From at around USD58 billion currency account deficit only back in May 2018, Turkey’s 12-month current account deficit eased to USD33bn as of November 2018. This looks like quite an extraordinary “rebalancing” as some like to say; though make no mistake. The roots of this incredible adjustment is in Turkey’s sharp economic contraction.
The November surplus of USD986mn marks the fourth straight monthly current account surplus for the first time since Turkey’s self-imposed 2001 economic crisis.
The trade figures point at a current account deficit of USD28bn for the whole year of 2018; roughly accounting to 3.5% of GDP drastically down from the summer peak of 6%.
The improvement in the November current account deficit was driven by the sharp slump in imports to a tune of 23% y/y in November as a result of the contracting domestic demand. A better tourism season with annualized net revenues up by USD3bn and the decline in the price of oil also have helped.
On the financing side, along with the current account surplus and the government’s €1.5bn eurobond issue in the month, official reserves increased by USD4.4bn in November. Yet inflows observed in the net errors and omissions item amounted to USD20bn across the first 11 months of the year accountings for almost 75% of the accrued deficit during the same term.
Net FDI inflows also rose slightly. They were up 2% y/y to USD10bn in January-November while portfolio inflows declined by 95% y/y to only USD1bn thanks to USD2bn of inflows in debt securities versus a USD1bn outflow in equities. As for the month of November solely, direct investments made a net contribution of USD1 bn to the financial account of which USD648mn was net capital investments, while USD333mn was net real estate investments.
The banking system posted a net loan outflow of USD2.15bn in November, the seventh monthly outflow in a row, an indication that there is less appetite for credit. Moreover, banks’ currency and deposits within their foreign correspondent banks diminished significantly by USD2.8bn in November; though on cumulative basis it is still strong at USD10bn.
Now that the economic contraction is proved with each data flow, the central bank’s monetary policy meeting on 16 January becomes critical. The government that have been trying to stimulate the economy through ad-hoc and unpredictable measures might urge the central bank for a rate cut now that the CPI inflation has also eased below the September peak of 25%. The expectations include a 50 basis points of rate cut; through such a rate cut expectation is not the market average.
While the current account balance is likely post a mild deficit in December, Turkey’s 2018 CAD is likely at USD27.5-28bn, which will roughly correspond to 3.5% of GDP. Looking forward, the decline in the CAD is set to continue in 2019; sharper in the first half of the year and rather flat in the second half heading to USD16-18bn; 2-2.5% of GDP.