An Intertemporal Benchmark Model for Turkey’s Current Account



As seen from figure 2, net investment income for Turkey is consistently negative. This
means that the returns on investment received by Turkish residents from their investments abroad
are lower than those earned by foreigners for their investment in Turkey. Not only is net
investment income negative, but it is also increasingly negative over the period under study.

Since 2000, Turkey’s net investment income has been declining from approximately $ - 4 billion
to $ - 5.6 billion. This component is a major contributor to the current account deficit. Net
investment income sheds light on the profitability of investment in Turkey. While higher returns
are leaving the country for foreign investors, the returns are being earned due to investment in
Turkey. Higher returns indicate profitability and competitiveness of a country, which has
implications for the future potential of Turkey.

The only component which has been consistently positive in Turkey for the entire period is
the unilateral transfers account. While the account appears to be declining, this is not due change
in the economy, but rather due to a change in accounting. Remittances that were earlier counted
in this account are now no longer a part of it.

From the two graphs we see a worsening position for all components3 and therefore the
current account in Turkey from 1992 to 2005. This raises concerns about the sustainability of the
current account. Conventional wisdom suggests that a current account deficit to GDP ratio of 4 -
5% or higher implies that the current account is unsustainable. Figure 3 maps the current account
to GDP ratio for Turkey. As can be seen from the graph, Turkey breached this threshold prior to
both previous crises.4 Figure 3 reveals that this ratio is worsening from 2003 onwards. At the
current rate of over 5%, Turkey should be suffering from a financial crisis. However, as Hudson
and Stennett (2003) show Ireland, Australia and Israel had current account deficits that were
above this threshold for several years. In fact, the US has been experiencing current account

3 As mentioned earlier, the change in unilateral transfers may be due to a change in accounting, rather than
changed fundamentals.

4 Turkey also crossed this threshold in 1995. Turkey was recovering from its crisis in 1995 and this would
have been a setback. However, Turkey was able to withstand this problem.



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