods.