The real story of Turkey’s “rebalancing”: Financing troubles ahead!
Turkey’s January current account deficit registered as $813 million, in parallel with survey expectations. Thus, CAD decreased by 88.4% YoY,…
Turkey’s January current account deficit registered as $813 million, in parallel with survey expectations. Thus, CAD decreased by 88.4% YoY, due to the contraction in the foreign trade deficit. Current account excluding net gold and energy trade, which posted a deficit of $1.5 billion in January 2018, recorded a surplus of $2.9 billion in the same period of this year.
Looks good, doesn’t it? According Is Bank research, the good news gets better in the capital account: “Unlike 2018, strong portfolio inflows were registered in January 2019. Thanks to the increase in global risk appetite, portfolio investments posted a capital inflow of 6.1 billion USD in January. During this period, the stock market recorded capital inflow of 1.3 billion USD, while the general government’s foreign debt issuances reached 3.4 billion USD. Banks also raised 1.1 billion USD of funds and pulled portfolio investments up in January”.
But, wait, there is a twist!
Economy czar Mr. Berat Albayrak immediately embraced this great piece of data, heralding once gain “the worst is over!” Yet, there is a dark underside to the shiny new Turkey story, which one can only find out in the fine print: Banks are deleveraging rapidly. And, there is little FDI or net inflows to financial markets. The habit of Central Bank of Turkey to report state F/X borrowing as portfolio flows distorts a picture which has only a very thin veneer of good news on the top.
We read this part from OYAK Securities Research note:
On the financing side, capital account with USD6.1bn inflow seem strong however, considering the previous year’s USD12.3bn, 12-month rolling financing outflow in January rose to USD9.8bn from USD3.6bn a month ago. FDI generated a monthly inflow of USD0.6bn while USD3.4bn public Eurobond issue, USD1.1bn bank Eurobond issue as well as USD1.3bn equity sale to foreign investors have led to USD6.1bn net inflows in the form of portfolio investments.
Short term debt repayments of banking sector have led other investments to generate USD0.6bn outflow. Combined with USD1.8bn outflow in the form of net errors and omissions, USD6.1bn capital inflows against USD0.8bn current account deficit has led to a monthly reserve buildup of USD3.5bn in January. Yet, fragile financing of current account deficit, highly leaning on reserves and net errors and omissions continues. Besides, reserves in 12-month rolling terms were down USD11.2bn, against the previous month’s USD10.4bn, mainly due to rising capital outflows as well as drop in net errors and omissions from USD21.0bn to USD20.1bn. Generally speaking, it is good to see financing requirement drops with declining current account deficit. However, Turkey needs access to secure financing during the recovery after ongoing recession in economic activity.
CAD will expand as soon as recession is over…or before
It should be noted that 2018 GDP data reported by Turkstat reveals a rather large inventory run-down, reaffirming anecdotal evidence that companies are maintaining production from current stocks. Obviously, once inventories are exhausted, even sustaining the current pace of low production would require higher imports.
Moreover, as Turkish export volumes decline progressively in response to the weakness in EU demand, Brent oil has launched a rally, which is bearish for the CAD and inflation outlook.
Ankara, apparently, confuses anemia with rebalancing.