Turkey’s current account is expected to record a deficit of $3.4 billion in June and end the year with a deficit of more than $40 billion, a Reuters poll showed on Friday, as soaring energy prices widen the shortfall. July preliminary trade data shows a staggering deficit of $10.6 bn, despite a moderate drop in agri-commodity and energy prices. A chorus of impartial economists are warning the nation that the country is facing a dangerous Balance of Payments bottleneck in winter months. Given falling energy prices (Turkey’s largest import item) and a windfall tourism season expected to generate gross $30-35 bn, is the threat reasonable? Yes, argues PATurkey Staff.
According to Reuters, the trade deficit, a major component of the current account balance, soared 184.5% in June to $8.17 billion, mainly due to Turkey’s hefty energy import bill. In July, the deficit rose at an annual pace of 144%, reaching $10.6 bn.
In a Reuters poll of 11 economists, the median estimate for the current account deficit (CAD) in June was $3.4 billion, with forecasts ranging from $2.35 billion to $5.2 billion. PATurkey estimate for July CAD would be in the range of $4-4.5 bn.
The deficit was seen at $40.15 billion for 2022 as a whole, with the range of forecasts between $35 billion and $51 billion.
Economists have been revising up their forecasts for the 2022 deficit due to surging energy prices. The median forecast was $29 billion five months ago and $40.30 billion in last month’s poll.
Under President Tayyip Erdogan’s economic plan, which prioritizes growth, exports and employment, with low interest rates, the central bank has cut its policy rate by 500 basis points since September, triggering a currency crisis that saw the lira lose 44% against the dollar last year.
The government says Turkey’s chronic current account deficit, which stood at $14.9 billion last year, will turn to a surplus under the plan.
However, Turkish exporters are revising down year-end targets in a move that could derail the government’s plans as new orders drop amid signs of a global slowdown and inflationary pressure.
Further drops in Brent oil prices could provide relief, but this is probably not in the works. Deutsche Bank said crude oil could continue running in the region of $100–115 a barrel in the near term with “strained refining capacity” before increasing demand concerns and signs of a growth slowdown provide a moderate easing to $90/barrel in 2023.
Fitch Solution forecast Brent crude oil to average at $105/barrel this year, implying a neutral outlook for the rest of the year.
Moreover, natural gas prices comprising one-third of the energy import bill of est. $100 bn per annum are expected to break new records in winter months, with one expert estimating Turkey will need at least $17 bn for LNG imports to meet industrial and household demand.
Turkey is also going to be seriously hurt by the recession in EU, which could curtail total exports by 5%, or $10-12.5 bn in the next 12 months.
Finally, banks and corporates have a heavy foreign debt amortization marathon in the 4th quarter of the year, amounting to roughly $25 bn for the period. PATurkey predicts roll-over will not exceed 80% on account of low demand for capex and banks’ loan/deposit ratios hovering around 95%. This means Central Bank of Turkey could end up bankrolling net redemptions of $5 bn only in winter months. With CDA premia hovering around 850-900 basis points and interest in EM debt and packaged loans dim, the re-financing problem could linger as long as Fed remains on a tightening path.
Preliminary forecasts PATurkey saw for 1H2023 CAD hovered around $20-25 bn. In other words, Central Bank will have to have at $35 bn in encashable assets to make sure banks and corporates have enough FX to meet import bills and net redemptions.
So far, retailers have not added to their FX deposit holdings patiently waiting in FX-insured TL deposits. However, the gap between CPI and TL depreciation is widening by the month, meaning some deposits under the scheme could be converted to spending. Moreover, in parallel to Fed hiking dollar rates, Turkish banks are now offering lucrative 3-5% per annum deposit rates to savers which could trigger an exodus from TL to FX. With most of the free FX cash of banks and corporates already lent to Central Bank via swaps or mandatory export revenue surrender requirements, any increase in FX demand will have to be met by the Central Bank, as well.
Despite this very problematic Balance of Payments math, Erdogan administration is instructing Central Bank to defend the TL, with two different sources reporting that the Bank had spent $66 or $60 bn YTD to slow down currency depreciation.
The Turkish Treasury has enough assets in Central Bank to meet its maturing foreign liabilities in the next 12 months estimated at $10-12 bn, however corporates could have a very difficult time paying off FX debt to foreign creditors or Turkish banks. In other words, company defaults are a strong possibility.
Industry spokespersons are claiming that rising FX financing costs coupled with a new drive by Central Bank to decelerate loan growth as a remedy against inflation is forcing them to reduce output. Turkey could have a recession in the winter, while dollar/TL soars beyond 21 (the current year-end forward rate) from the current 18, exacerbating poverty and inflation.
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