# **III. How Much can the Current Account Deviate from its Path?**

This section makes use of the parameters estimated in the previous section to simulate the future dynamics of the current account based on the projected values of its determinants. The current account balance is simulated over the medium term (2018-2022), using the coefficients from the current account determinants equation. We start by considering a baseline scenario that considers the projected values of the determinants. Then, we consider simulated additional scenarios for the current account after selected determinants are subject to a set of shocks or deviations from the baseline scenario, while the remaining determinants take the values of the baseline scenario.

## **The baseline scenario**

**The baseline scenario that considers the projected values of the determinants of the current account based on the IMF’s World Economic Outlook (WEO), the World Bank Turkey country office staff estimates, and authors’ projections** for inflation and global uncertainty variables. We use actual values for 2018 where available and the latest available forecasts for 2019-2022. Table 4 below reports the values considered for the baseline indicators before difference, lag or log transformation. We assume that inflation volatility over the 2019-2020 period is above the previous five-year average, falling in 2022 to its 2010-2017 average level. We assume that global uncertainty remains relatively moderate in 2019 and slowly increases in 2020 and 2021. The projections for net foreign assets (in % of GDP) for 2020-2022 are generated endogenously, by adding 50 percent of the previous year’s current account deficit to the stock of NFA. The projections for the remaining variables are obtained from World Bank staff projections and WEO. It is important to note that this simulation is akin to a static “what if” analysis rather than a general equilibrium forecast, and it should not be read as the latter.  First, simulated shocks are deterministic and do not allow for stochastic interaction between the variables.  Second, the underlying model is descriptive in nature, hence built to provide an accurate representation of the determinants of the current account balance, rather than to provide the best possible forecast.

**Table 4: Projected values for current account determinants: the baseline scenario**

|Variable|2017|2018|2019|2020|2021|2022|Source|
|---|---|---|---|---|---|---|---|
|Credit to private sector (in % of GDP)|84.90|76.90|73.90|74.90|75.90|76.90|WB|
|Real effective exchange rate|73.36|62.36|57.99|50.95|55.00|58.00|WB|
|GDP growth|7.43|2.60|-2.537|2.541|2.961|3.008|WEO|
|GDP growth partners|3.37|2.78|2.32|2.09|2.00|1.97|WEO|
|Net foreign assets (share of GDP)|-0.54|-0.46|-0.44||||WB|
|Oil prices|54.40|71.07|61.77|61.50|60.77|60.38|WEO|
|FDI (in % of GDP)|0.96|0.80|0.94|0.94|1.00|1.10|WB|
|Terms of trade|90.69|89.00|85.00|82.60|83.30|83.00|WB|
|GDP PC in PPP terms|24496|24850|23922|24233|24655|25100|WEO|
|GDP PC in PPP terms partners|37000|37652|38238|38749|39243|39737|WEO|
|Trade openness|53.87|59.40|58.40|60.60|58.80|60.00|WB|
|Trade openness partners|81.42|83.72|83.52|82.11|81.80|81.22|WEO|
|Inflation volatility|0.037|0.06|0.07|0.05|0.05|0.04|Own|
|VXO|9.60|16.52|18.00|20.00|22.00|23.00|Own|
|Public sector expend(in%of GDP)|21.78|22.30|23.00|22.30|21.90|21.90|WB|

Source: Authors’ elaboration

**Under the baseline projection, the current account balance is expected to improve over the 2018-2022 period by 1.5 percent of GDP on average relative to the previous (2013-17) five year period** (Figure 27). The model outof-sample predicts strong CAD reduction in 2018 by 1.3 percent of GDP, which is consistent with the realized CAD contraction (to 3.6 percent of GDP) in 2018. The CAD is projected to further decrease by additional 1.2 percent of

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