Turkey: Current account deficit widens in April

In Turkey, current account balance in April ran a deficit fort he sixth month in a row, despite weak lira and President Mr. Recep Tayyip Erdoğan’s perspective to increase exports, due to the global rally in energy prices widening the foreign trade deficit. The current account deficit, which was announced as $2.74 billion on a monthly basis, was realized below the market expectation of $3.2 billion deficit. The current account deficit widened in the monthly period compared to the 1.22 billion USD deficit in April last year. On a 12-month basis, the current account deficit widened from $24.2 billion to $25.7 billion. This annualized current account deficit amount corresponds to approximately 3.5% of our projected GDP for 2022. Excluding energy and gold, the current account surplus rose from $34.5 billion to $37.4 billion.

When we look at the most determining factors in the current account; The overall picture continues to rise compared to last year. Although there is no deterioration in the table except for energy and gold, the energy bill continues to increase. In this context, the deficit in goods trade was $4.43 billion. Services provided a surplus of 2.7 billion dollars with the increase in tourism income, while the strengthening in this item has a somewhat balancing effect. The tourism side may also reduce the pressure from energy in the coming months, and the first reflections of this effect are seen in April. The cost pressure on the energy bill will continue as oil prices increase further in May.

While net inflows originating from direct investments on the financing side were 323 million dollars in April, it is seen that there was a net outflow of 606 million dollars on the portfolio side. While net purchases of stocks were 139 million dollars, net sales of debt instruments were 136 million dollars. While banks and other sectors made net repayments of USD 606 million and USD 26 million, respectively, in bond issuances abroad, the General Government issued new bonds amounting to USD 305 million. Official reserves, on the other hand, increased by $3.22 billion in April after the decline in the January-March period. On the other hand, as we can see on the basis of high-frequency data in the weekly statistics announced by the Central Bank, it is observed that reserve assets will continue to decrease in the environment of the increase in foreign currency and the widening of the current account deficit. Net errors, omissions or capital movements of unknown origin showed a very strong monthly inflow of 4.51 billion dollars, increasing the inflows to 11.8 billion dollars in the January-April period. The current account deficit continues to reflect the foreign exchange demand in the country seriously with the effect of the energy bill, and on the financing side, the effect in April is seen to come from the net errors and omissions item.

The negative effects of the Ukraine-Russia war show its impact on imports in the foreign trade channel, especially through energy prices. Considering the even higher oil prices in May, it is seen that the effects from this will continue. As a matter of fact, the leading data of May in foreign trade data shows a high amount of 6.95 billion dollars on the energy import side. The aforementioned war risk also negatively affects the export potential due to the global economic repercussions it creates. Although external demand indicators in 2Q22 still maintain their somewhat strong trend, we expect this effect to turn negative in the second half of the year due to the increased recession potential in the Euro Area.

The Central Bank will hold its next interest-setting meeting on June 23. While the bank has kept the policy rate at 14% for the last 5 months, Mr. Erdogan said last week that interest rates will continue to fall. As inflation hit a 24-year high of 73.5% in May, in this environment, regulatory authorities took a series of steps to tighten consumer demand to protect the lira and rein in inflation. Monetary and fiscal policies continue to remain loose with the perspective of supporting the growth momentum and it is understood that they will continue in this way for a certain period of time.

We expect the current account deficit to be adversely affected due to the fact that energy costs will remain high due to geopolitical risks and continue to increase the import bill in the coming period, and the impact of the restriction of global growth potential due to these risks on export performance. The potential in tourism, on the other hand, does not seem to have a very negative impact, even if the income effect of approximately 4 billion dollars in Russian tourism is zeroed. We see a high probability of a current account deficit of 37 billion dollars (approximately 5.1% of GDP) by the end of the year.

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