Mystery Inflows to Turkish Economy Reach Highest on Record

  • So-called net errors and omissions hit $9.7 billion in 2015
  • Such inflows seen as unhealthy way to plug current-account gap

Turkey’s capital inflows of unknown origin last year reached the highest level since the central bank began keeping records in 1975, spurring fears that the government’s way of financing the current-account gap is unsustainable.

The central bank reported Thursday that “net errors and omissions” rose to $9.7 billion. One possible cause is the difference between actual tourism revenue and the amount estimated by the bank, which relies on surveys of foreign visitors. Another, put forward by former Customs Minister Nurettin Canikli, is that regional chaos is creating a financial “safe haven” in Turkey.

The rise in mystery inflows casts doubt over the government’s achievement in narrowing the current-account deficit, considered the economy’s biggest vulnerability in 2013. An improvement in the foreign trade imbalance was key, but as the gap narrowed, financing from mystery funds rose. Combined with foreign reserves sold, they were equivalent to 67 percent of the deficit last year -- the highest level since Turkey’s last surplus in 2001.

“It is impossible to see this as a healthy way of financing the deficit,” Finansbank AS chief economist Inan Demir said by phone. “The size of the net errors and omissions shows the difficulty Turkey is facing while it finances the gap in its current-account, even as it shrinks.”

Narrowing Deficit

Turkey’s current-account gap narrowed at a slower pace in December than in the previous two months as the impact of lower oil prices diminished at the end of last year. The deficit shrank 24 percent to $5.07 billion, from $6.66 billion a year earlier. The median estimate in a Bloomberg survey was for a $5 billion shortfall.

The gap had narrowed at an annual rate of about 59 percent and 84 percent in November and October, respectively, the central bank said Thursday. The lira traded 0.2 percent lower at 2.9286 per dollar at 1:08 p.m. in Istanbul.

Mystery flows are called net errors because the central bank can’t tell where exactly the money came from and how it entered the country.

A potential reason for the increase could be non-financial companies’ inability to pay back foreign-exchange debt, due to the lira’s slump or for other reasons, which forced them to repatriate assets through unofficial channels, Demir said.

Unclear Sources

There’s a close link between the amount of money Turks bring in from abroad and the amount of mystery flows, according to Murat Ucer, an Istanbul-based economist at Global Source Partners Inc. When the former dries up, the latter surges, he said, citing official data he compiled going back to 2007.

Trade with Iran has also been suggested. A long-time gold importer, Turkey became an exporter in 2012 when it started paying for Iranian gas in precious metals as a way of circumventing international sanctions that have now been lifted.

Regardless of source, a key concern about unexplained inflows is what it says about how Turkey finances its current-account, Maya Senussi, a senior economist at Roubini Global Economics LLC in London, said by e-mail.

“It underscores the fragility of the deficit-financing,” Senussi said. “It is unpredictable and unsustainable, and it is fairly safe to assume it is not meant to be long-term investment.”

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