While Mehmet Simsek’s economic stabilization program is yet to achieve any significant progress in terms of inflation, Turkey’s other chronic weakness, namely unsustainable current account deficits are on the mend. August Balance of Payments data reveals a rapidly shrinking deficit, despite an overvalued TL and numerous data indicating that domestic demand growth is still too high for comfort. Our regular contributor, Chief Economist of leading Turkish brokerage house, Gedik Invest, Mr Serkan Gonencler analyzed the data:
A current account surplus of USD4.3bn was recorded in August, in line with expectations.
The C/A balance delivered a surplus of USD4.3bn in August, close to market expectations, as the median expectation was USD4.2bn, while our forecast indicated a surplus of USD4.4bn. Meanwhile, we also see that TurkStat’s revisions to the International Trade in Services Statistics have also led to positive adjustments in the 2023 and 2024 C/A balance figures. These revisions (largely stemming from net transportation services) amounted to USD4.5bn for 2023 and USD2.1bn for the January-July period of 2024.
As a result of these revisions, the 12-month trailing C/A deficit, previously reported as USD19.1bn at the end of July, decreased to USD15.1bn. Given the C/A surplus of USD0.5bn in August 2023, the 12-month trailing C/A deficit continued to decline, reaching USD11.3bn by the end of August, which corresponds to slightly below 1% of GDP. Note that back in May 2023, when the C/A deficit peaked at USD55.6bn, this figure represented 5.5% of GDP.
The improvement in the C/A balance is largely attributed to better performance in net gold and energy trade.
Consequently, we observe a decline of approximately USD44bn in the C/A deficit compared to the peak in May 2023. During the same period, the trade deficit also contracted by a similar magnitude from USD122bn to USD79bn. This deceleration seems to have been driven mainly by some USD41bn improvement in the balance of gold and energy trade, roughly USD36bn of this pertaining to a decline in imports, and USD5bn to increased exports. Additionally, while the intermediate goods imports (excluding gold and oil) declined by about USD20bn, supported by moderate global commodity prices, the same amount of increase in imports of consumption and capital goods offset this positive effect.
Domestic demand still too hot
In summary, although the reductions in the Turkish C/A deficit in the past have generally occurred as a result of slowdowns in growth, attributing the recent decline over the past 1-1.5 years to a growth slowdown would not be accurate, as we see no slowdown in consumption and capital goods imports. Put differently, if the desired cooling in domestic demand had been achieved, it would have been possible to record a much lower C/A deficit or even a surplus, supported by lower consumption and capital goods imports.
The C/A balance may close the year at around USD11.5bn.
In the upcoming period, the positive contribution to the C/A balance from net gold and energy trade, as well as intermediate goods imports, is expected to diminish. On the other hand, the negative impact from imports of consumption and capital goods imports may also lessen as domestic demand slows down. In summary, we expect the C/A deficit to remain roughly flat over the next 3-6 months period.
In this context, we forecast a year-end C/A deficit of about USD11.5bn.
Despite the C/A surplus in August, FX reserves fell by USD2.5bn.
Although there was a C/A surplus in August, the capital account showed a deficit of USD6.8bn, with USD3.2bn coming from official channels and USD3.7bn from net errors and omissions. Consequently, the rapid upward trend in official reserves observed since April was interrupted, resulting in a decline of USD2.5bn. the capital outflows in August were largely driven by portfolio investments and net deposits, while the private sector’s borrowing activity seems to have remained strong.
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