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Foreign Liquidity Constraints in 2008

Thu, Feb 28 2008, 17:10 GMT
by Yapi Kredi Bank Economic Research Department

Yapi Kredi Bank

Turkey ended 2007 with USD 38 billion current account deficit, corresponding to 7.8% of the projected GDP. This represented little improvement with respect to previous year’s deficit of 8%, despite considerable economic slowdown. Nevertheless, Turkey still achieved to attract substantial capital inflows in the amount of USD 50.4 billion, surpassing by a wide margin the current account deficit. It is worth to note that this magnitude in capital inflows, which is significantly over 2005 and 2006 realizations, was recorded in a year when tensions and fluctuations in global economy broke out frequently.

Before proceeding further, the structure of foreign financing in 2007 will be briefly examined below. Most striking feature in capital flows is the increasing reliance on corporate sector’s borrowing in foreign financing which entails a significant weakness for the coming years, given the fragilities in the global economy that may limit foreign liquidity availability.

I. Structure of Foreign Financing in 2007

In more detail, FDI inflows (net) were recorded at USD 19.8 billion in 2007, exceeding slightly previous year’s USD 19 billion. In this sense, FDI continued to occupy an important place within total capital inflows. Major difference between 2006 and 2007 in financing could be found in portfolio inflows and corporate sector borrowing, the former declining and the latter surging significantly. Impact of mortgage market concerns and risk aversion of investors led to sales of government bonds in local markets, which contained inflows through portfolio investment in 2007. On the other hand, in 2005 and 2006 we had witnessed a change in corporate sector behaviour in terms of foreign borrowing: Namely, corporate sector started to turn its face towards foreign financing sources as opposed to domestic means, mainly due to strong YTL and low international interest rates. In 2007, we have seen this tendency to strengthen as shown in Table 1. Banking and corporate sector’s (net) foreign borrowing together surged to USD 35.7 billion in 2007 from around USD 23 billion in the previous two years. Of this amount, USD 30.2 billion has been obtained by the corporate sector, USD 13 billion more than the previous year, while banking sector’s borrowing remained at USD 5.5 billion, not significantly different from 2006 performance. This increase in corporate loans is dramatic and makes us worry about its sustainability in the coming period. In this sense, corporate sector’s financing behaviour and details of this type of borrowing require to be monitored in the period ahead.

II. Financing Requirements in 2008

The question is whether corporate sector will be able to find the decent conditions in the global economy to continue borrowing in 2008. Our forecasts for the financing requirement for current account deficit in 2008 show that we need corporate sector continue borrowing at full strength this year, namely significantly above 2005 and 2006 and at least as much as 2007. If this condition doesnot hold, we may find ourselves in trouble in the financing of current account deficit that could lead to a correction in the foreign exchange rate.

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Published on  Thu, Feb 28 2008, 17:15 GMT

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