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Wrong-Again Turkish Current-Account Data Add to Investor Risks

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As if Turkey’s inconclusive election result and decelerating economic growth weren’t bad enough, investors must now grapple with misleading official data.

Almost every time the central bank has reported the current-account deficit in the past two years, it’s increased the figure in the following months. The corrections mean the shortfall that sent bonds rallying earlier this year was probably understated to the tune of $902 million, or about 9 percent, according to data compiled by Bloomberg.

The delusive readings matter to investors because Turkey’s current-account gap makes the country more susceptible in the eyes of Moody’s Investors Service and Standard & Poor’s to any sudden loss of global investor appetite. Against this backdrop, there’s still no clarity about which parties will form the next government more than a week after the parliamentary election.

“The revisions merely serve to underline the problem of Turkey’s current-account deficit,” William Jackson, an economist in London for Capital Economics Ltd., said by e-mail on Monday. “This makes the economy, and the lira, particularly vulnerable.”

The risks of investing in Turkey can be measured by the country’s bond yields, which are the third-highest of any major emerging market. The lira, meanwhile, has depreciated 15 percent this year against the dollar, the worst performance after Brazil’s real among the 31 most-traded currencies worldwide.

Record Lows

The data revisions have come as concern deepened over central bank independence amid government pressure to lower interest rates to spur growth. While the lira weakened to record lows, Governor Erdem Basci has kept the benchmark rate unchanged since February. The central bank didn’t respond to requests for comment by e-mail and phone.

Final corrections to the current-account data in the past 23 months to March yield a deficit that’s $3.4 billion higher than originally reported. The pace of revisions accelerated in the last six months, with a total of $1.4 billion in adjustments to widen the shortfall.

One source of unreliable data could be the difficulty classifying cash inflows as war in neighboring countries pushed some 2 million refugees into Turkey, according Murat Gulkan, who helps oversee about $400 million in investments at Istanbul-based Unlu Portfolio Management. The central bank has also over estimated tourism revenue, which then gets revised lower, pushing the shortfall up, he said.

‘Natural Forces’

While the quality of the data seems to have deteriorated, “natural forces are taking care of the current-account deficit,” he said. “A slowing economy, weaker currency and lower oil, of course, are all bringing the headline number down to a much more manageable number.”

The gap will probably fall to 4.8 percent of gross domestic product this year from almost 10 percent in 2011, according to the average estimate in a Bloomberg survey of economists.

The central bank has been reporting record amounts of so-called net errors and omissions, or mystery money without any determinable source, as part of its balance of payments data. The total in the first four months of the year was almost $7 billion.

“High inflows due to unknown sources is worth paying attention to,” said Ipek Ozkardeskaya, a market analyst at London Capital Group. “Downward revisions for the current-account balance and expected outflows of capital will pressure the lira.”

Capital Flows

Turkey’s dependence on capital inflows to fund its current-account deficit makes it vulnerable to a pullback in investor demand for riskier assets as the U.S. moves closer to raising interest rates for the first time since 2006.

Foreign holdings of Turkish stocks and bonds dropped to $91 billion in May from almost $150 billion in early 2013, according to central bank data. Investor inflows were about $3 billion in 2014, from $22 billion in 2012. This year flows reversed, with more than $3 billion being pulled out of the country so far.

About 60 percent of the deficit this year has been covered by the mystery money along with central bank reserves, pointing to “another difficult year for the central bank,” Citigroup Inc. analysts Ilker Domac and Gultekin Isiklar in Istanbul said in a June 11 report. “Both the magnitude and the quality of capital flows lead us to remain cautious about the lira.”

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