Turkey’s January current account deficit printed at $7.1bn, above the consensus forecast of $6.9bn. The 12-month rolling deficit rose to $51.6bn (6.0% of estimated GDP) from $47.2bn in December. On the financing side, FDI fell to multi-year lows, as portfolio flows shouldered most of the burden. After the release of balance of payments (BoP) data, the lira began heading south, decoupling from other EM F/X. Several investment banks and investors expressed growing concern with Turkey’s external imbalances.
Sekerbank Research: CAD expected to widen further
C/A deficit likely to increase further to USD53.5bn in February. Preliminary foreign trade data announced by the Ministry of Customs for February indicated a slowdown in the pace of the acceleration in the external deficit. Accordingly, we expect February’s C/A deficit at about USD4.3bn, which would still lead to an increase in the annual C/A deficit to about USD53.5bn, wrote Sekerbank researchers.
Over a longer horizon, tourism is expected to limit the deterioration in the external account, but if the government continues with its current campaign to stimulate the economy, CAD could close 2018 at about 6% of GDP, which had in the past signaled BoP stress.
Goldman Sachs worried
“Portfolio and other investment were more than enough to finance the current account deficit in January and reserves increased by US$4.4bn. Net portfolio inflows were at US$4.9bn, largely driven the US$3.2bn inflow into government debt and US$1.3bn inflow into debt issued by banks. Net other investment inflows at US$7.5bn were also very notable, of which US$4.2bn were due to banks and US$3.4bn due to other sectors. Both banks and other sectors reduced their foreign assets and increased their liabilities.
On our estimates, the current account deficit was 5.5% of GDP in 2017. With the continuing widening of the current account deficit and the increased reliance on portfolio inflows, the external imbalances have once again become a concern for the economic outlook in Turkey” wrote Goldman Sachs research team.
“The current account deficit has widened very sharply and the trade deficit is at levels we’ve only really seen in 2011 and 2013, both of which were followed by sharp currency falls, interest rate hikes and then a sharp slowdown in growth,” “For now, the Turkish economy seems to have been given the benefit of the doubt by investors but I’m concerned how much longer that can last.” Said senior EM economist William Jackson of Capital Economics.
Financing very weak
Sekerbank broke down the financing account for us:
USD1.2bn inflow through the non-residents’ purchase of local government bonds,
– USD2.0bn inflow through the Treasury’s Eurobond issuance,
– USD1.3bn (net) Eurobond issuance by banks,
– USD0.5bn (net) Eurobond issuance by the corporate sector,
– USD1.4bn increase in non-residents’ deposits,
– USD1,2bn through new loans, of which USD1.1bn was granted by the corporate sector,
– USD2.0bn inflow through trade loans,
– USD0.3bn inflow through net FDI,
– And finally, USD2.9bn inflow through banks’ transactions with offshore branches (note
that this item had made a USD3.8bn negative impact in December.
Turkey’s traditional F/X earner “unidentified flows” (net errors and omission) bled during the month, while FDI fell to post-2009 recession low of $8 bn in annualized terms.
Banks remained reluctant to add to F/X borrowing above and beyond what is required to finance larger trade transactions. Given the recent Moody’s downgrade and leverage troubles at home, it needs to be seen how long the corporate sector can continue to borrow.
Lira sinks, outlook uncertain
After the data print, dollar/TL rose by 0.7%, while annualized yield Turkey’s benchmark 10 year government bond soared to 12.63%, with the bond dropping 2% in value.
Under the current, relatively loose global financial conditions, it will not be a problem to finance the yawning CA gap. However given the most-likely scenario of tightening financial conditions, Turkey will face rising odds of yet another double-digit depreciation of the TL, which kills economic growth and boost inflation.
AKP’s objective of achieving even faster growth to the run-up to November 2019 general and presidential elections creates significant risks of a “road accident”.
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