‘Net Errors and Omissions’ Fuel Turkish Deficit Concern

By Benjamin Harvey

Photographer: Chris Ratcliffe/Bloomberg

“This is the money that has surfaced in Turkey, essentially, which seems to have gone... Read More

Turkey’s improving current-account deficit is raising questions about the sources of financing that are shrinking the gap.
While a report this week showed the shortfall narrowed 35 percent over the past year to $29.6 billion through August, yields on 10-year bonds have climbed 64 basis points in the period amid concern the trend isn’t sustainable. The deficit has been buoyed in 2014 by $9.1 billion in unexplained income classified as “net errors and omissions” by the central bank.
Investors have yet to conclude the shrinking deficit
means reduced risk as the Federal Reserve phases out monetary stimulus, according to Isik Okte, a strategist at TEB Investment in Istanbul. U.S. policy makers have been scaling back their monthly bond purchases since January, and are set to end the final $15 billion chunk this month.
“Turkey’s current-account deficit is being funded through the net errors and omissions column, which raises doubt about the financing,” Okte said by e-mail yesterday. “The trend is positive, but the underlying dynamics are being questioned.”
The increase in Turkey’s unexplained inflows may result from capital flight from Russia and Ukraine after protests erupted in Kiev’s Independence Square, or Maidan, at the end of last year, according to Tim Ash, chief economist for emerging markets at Standard Bank Group Ltd. in London.

Capital Flight

The U.S. and European Union have imposed sanctions against Russia, saying President Vladimir Putin has aided the separatists in Ukraine.
“That huge net errors and omissions inflow in August and year-to-date of more than $9 billion might be just Russian and Ukrainian flight capital looking for a safe home away from the Western sanctions threat,” Ash said by e-mail yesterday. “The bulk of it, close to $8 billion, came in the immediate aftermath of Maidan, at a time when Turkey was offering stellar nominal rates.”
Regardless of the source, “it’s an inflow of errors and omissions, so that’s reassuring,” he said. “If it was an outflow, we would be worried. In the end, people are putting money to work in Turkey.”

Highest Rate

The yield on 10-year lira bonds jumped 20 basis points to 9.20 percent yesterday. That’s the highest rate after Brazil and Russia among 20 emerging markets tracked by Bloomberg.
“This is the money that has surfaced in Turkey, essentially, which seems to have gone into the system but the source is not clear,” Finance Minister Mehmet Simsek said in an interview in Ankara yesterday. “You can’t relate it to trade, you can’t relate it to anything else, because it’s simply coming out from under mattresses.”
The current-account deficit will probably narrow to $46 billion this year, or about 5.7 percent of gross domestic product, according to government estimates. That’s down from 8 percent in 2013 and almost 10 percent in 2011, when it was the world’s largest in absolute terms behind the U.S.
The lira strengthened 0.3 percent today to 2.2564 per dollar as of 11:15 a.m. in Istanbul, extending its gain to 0.6 percent since Oct. 15, when the central bank released the balance of payments data.

Iraq Crisis

Capital flight from neighboring Iraq and Syria, where the advance of Islamic State insurgents has pushed more than a million refugees across Turkey’s border, could also explain some of the increase in net errors and omissions, according to Mehmet Besimoglu, chief economist at Oyak Menkul Degerler in Istanbul.
“As long as the flow continues, it helps the currency,” Besimoglu said. “However, since we do not have any idea on the sustainability of these flows, there is always a risk, which creates volatility.”