Sustainability of the Current Account Deficits: An Application with the Turkish Data

Many developing countries have experienced substantial and persistent current account deficits in recent years; this has raised the issue of sustainability since currency crises were often associated with large and persistent current account deficits. With this motivation, after presenting a brief history about balance of payments in Turkey, macroeconomic determinants of the current account deficits in Turkey were investigated by Vector Auto Regression and Auto Regressive Distributed Lag models in lights of the theoretical arguments made about Turkish Economy through making comparisons with Latin American and East Asian countries. Then, sustainability of the current account deficit was analyzed by different empirical techniques associated with solvency and excessiveness concepts. Both the long run relationship between exports and imports together with national cash flow and consumption were analyzed. In order to distinguish between sustainable and unsustainable periods for current account deficits, Markov regime switching model was used thereafter. Finally, sustainability of the current account deficits in Turkey was evaluated according to the macroeconomic fundamentals together with discussing the composition of current account deficit and the way of financing to have insights about the future path of current account balance. Problem about current account deficits were considered as structural for two reasons. First, the deficits were mainly caused by high rate of investments rather than temporary over-consumption decisions. Second, they were caused by foreign trade deficits largely as an outcome of dependence of production and exports on imported intermediate goods. Furthermore, there were negative developments about the way of financing in last years that share of debt instruments in financing has increased against FDI. As a result, it has seen that Turkey would continue to have current account deficits in the next years and sustainability of these deficits has become increasingly difficult.

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