It's the oil, stupid!

Turkey has been experiencing a significant trade deficit since 2003. Is it because the country imports too much and/or exports too little due to appreciation of the local currency?

Two tables below explain the problem. The main culpit is the high energy prices. The ratio of manufacturing exports to intermediate goods has never been higher. Ditto for the export/import ratio -- IF ONE EXCLUDES ENERGY BILL.




If there we no change in the energy prices, the ratio of exports to imports would be much better:

Figure: The ratio of exports to imports under 2000 prices

The Turkish Economy - Recent Developments (2)

Public borrowing constitutes a heavy burden on the financial system. One reason is the under-developed nature of the Turkish capital market. Financial deepening of the system as measured by broad money supply M2Y (which comprised of both domestic currency and foreign exchange deposits) was 28 percent of GDP in 1989 and stayed around 30-35 percent throughout 1990s despite financial liberalization in 1989. Following the economic reform program in 2001, M2Y/GDP ratio has risen gradually and reached to 50% in 2006. The ratio of the domestic debt to M2Y has declined, but it still above the pre-2001 level. Domestic cash debt (i.e. debt excluding to public institutions) is 74%. Net domestic borrowing is almost nill, thanks to fiscal austerity and privatization revenues. Gross domestic borrowing, on the other hand, is at pre-1994 level.

The Turkish Economy - Recent Developments (1)

The fragility of the economy to external shocks was tested in May 2006, when a turmoil in the global financial markets caused local interest rates to rise from 13 percent to 23 percent coupled with 30 percent devaluation in Turkish Lira. The Central Bank responded with a 425 basis point interest hike. After a brief spike to double digits, inflation has returned to pre-May levels at 9 percent. The Lira has recovered most of its previous loses towards the end of the year. Yields on short term treasury, however, remain high and real interest rates, 12 percent at the start of 2007, are still 600 basis points above pre-May levels.