“They’ve hit the wall, and hard”: Record Turkish current account surplus suggests deep recession

“They’ve hit the wall, and hard”: Record Turkish current account surplus suggests deep recession
By Akin Nazli in Belgrade October 11, 2018

Turkey’s current account swung to a surplus of $2.59bn in August, the highest monthly surplus ever and the first seen since September 2015, the central bank announced on October 11.

Timothy Ash of Bluebay Asset Management responded in an e-mailed comment: “Suggests deep recession as the price of rebalancing. Likely as deep as 2008/09, perhaps worse, between 08/09 and 01/02. The cost of failed policy responses earlier this year—when every economist worth their salt were telling them to slam the brakes on. But they knew better and the result is they have hit the wall and hard. Case of taking the car to the body shop for a rebuild, but not sure the state of the passengers. They seem dazed, in disbelief as to what has happened. I think they thought the shiny new Turkish car was indestructible.” 

The market was expecting a surplus of $2.5bn for the month, according to a Reuter’s poll of economists. Ten economists in the survey also cut their median current account deficit forecast for 2018 to $38.5bn from a previous $47bn.

Across January-August, the deficit rose, by 14% y/y to $31bn.

The latest data also showed the 12-month cumulative current account deficit declining from $54.6bn in July to $51.1bn in August, the lowest figure seen since February—but that still compared very unfavourably with the $36.8bn seen in August 2017.

According to the latest central bank survey, Turkey’s end-2018 current account deficit expectations declined to $49.7bn in September from $52.7bn in August.

The current account deficit stood at 5.8% of GDP in August, down from a peak of 6.6% of GDP in May, according to Capital Economics’ calculations.

Earlier this week, the International Monetary Fund (IMF) announced in its latest edition of the World Economic Outlook that it expected Turkey’s current account deficit to come in at 5.7% of GDP in 2018, slightly better than the 5.5% recorded in 2017. The fund’s previous forecast was for 5.4% of GDP in 2018.

The Turkish government forecasts that the current account deficit will fall to 4.7% in 2018 from 5.6% in 2017, according to its recently released medium-term economic programme.

“Almost entirely reflects a slump in imports”
“Turkey’s current account position improved further in August adding to the evidence that a weaker lira is helping the economy to rebalance. But this adjustment almost entirely reflects a slump in imports, a sign that domestic demand has been hit hard sharply following August’s collapse in the lira and a sharp tightening of financial conditions,” Jason Tuvey of Capital Economics said in a research note.

The current account position tends to improve in the middle of the year due to stronger tourism receipts, Tuvey also noted, adding that the breakdown of the data showed that the narrowing of the current account deficit was driven by an improvement in the goods trade balance.

“Worryingly, there’s no evidence yet that a weaker lira—which is down by more than 35% since the start of this year—has provided a significant boost to exports,” Tuvey added.

Capital Economics expects the current account deficit to narrow further over the coming months. Domestic demand will continue to weaken, increasingly weighing on imports. As some spare capacity opens up in the domestic economy, Capital Economics sees Turkish exports picking up on the back of a boost to competitiveness from the weaker lira.

On the financial account, the data highlight the key drivers of the extent of the currency crisis in August, according to Tuvey. Turkey recorded net capital outflows of $14.4bn last month alone and, on a 12-month basis, net inflows slowed from $20.8bn to just $10.8bn. That was driven by much weaker “other” investment—i.e., banking sector—flows as banks struggled to roll over external financing.

Consequently, the country’s official reserves declined by $8.1bn in August alone and $13.4bn in January-August. Inflows through the net errors and omissions account of unidentified capital inflows, amounted to $3.7bn in August alone and to $15.1bn across the first eight months.

Net FDI inflows stood at $737mn in the month while net portfolio outflows amounted to $1.79bn.

Rebalancing gathering pace
The annual contraction in June's current account gap confirmed that the expected rebalancing is gathering pace just as the full-blown currency crisis is expanding into the real economy. The widening gap across the first four months of 2018 was a serious concern for those trying to get a grip on Turkey's overheating economy, which other data released on June 11 showed grew at the stellar rate of 7.4% in the first quarter of this year. The initial signs of re-balancing came in May.

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 from $47bn in 2017, 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.

The contraction in Turkey’s foreign trade gap raced to 77% y/y in September after falling 59% y/y in Augustpreliminary data from the customs ministry showed on October 1.

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. The political and economic outlook in the country is not secure enough to attract sufficient longer-term stable foreign investment capital.