P.A. Turkey

Turkey September BoP:  Solid surplus to continue, ample financing, but disturbing  “unidentified” outflows

Overview

We see a strong current account surplus and a healthy financing flows in the September balance of payments data published the Central Bank of the Republic of Turkey (CBRT). In a scenario where there is no change in monetary policy, we predict further positive developments in which the external balance will not put much pressure on the exchange rate. On the other, there was  a limited decline in reserves due to a very high outflow in the net errors and omissions item, the source of which is unknown. In all honesty, the $20 billion outflow since the beginning of the year is disturbing.

Current surplus slightly better than expected

According to CBRT data, the current account balance in September 2024 was a monthly surplus of 3.0 billion dollars, slightly higher than IS Investment and the market’s estimate of 2.8 billion dollars. The difference is due to tourism revenues being slightly higher than we anticipated.

A current account deficit of 5.3 billion dollars was accumulated in the first 9 months of the year. Due to high energy prices, abnormal gold demand and relatively expansionary domestic demand conditions, a current account deficit of 36.1 billion dollars was recorded in the first 9 months of 2023.

 

The core current account surplus, which excludes energy and gold, is at a level of 7.7 billion dollars, consistent with the September values ​​of recent years. In the first 9 months of the year, the core current account surplus is 38.7 billion dollars, 12.4 billion dollars higher than the same period in 2023.

 

When we look at the details of the headline current balance, we see a goods trade deficit of 3.1 billion dollars and a revenues deficit of 1.3 billion dollars, against a services surplus of 7.4 billion dollars. Gross travel revenue, one of the major items in the services balance, is increasing by 5.6% year on year with $6.5 billion, while gross passenger transportation revenue  increases by 3.6% to  $2.1 billion.

 

Let us underline that the improvement in the current account balance is mainly service-oriented. The core goods balance, which we look at by excluding services as well as gold and energy, is relatively weak compared to September of previous years, with a surplus of 1.6 billion dollars. We associate it with low demand in our export markets rather than the real appreciation of the Turkish lira.

 

Healthy flows in financial account

The financial account recorded an inflow of 2.5 billion dollars in September, which largely covers the outflows in August. When we look at credit and debt instruments together, we see that long-term external borrowing are ample. We calculate the long-term external debt rollover ratio of banks as 160% (September 2023: 262%) and that of nono-financials  as 195% (September 2023: 152%) in September 2024.

For the first nine months of the year, this rate is 166% for banks (January-September 2023: 114%) and 138% for companies (January-September 2023: 89%).

The issue that has been disturbing us in the financial account in recent months is the increase in residents’ purchases of foreign securities. We see a financial outflow of 2.6 billion dollars in September alone in this account. Almost all of this figure comes from resident households and private companies. When we look at it since the beginning of the year, the amount corresponds to 12.5 billion dollars, or 1% of the 2024 estimated national income. The increase in the amount may be related to attractive yields on short-term US treasury bonds. We expect this trend to weaken with the Fed’s interest rate cuts.

 

While current account surplus shrinks in October, reserves increase

In October, we predict the monthly current account surplus shrinking with the seasonal decline in tourism and passenger revenues. We see that exports are resilient despite the negative foreign demand and the appreciating Turkish lira, while imports remain moderate. As a result, we foresee a current account surplus of around 1.3 billion dollars in October.

 

When we add up the entry, exit, issuance and redemption movements of foreigners in securities such as stocks, GDS, ÖST and Eurobond, we calculate an inflow of 3.9 billion dollars from the portfolio movements of foreigners in October.

 

 

Based on the daily analytical balance sheet data, we calculate an increase of 6.4 billion dollars in the CBRT’s gross reserves in October, excluding the gold holdings revalution. When we add up the current account surplus and foreign portfolio inflows that we foresee, it is below the 5.2 billion dollars gross reserve increase, so the sum of other financing items and net errors and omissions will also make a positive contribution. On the contrary, the preliminary data in November reveal a limited decline in reserves.

 

We continue to update our current account deficit forecast downwards

The decline in oil prices directly supports the external balance, while tightening financial conditions at home indirectly support the external balance through low gold imports and weak domestic demand. When we evaluate the upward revisions made by the CBRT in the balance of payments series and the current account surplus data, which is higher than we expected, we reduce our current account deficit forecast for 2024 from 12 billion dollars to 10 billion dollars (0.8% of the estimated national income).

Our forecast is consistent with past periods of tightening in monetary policy. Our 2025 forecast is slightly higher at 17 billion dollars (1.1% of 2025 estimated national income).

 

Serhat Gürleyen, Research Director

Dağlar Özkan, Economist, IS Investment Research

 

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