Turkey’s rising current account deficit: a bad omen

Turkey November 2020 current account deficit is announced by the central bank as USD 4,063 million up by USD 4,048 million compared to the same month of 2019. Hence the 12-month rolling deficit is now USD 37,974 million up from the October level of USD 33, 926 million; accounting to 5.0% of GDP.  Last year the same term Turkey posted USD 9,602 million current account surplus.

Such a level of swing in the BoP, will surely keep on weighing on the Turkish lira forcing the central bank for a tighter monetary policy to attract the much needed financing that only comes in the form of portfolio flows. So it is no surprise the AKP government is keeping up with its “reform” rhetoric, in an effort to block the necessity of further rate hikes for Turkey to reach the much needed foreign funds.  If not delivered, economically and socially, such a stance is to backfire on TL along with ailing GDP growth in Turkey.

Getting back to figures… While the tourism income down to USD 7,955 million from last year’s USD 24,607 million played a major role in the widening of the current account deficit last year, the government’s credit push to stimulate domestic demand following the COVID-19 shock also has an important part in adding to to Turkey’s macroeconomic imbalances.  The “Goods” deficit (including Turkey’s heavy gold purchases) soaring to USD 34,506 million from the 2019 level of USD 13,078 million has added fuel to Turkey’s current account gap.

The financing side too has a problematic structure. Rate hikes seems to have attracted portfolio flows while quality investments keep shying away from Turkey with the private sector deleveraging continuing.

Direct investments recorded a net inflow of USD 3,464 million in the 11 months of 2020; down from last year’s USD 5,423 million. Portfolio investments recorded a net inflow of USD 1,298 million in November only thank to the central bank’s rate hikes, carrying the ytd figure to USD 10,618 million. In November, non-residents’ equity securities and government domestic debt securities net purchases were USD 1,276 million and USD 607 million, respectively.

Under other investment, banks’ currency and deposits within their foreign correspondent banks and nonresident banks’ deposits held within domestic banks increased by USD 1,118 million (reaching USD 1,554 million ytd) and USD 2,230 million (USD 5,603 million ytd), on net basis, respectively.

Regarding the loans provided from abroad, banks, General Government and other sectors realized net repayments of USD 629 million adding to USD 5,622 million in the 11 months of 2020, USD 35 million and USD 191 million (reaching USD 4,182 million ytd), respectively. Turkey’s private sector kept deleveraging.

The central bank’s rate hikes served the purpose as of November and the melt down in Turkey’s official reserves was limited with USD 145 million.