Turkey’s current account (CA) deficit came in at USD 5.13bn in February, slightly higher than the market consensus of USD 5.05bn. The current account balance registered a USD 5.8bn deficit (revised from USD 5.6bn) in January. February’s CA shortfall was 20.5% % higher compared with the same month of 2012 and this was the fastest annual expansion since October 2011. In the first two months of the year, Turkey’s current account deficit widened 10% y/y to USD 10.94bn.

Highlights:

Trade deficit was USD 5.57bn in February, down from the previous month’s USD 5.94bn but it widened 17% y/y, being the main factor behind the CA deficit. Exports rose 6.2% y/y and imports increased 9.1% y/y.

FDI was weak at USD 311mn, corresponding only 6% of the CA deficit. Capital inflows declined from USD 9.3bn in January to USD 8.08bn in February. Portfolio investment inflows reached USD 3.07bn, financing some 60 % of the CA deficit. There was an outflow of USD 353mn from the equities in the month.

Net errors & omissions item registered an outflow of USD 1.65bn after it posted an inflow of USD 223mn in January. Official reserves increased USD 874mn after they rose USD 3.7bn in January. This time, there is no strong contribution from net errors & omissions to the financing of the deficit unlike the case last year. In the first two months of 2013, net errors& omissions registered an outflow of USD 1.4bn versus an inflow of USD 3.5bn in the same period of 2012.

In parallel with a slower growth, the CA deficit declined to USD 47.5bn in 2012, just around 6% of the country’s GDP, from a record high of USD 75.1bn in 2011. The current account shortfall is expected to be USD 59.5bn at the end of this year while GDP growth expectations for 2013currently stand at 4.2%.

Comment:

Turkey’s current account deficit is regarded as the Achilles’ heel of its economy. Central Bank governor Erdem Basci recently argued that under current global economic conjuncture a 6% of CA deficit (of GDP) is manageable but an ideal CA deficit/GDP ratio for the Turkish economy is 5%. The expected economic recovery, which is believed to be still at its early stages, will be the main factor behind the changing trend from last year. Some signs of gradual recovery in domestic demand are seen in the foreign trade figures. Consumer goods imports and capital goods imports rose 13.3% y/y and 10.5% y/y in February. Loan growth is still strong.

However, some recent data sent rather mixed signals on the pace of “expected” recovery. Auto sales grew 5% y/y in March, slower from the 19% y/y and 16% y/y gains in January and February. Consumer confidence weakened in March; the headline consumer confidence index fell to 74.9 from 76.7 in February, reversing the previous four months’ gains. Also out on Wednesday, the industrial turnover index rose 4.9% y/y in February after it increased 6.7% y/y in the previous month.

If the economic activity gains momentum as expected and if it starts to affect the country’s CA deficit, again as widely anticipated, then the central bank may need to consider tightening monetary conditions. If we are going to witness a recovery this will mainly be domestic-demand driven as Turkey’s largest trade partner Europe has not shown any signs of coming out of recession. Turkey exported more goods to the Middle East region last year that supported the country’s external balances. Gold exports (especially to Iran) made significant contributions to the country’s export revenues but this year will probably be different. Due to sanctions against Iran, gold exports may lose momentum.

Last month, the central bank raised reserve requirements to keep loan growth in check (it wants to keep loan growth at 15%). On the other hand, it has been under pressure from politicians and businessmen to support GDP growth. The central bank is having a tough year.

Capital flows into emerging markets, in case of Turkey supported by expected investment grade actions, may also put additional pressure on the current account balances. The central bank does not want a strong TRY as this will boost imports which in return will lead to higher CA deficit. But in any case, we are more likely to see the country’s current account deficit deteriorate in the remainder of the year.