Improvement in C/A balance in June…
In June, there was a C/A surplus of USD674 million, reducing the 12-month trailing deficit to USD56.5bn from USD59.7bn. The June current account (C/A) balance posted a surplus of USD674 million, surpassing the median expectation indicating a surplus of USD300 million, and our projection hovering around zero. As a result, the 12-month cumulative C/A deficit decreased to USD56.5bn from USD59.7bn. During the January-June period, the C/A deficit reached USD37.0bn, marking a considerable deterioration from the USD28.7bn in the same period of last year.
The declining trend in official FX reserves reversed in June
The declining trend in official FX reserves reversed in June. Alongside a USD0.7bn surplus, there was a capital inflow of USD5.0bn in June through conventional channels. There is an increase of USD11.2bn in official FX reserves, suggesting that the net errors and omissions item turned positive at USD5.5bn. Among the USD5.0bn capital inflow, USD1.8bn originates from portfolio investments, of which USD1.1bn corresponds to equity inflows. Additionally, the most significant financing source is a USD2.5bn increase in deposits. While commercial loans grew by USD1.2bn, FDI remained limited at a mere USD0.1bn.
External deficit is expected to rise again in July but may enter a decreasing phase thereafter
The current account deficit is expected to rise again in July but may enter a decreasing phase thereafter. The primary source of the C/A surplus in June was the reduction of the foreign trade deficit from an average of USD11bn in the first five months to USD5.2bn in June. Yet, the foreign trade deficit rebounded to USD12.4bn in July, indicating that there has not been a significant improvement in trade dynamics (especially in consumption and investment goods import demand) despite the more than 30% depreciation of the Turkish Lira.
With the July foreign trade deficit at hand, we may expect July C/A deficit at close to USD5.0bn (July 2022: USD3.5bn deficit), implying that the 12-month rolling C/A deficit will rise again to around USD58bn. In the current inflationary environment, we actually do not anticipate a notable improvement in trade dynamics (withdrawal in import demand). Nonetheless, the normalization of global spot natural gas prices will continue to drive down energy import costs. Furthermore, while gold imports, a significant source of the C/A deficit, are expected to remain strong, they could decline from the current levels of around USD30bn on a 12-month rolling basis.
In summary, we expect that the 12-month rolling C/A deficit may start declining after July due to reductions in gold and energy imports. As such, we expect the 12-month rolling C/A deficit to decline from the current USD56.5bn to some USD50bn by end-2023, and potentially to USD40-45bn levels by 1Q24.
Serkan Gönençler
Chief Economist, Gedik Invest
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