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UPDATE 2-Turkish current account deficit shrinks to 34-month low

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(Adds details) By Seltem Iyigun

ISTANBUL, Oct 11 (Reuters) - Turkey's current accountdeficit fell in August to its lowest level since October 2009,central bank data showed on Thursday, due mainly to a rise ingold exports and a slowing economy.

The current account deficit fell to $1.18 billion from arevised $4.097 billion a month earlier, below a Reuters pollforecast for a deficit of $1.750 billion, data showed.

"The significant slowdown in the economy narrows the currentaccount deficit," said Garanti Securities economist Gizem OztokAltinsac. "It would stand at around $50-55 billion at theend-2012, which is equivalent of 6 percent of national output.

"This is positive for the lira in the medium-term and forhopes of a credit rating upgrade," Oztok said.

In the first eight months of the year the deficit, regardedas a major weak point of the Turkish economy, was $36.08billion, 33 percent lower than in the same period of 2011.

Late in August, credit rating agency Fitch said it mightlift Turkey to investment grade if it makes progress towards itspotential growth rate, trims inflation to target and narrows thecurrent account gap to a more sustainable level.

Fitch currently assigns Turkey a BB+ sovereign rating with astable outlook, one notch below investment grade. The ratingagency said on Wednesday it will review the rating quite soon.

The trade deficit, a major contributor to the currentaccount deficit, dipped 26 percent compared with a year ago to$45.2 billion in the first eight months of 2012.

"The bulk of this improvement stems from net gold exports,as 12-month cumulative net gold exports reached $1.4 billion inAugust, from $-1.2 billion in July," said Emre Tekmen, aneconomist at TEB.

"We expect the 12-month cumulative current account deficitto continue to contract in the coming months. Nevertheless, as aresult of the central bank's monetary easing, we expect domesticdemand and imports to pick up gradually in Q4."

The declining trend in the current account deficit is likelyto reverse its course starting from November, Tekmen added.

To narrow the current account deficit - which reached 10percent of output in 2010 - and reduce inflation, Turkey'scentral bank has employed a policy mix since late 2010 based ondaily liquidity injections, an adjustable interest rate corridorand a low policy rate.

The bank cut the upper end of the corridor - the gap betweenits overnight lending and borrowing rates - by 150 basis pointsto 10 percent for the first time in seven months in September,and hinted it could do more to support growth.

Turkey was Europe's fast-growing economy last year,expanding 8.5 percent, but with domestic demand falling thisyear despite strong exports, policymakers are trying to steer ittowards a soft landing. Earlier this week, the government cutits growth forecasts for 2012 and 2013, and warned that budgetdeficits would be wider than previously thought.

(Editing by Catherine Evans)

((seltem.iyigun@thomsonreuters.com)(+90 212 350 7062)(ReutersMessaging: seltem.iyigun@thomsonreuters.com))

Keywords: TURKEY/CURRENTACCOUNT

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