Aysu Çelgin is a Researcher at the CBRT
Mert Gökcü is a Researcher at the CBRT.
Özgür Özel is a Deputy Executive Director at the CBRT.
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The Turkish economy has witnessed a rebalancing in terms of pace and composition since 2018 with net exports as the main driver of growth (Chart 1). This particular shift in net exports and the resulting sharp contraction in the current account deficit are critical for rebalancing. In fact, the external balance has been improving since 2011. In this blog post, we will seek to contribute to a better understanding of the drivers of this improvement over recent years. Therefore, we will analyze the impact of the explanatory variables on the cumulative external balance components using findings from Çelgin et al. (2019).
In Çelgin et al. (2019), we split up the effects of income and relative prices in Turkey’s GDP-defined real exports and imports excluding gold trade. In that study, exports of goods excluding gold were explained using the export-weighted global growth index, i.e. the indicator for external demand conditions, and CPI-based real exchange rate representing relative price effects. The models showed that demand conditions played quite a dominant role in explaining exports of goods excluding gold, which were up by a cumulative 66% between 2011 and 2018, a large portion of which (50.6 points) was accounted for by external demand growth (Chart 2).
The decomposition of exports of services, on the other hand, was accomplished using the GDP-weighted global growth index and the real exchange rate. Our analysis suggests that income and substitution effects provided a more balanced contribution to exports of services (Chart 3).
As services imports comprise a small portion of total imports, we chose not to break down imports into goods and services. Like exports, imports excluding gold were also explained by the determinants of demand and the real exchange rate. In order to decompose the effects of domestic and external demand on imports, we divided the determinants of demand into two categories: exports and non-export GDP (domestic demand). As shown in Chart 4, in terms of magnitudes, the variables have provided similar contributions throughout the period in question. However, domestic demand seems to be slightly more impactful.
A closer look at the import figures to better understand more recent developments in external balance reveals that real exchange rate changes have been more pronounced in lowering imports since 2017 (Chart 5).
In conclusion, empirical evidence indicates, as suggested by previous studies, that real exchange rate changes provide some boost to exports, but demand movements remain as the main driver of the export performance. Although the real exchange rate has a larger impact on imports than on exports, our findings show that aggregate demand is the major determinant of imports. Compared to previous periods, the effect of the real exchange rate was more pronounced in the recent improvement of the external balance.
Çelgin A., Gökcü M., Özel Ö. (2019). Decomposition of Income and Relative Price Effects in Exports and Imports. Central Bank of the Republic of Turkey, Research Notes in Economics, No: 19/05.