Transcript Document

Will History Repeat Itself?
An Assessment of Turkish Current
Account Trends and Prospects
Cevdet Akçay & Murat Üçer
December 2, 2005
Outline
Why we worry at all, and a few facts
and propositions on the current account
Speculations on the future, taking
history and convergence as reference
Some empirical observations
Conclusions: Don’t worry be happy?
Why worried? Because of history…
Current Account Balance and Capital Flows
(as % of GNP)
10
Capital Account Balance (Inc. Net E&O)
8
Current Account Balance
6
4
2
0
-2
-4
-6
-8
1989Q4
1992Q2
1994Q4
1997Q2
1999Q4
2002Q2
2004Q4
…and because of conventional wisdom
“What are sustainable rates of real appreciation or of
current account deficits and what invites a crisis?
...it is safe to say that a rapid real appreciation –
say over 2 or 3 years – amounting to 25 percent or
more, and an increase in the current account deficit
that exceeds 4 percent of GDP, without the
prospect of a correction, takes a country into the
red zone”
Excerpt from “A Primer on Emerging Market Crises”
R. Dornbush, June 2001
Current account deficit will likely continue this way in the
near term; financing composition and prospects are
improving, but still mostly debt and unidentified inflows…
Current Account Balance
(12-month rolling; in US$ billions)
Capital Account
(as % of GNP)
20
12
15
9
10
6
5
3
0
0
-5
-3
-10
-6
-15
-9
Net Errors&Omissions
Direct Investment
Equity Portfolio
Other Portfolio
Current Account Balance (exc. energy bill)
-20
-12
Current Account Balance (inc. energy bill)
-25
Jan-00
Sep-00
May-01
Jan-02
Sep-02
May-03
Jan-04
Debt Securities
Official Loans
Private Loans
Sep-04
May-05
-15
1992Q4
1995Q2
1997Q4
2000Q2
2002Q4
2005Q2
But sustainable only under fairly benign assumptions while
decline in “measured” debt reflects temporary factors,
measurement issues, and real exchange rate appreciation
Basic sustainability arithmetic:
Non-Interest Current Account Balance +
Non Debt Creating Flows >
External Debt Dynamics
(as % of GNP)
100
Public
90
Private
80
(Real Foreign Interest Rate – Real
Total
70
Appreciation – Real Growth Rate) X
Initial Net Debt Ratio
60
50
Assumptions:
NICA = -5%
NDCF = 2.5%
Interest rate = 4%
Real growth = 5%
Real appreciation = 0%
Initial net debt ratio = 30%
40
30
20
10
0
2000
2001
2002
2003
2004
2005Q2
The widening in the deficit was driven by investment, and
the corporate sector; good news, with caveats…
Saving&Investment Balances: Private vs. Public
(as % of GNP)
Saving and Investment Balances: Total
(as % of GNP)
30
25
28
20
26
15
24
10
22
5
20
0
18
-5
16
-10
14
-15
Public
Private
Overall Balance
Investment
12
-20
Saving
10
1999Q1
1999Q4
2000Q3
2001Q2
2002Q1
2002Q4
2003Q3
2004Q2
2005Q1
-25
1999Q1
1999Q4
2000Q3
2001Q2
2002Q1
2002Q4
2003Q3
2004Q2
2005Q1
And given the international backdrop, policy response
could have been hardly different…
Public Sector Primary Balance
(as % of GNP)
Base Money and O/N Interest Rate
70
40
8
35
7
Net Domestic Assets (left scale; billion NTL)
Net Foreign Assets (left scale; billion NTL)
60
O/N Interest Rate (right scale; %)
6
30
5
25
4
50
20
3
40
15
2
10
1
30
5
0
1999
2000
2001
2002
2003
2004
2005e
2006f
-1
20
0
-2
-5
-3
Central Government
Rest of the Public Sector
-4
-5
Public Sector Primary Balance
10
-10
*Note: The sum of NFA&NDA make up the base money.
-15
Jan-02 Jun-02 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04
0
Dec-04 May-05 Oct-05
Speculations on the future, taking history
and convergence as reference…
How does the latest boom compare to
history?
How does Turkey compare to convergence
economies when they started the chapter-bychapter negotiations?
Current Account Reversal Episodes: Past and Present
Investment-Saving Balances (%)
(as % of 4-quarter rolling GNP)
Growth, Private Absorption, and Credit
(quarter-on-quarter; %)
Total
Investment
Total
Saving
Total
(S-I)
Private
(S-I)
Public
(S-I)
GDP
Growth
Private
Cons.
Private
Inv.
Real
Credit
2 years*
3.85
1.10
-2.75
-1.33
-1.42
14.3
11.6
47.6
22.0
1 year*
3.26
0.41
-2.85
-0.45
-2.40
8.4
8.4
44.1
10.1
2 years
-1.67
0.11
1.78
3.87
-2.09
12.0
9.2
12.0
47.5
1 year
0.10
1.34
1.24
2.73
-1.49
3.3
-0.6
-1.7
4.0
2 years
0.72
-4.84
-5.56
-2.24
-3.32
6.3
4.2
6.5
3.0
1 year
1.22
-2.90
-4.11
-5.44
1.33
8.6
5.6
16.4
15.9
2 years
3.07
0.11
-2.96
-13.22
10.26
19.2
23.6
88.8
109.3
1 year
0.39
-0.88
-1.27
-4.63
3.36
4.2
4.4
15.8
31.4
Avg (2 years)
...
...
...
...
...
8.7
8.1
16.6
10.8
Avg (1 year)
...
...
...
...
...
4.2
4.0
8.0
5.3
1993-94
1997-98
2000-01
2004-?
* Years before the current account reversal.
Current Account Reversal Episodes: Past and Present
Exports, Imports, RER, and Productivity
(quarter-on-quarter; %)
Export Import US-10 RER Productivity
Vulnerability Indicators
External Factors
(quarter-on-quarter; %)
Debt Service ST Debt * External
(as % of
(as % of Debt* (as %
exports)
reserves) of GNP)
Terms
Fed World
of
Funds Growth
Trade
1993-94
2 years*
23.8
41.7
-1.7 11.2
18.6
...
...
...
4.4
-1.5
3.6
1 year*
13.2
36.6
-1.1 11.0
12.9
27.2
207.3
...
2.7
0.0
1.1
2 years
50.0
34.9
-1.1 12.5
5.0
...
...
...
3.9
0.3
5.8
1 year
17.4
10.4
-1.1
7.4
-0.8
20.3
95.1
58.8
-2.5
0.0
2.7
2 years
15.1
25.8
0.9 19.2
16.2
...
...
...
-13.4
1.7
6.4
1 year
13.7
19.6
-0.6 14.9
7.7
35.5
101.3
71.2
-4.2
1.1
2.3
2 years
22.7
44.9
0.5 14.9
18.6
...
...
...
0.6
1.8
5.4
1 year
4.7
9.2
8.5
3.8
36.0
80.3
50.5
-3.3
2.0
2.4
Avg (2 years)
22.6
28.1 …
7.3
14.1
…
…
…
0.4
…
6.8
Avg (1 year)
10.7
13.2 …
3.6
6.8
…
…
…
0.2
…
3.4
1997-98
2000-01
2004-?
-0.4
* Years before the current account reversal.
EU Accession Countries: Selected Indicators
Inflation (annual; %)
Poland
Hungary
Czech Republic
Slovak Republic
Romania
Bulgaria
Turkey
GDP Growth (%)
RER Appreciation (%)
Interest Rate (%)
Before
After
Before
After
Before
After
Before
After
15.1
18.3
8.5
6.1
45.8
2.6
9.5
12.1
6.4
8.6
52.5
10.6
6.8
4.6
-0.7
1.5
-1.2
2.3
4.4
4.5
0.0
2.9
3.9
4.8
9.0
4.3
9.0
6.6
-7.0
5.8
0.7
0.8
6.7
8.1
11.0
6.9
19.4
16.9
7.7
14.4
74.2
3.2
14.7
13.2
6.3
7.5
47.0
3.0
7.4
...
5.0
...
16.6
...
16.4
...
Current Account Balance
(as % of GDP)
Current Account Balance
(exc. FDI; as % of GDP)
Fiscal Balance
(as % of GDP)
Unemployment (%)
Before
After
Before
After
Before
After
Before
After
Poland
Hungary
Czech Republic
Slovak Republic
Romania
Bulgaria
-3.7
-4.5
-6.4
-5.7
-3.6
-5.0
-5.8
-7.5
-2.3
-1.7
-4.6
-6.4
-0.6
3.6
-4.2
-2.1
-0.8
1.2
-1.8
-1.1
5.9
3.2
-1.8
0.4
-1.6
-4.5
-0.9
-3.2
-16.9
1.5
-0.8
-4.9
-1.5
-3.1
-34.1
1.3
10.5
8.7
4.8
16.2
11.3
16.0
11.7
7.4
7.6
18.9
10.1
18.3
Turkey
-6.3
...
-4.5
...
-3.0
...
9.5
...
Source: IFS, Eurostat, World Development Indicators.
Note: Poland, Hungary Czech Rep. started negotiations on March 1998; Slovakia, Bulgaria, Romania in early 2000.
For real exchange rate, "before" corresponds to cumulative appreciation from t through t-2; "after" correponds to cumulative
appreciation from t+1 through t-1, where t is the year in which negotiations start. For all other series, "before" corresponds to t-1,
"after" average of t and t+1.
Turkey is more indebted and FDI outlook
is less certain…
NIIP Excluding FDI
(as % of GDP)
30
20
10
0
-10
-20
-30
-40
Poland
Hungary
Czech
Slovak
Turkey
We have conducted two empirical exercises
Searched for the Balassa-Samuelson effect in
the data
Looked at the sort-run determinants of the
current account in a vector autoregression setup
On the Balassa-Samuelson (B-S) Effect
Trade integration → higher productivity increases in the traded
goods sector (TG S) → higher wages → (under the assumptions of
full employment and perfect labor mobility across sectors) → higher
wages in the non-traded goods sector (NGS) → No matching
productivity increase in NGS → profitability concerns push up PNGS
→ CPI ↑ while (PTGS/PNG) ↓ → Real Exchange Rate (RER)
appreciation given that the counter-party productivity differential is
smaller.
ПNGS = ПTGS (common to all trading partners) + the rate of
depreciation (provided that the exchange rate is not constant) + a
productivity differential measure reflecting the asymmetry of the
productivity gains between the home country and the trading
partners.
Periods of prolonged appreciation due to periods of persistent
productivity differentials OR periods of real exchange rate
disequilibria?
Real Effective Exchange Rate vs. Productivity Ratio
Productivity Ratio
(2002=100)
120
Real Effective Exchange Rate
(as % of GNP)
180
REER
115
4 per. Mov. Avg. (REER)
160
110
140
105
100
120
95
100
90
80
85
80
60
1989Q3 1991Q2 1993Q1 1994Q4 1996Q3 1998Q2 2000Q1 2001Q4 2003Q3 2005Q2 1989Q1 1990Q3 1992Q1 1993Q3 1995Q1 1996Q3 1998Q1 1999Q3 2001Q1 2002Q3 2004Q1 2005Q3
Regression Output: Real Exchange Rate and
Productivity Differential
Dependent Variable: RERLN_CPI
Sample(adjusted): 1990:1 2005:2
Included observations: 62 after adjusting endpoints
Variable
C
PROD_RATIO_LN
PROD_RATIO_LN(-1)
DUM
AR(1)
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
Inverted AR Roots
Coefficient Std. Error
5.1610
0.2033
1.9627
0.4851
-1.2173
0.4820
-0.1059
0.0353
0.8287
0.0821
0.8093
0.7959
0.0628
0.2251
86.1906
1.8582
0.83
t-Statistic
25.3888
4.0460
-2.5257
-2.9994
10.0962
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)
Prob.
0.0000
0.0002
0.0144
0.0040
0.0000
4.7656
0.1391
-2.6191
-2.4475
60.4634
0.0000
RER Regression Inferences
The sum of the current and lagged productivity ratio coefficients
is 0.746, thus over the long run a 1% Δ change in the
productivity differential → a 0.746% Δ in the RER.
For the whole sample period (1990Q1 through 2005Q2), the Δ
in productivity differential is 30.7%, and the change in RER is
42.6%, implying that 53.8% of the Δ in the RER can be
attributed to the Δ in productivity differential.
The residual series from this regression is taken as an RER
series that is cleared from effects of relative productivity
changes, and thus encompasses all other drivers of the real
exchange rate except for the productivity differential variable.
The purpose is to gain insight into the impact of RER Δs on the
current account deficit in the absence and in the presence of a
Balassa-Samuelson effect.
On the Short Run Determinants of the
Current Account
In the VAR framework, we included capital inflows,
the real exchange rate(actual in one version and the
residual in the other), output growth, and current
account balance as endogenous variables.
To the extent that a significant portion of the RER
variation comes from factors other than BS,
coefficients of the actual and the residual RER series
should be roughly similar in the current account
equations.
Better use of VAR models are made through variance
decompositions and impulse responses. We utilize
both methods to gain insight into current account
dynamics in general, and the role of real exchange
rate in particular.
Variance Decomposition With Actual RER
Period
1
2
3
4
5
6
7
8
9
10
Variance Decomposition of CAROLL:
S.E. INFLOWROLLNEW RERLN_CPI GNPGRWTH
0.50470
1.08771
1.62187
2.00070
2.20218
2.27657
2.29745
2.31832
2.35162
2.38333
11.75329
47.07753
53.43528
54.42295
53.20238
51.52776
50.60505
50.97212
52.14844
53.27852
11.29438
16.17327
21.59098
25.84717
29.38726
31.90586
32.99190
32.70950
31.79162
30.98822
9.27596
5.35560
3.42433
2.43786
2.01473
1.93086
2.03035
2.16042
2.22709
2.23170
Cholesky Ordering: INFLOWROLLNEW RERLN_CPI GNPGRWTH CAROLL
CAROLL
67.67636
31.39361
21.54941
17.29202
15.39564
14.63551
14.37270
14.15797
13.83285
13.50156
Variance Decomposition With Residual RER
Period
1
2
3
4
5
6
7
8
9
10
Variance Decomposition of CAROLL:
S.E. INFLOWROLLNEW RESID_DUM GNPGRWTH
0.52450
1.12661
1.68273
2.02204
2.18133
2.22788
2.23412
2.25472
2.29934
2.34615
15.95593
48.87406
53.40076
54.52912
54.36664
53.73622
53.46861
54.20191
55.62957
56.99822
8.14417
9.31371
13.52149
14.39503
14.78839
15.26297
15.48195
15.21109
14.65318
14.12677
8.61707
6.51905
5.51545
5.03067
4.96629
4.93185
4.90437
4.91704
4.94827
4.97654
Cholesky Ordering: INFLOWROLLNEW RESID_DUM GNPGRWTH CAROLL
CAROLL
67.28283
35.29319
27.56229
26.04517
25.87868
26.06896
26.14507
25.66997
24.76898
23.89848
Impulse Responses With Actual RER
Response to Cholesky One S.D. Innovations ± 2 S.E.
Response of CAROLL to INFLOW ROLLNEW
Response of CAROLL to RERLN_CPI
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
1
2
3
4
5
6
7
8
9
10
1
Response of CAROLL to GNPGRW TH
2
3
4
5
6
7
8
9
10
Response of CAROLL to CAROLL
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
1
2
3
4
5
6
7
8
9
10
1
2
3
4
5
6
7
8
9
10
Impulse Responses With Residual RER
Response to Cholesky One S.D. Innovations ± 2 S.E.
Response of CAROLL to INFLOW ROLLNEW
Response of CAROLL to RESID_DUM
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
1
2
3
4
5
6
7
8
9
10
1
Response of CAROLL to GNPGRW TH
2
3
4
5
6
7
8
9
10
Response of CAROLL to CAROLL
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
1
2
3
4
5
6
7
8
9
10
1
2
3
4
5
6
7
8
9
10
On the Short Run Determinants of the
Current Account
Coefficients of the actual and the residual RER series did come
out to be similar, implying that a significant portion of the real
exchange rate variation could be attributed to factors other than
BS.
For both set ups, variance decompositions clearly show that the
current account is mostly a capital account driven phenomenon.
To the extent that the real exchange rate has any impact on the
current account balance, roughly half of that stems from that
portion of the change in the real exchange rate that is not
linked to productivity differentials.
Impulse response functions also indicate that capital inflow
shocks and shocks to both versions of the RER variable have an
impact on the current account, the order reflecting the strength
of impact very much in the spirit of variance decomposition
inferences.
Conclusions
Turkey now is very similar to the convergence economies
then; plus we detect some encouraging differences from
earlier boom episodes, in addition to flexible exchange
rate and a stronger banking sector.



Yet, we are still in transition.
Our VAR exercise confirms a history of mainly capital accountdriven current account adjustments, which typically entailed a
“correction” in the real exchange rate.
The B-S regressions suggest some overvaluation in this latest
episode as well.
But an “old-style reversal” seems highly unlikely as long
as EU momentum is maintained, international
environment remains benign, and strong fiscal policy is
supported by structural reforms.