“Rebalancing by anorexia”: Analyst responds to Turkey’s second straight current account surplus

“Rebalancing by anorexia”: Analyst responds to Turkey’s second straight current account surplus
By Akin Nazli in Belgrade November 12, 2018

Analysts described Turkey as in the midst of an ultra-intensive economic rebalancing as latest trade data showed the country recording a second straight monthly current account surplus. The surplus for September came in at $1.83bn, according to central bank figures announced on November 12.

The regulator also said it was sharply revising down the previously announced August surplus of $2.59bn to $1.86bn, but even after the revision the figure for the eighth month still stands as the highest monthly surplus ever and the first seen since September 2015.

Not since 2015 has Turkey seen a current account surplus in two consecutive months, Fercan Yalinkilic of Bloomberg pointed out on Twitter.

The market had forecast a surplus of $2bn for September, according to a Reuters’ poll of economists. Participants in the survey also cut their current account deficit average prediction for the full year of 2018 further to $33bn in September from $38.5bn in August, $47bn in July and $53bn in June.

Across January-September, the annual change in the cumulative deficit turned negative for the first time this year, pointing to a 4% y/y contraction to $30bn. Financial outflows amounted to $4.26bn in the first nine months, versus an inflow of $34bn a year ago, while reserves were down $17bn and unidentified inflows amounted to $17.3bn.

“Rebalancing by anorexia”
“Turkey—another much improved current account print for September, with a monthly surplus of $1.83bn, a turnaround from the $4.4bn deficit one year earlier. Rebalancing on overdrive,” Timothy Ash of Bluebay Asset Management said in a tweet, adding: “Exports up 20% y/y, imports down 17% y/y. Impact of cheap currency and recession.”

“Rebalancing by anorexia. Core deficit shrinks at an incredible pace. This may be good news for lira, but augurs very poorly for the consumer, [ruling party] AKP in local elections [scheduled for March 2019],” Atilla Yesilada of Istanbul Analytics replied to Ash.

Turkey, hooked on foreign-currency debt, has endured one of the worst current account deficits in the world. Its economic health is dangerously reliant on hot inflows of foreign external financing to enable growth. Over the long term, the political and economic outlook in the country has not been secure enough to attract sufficient longer-term stable foreign investment capital.

Domestic political risks will continue to weigh on the credit rating outlooks for Italy, Brazil, Turkey and Argentina, Moody’s Investors Service said on November 6 in a report entitled “Outlook:  Sovereigns – Global: 2019 outlook still stable, but slowing growth signals increasingly diverging prospects”.

Most vulnerable
“Among G-20 emerging market countries, Argentina and Turkey have relatively high exposures to external financing and therefore are the most vulnerable,” Moody’s also said on November 8 in a report entitled “Global Macro Outlook: 2019-20 - Global growth to decelerate amid tightening global liquidity and elevated trade tensions”, adding: “While [the central bank’s move to raise the one-week repo lending rate, to 24% in September, from 17.75% previously, making for a 16 percentage-point increase since the beginning of the year and] the new government’s promises to undertake fiscal consolidation and the budding rapprochement between Turkey and the United States have for now alleviated the extreme financial market pressures, Turkey remains susceptible to external shocks in an increasingly unsupportive external environment. Although the large current account deficit during the first half of 2018 shifted to surplus as of August on account of weak domestic demand, Turkey’s net new borrowing needs will remain substantial at about 30% of GDP in 2019. Moreover, at around $68 billion, foreign exchange reserves at the central bank cover less than half of the country’s annual foreign-currency repayment needs.”

“August and September current accounts in Turkey did show around $2bn as forecast. We stick with our view that this implies worse than expected 2018 GDP figures (we’ll know better with 3Q GDP release probably around 2H December),” Charlie Robertson of RenCap said in a tweet.

Turkey’s foreign trade deficit shrank by 93% y/y to $529mn in October, marking the lowest monthly shortfall registered since the country’s 2001 economic crisis and coming in the wake of the 77% y/y plunge recorded in Septemberpreliminary customs ministry data showed on November 1.

The latest data also showed the 12-month cumulative current account deficit declining further from $51.1bn in August to $46bn in September, the lowest figure seen since November 2017—but that still compared very unfavourably with the $39.5bn seen in September 2017.

Weakening demand
“The 12-month rolling deficit narrowed to $46.1 billion (down by $9 billion since July), translating into roughly 5.6% of GDP. This trend is likely to remain in place going forward given weakening domestic demand and the strength in exports and tourism,” Muhammet Mercan of ING Bank said in a research note.

He added: “On the financing front, the capital flow outlook remains weak with $4.9 billion outflows in September after a $14.3 billion outflow a month ago. Both moves were driven by a rise in the FX currency and deposit assets of banks with another $2.5 billion in September. So, it seems banks kept transferring FX to their corresponding banks abroad.”

“The details show that portfolio outflows from the bond and equity markets amounted to $0.3 billion while the net loan repayments from the banking system reached $5.2 billion with $4.4bn repayments in the long-term vs a mere $0.4 billion drawings. In contrast, the long-term debt rollover ratio for the corporates was as high as 106% in September. $4 billion increase in short-term FX deposits at the central bank and $3.5 billion depletion of official reserves helped finance the outflow, while unexplained flows (recorded as net errors and omissions) were relatively negligible with $-0.4 billion in September, after a large inflow of $4.3 billion in August,” Mercan also said.

“Overall, September data shows that outflows have lost momentum in comparison to August, becoming less of a market concern. However, the outlook will likely remain challenging given sizeable total external financing needs in the period ahead mostly due to private debt amortization. However, given the ongoing loss of momentum in the economy and a weaker Turkish lira, trade balance is likely to recover, indicating we'll see further improvement in the external deficit,” Mercan added.

“We project Turkey's trade balance around flat in Q4, which is better than at any time in 2008/9. This in turn puts the current account in surplus towards the end of the year, something Turkey hasn't seen since the early 2000s. The flip side of this is a sharp contraction in GDP,” Robin Brooks of IIF previously said on November 9 in a tweet.

Credit crunch still building
“Turkey's credit crunch continues to build. Data through Nov. 2 show contraction in Lira-denominated credit in Q4 is worse than Q3. That's positive for the Lira, since it swings the current account into surplus. But it presents downside risk to our -0.9% growth f/c for 2019,” Brooks said on November 8.

“We think that GDP growth [in Turkey] weakened from 5.2% y/y in Q2 to about 1.3% y/y in Q3,” Liam Carson of Capital Economics said on November 9 in a research note.

Capital Economics sees the bigger current account risks lying in the six EMs of Turkey, Argentina, Ukraine, Pakistan, the Philippines, and Romania, Carson and William Jackson said on November 7 in another research note entitled “Are EMs’ current accounts still a point of concern?”

Turkey’s current account deficit widened by 42% y/y to $47.1bn in 2017, driven by rising gold imports and energy prices.

Fitch expects Turkey's current account deficit to narrow significantly, to $12bn in 2019, as slowing economic growth and a materially weaker lira suppress imports and boost exports. However, the country's financing requirement will remain large as a proportion of liquid foreign assets due to maturing external debt.