Turkey posts current account surplus for fourth straight month as rebalancing bites

Turkey posts current account surplus for fourth straight month as rebalancing bites
By Akin Nazli in Belgrade January 11, 2019

Turkey’s has posted a fourth straight monthly current account surplus for the first time since its 2001 economic crisis, the central bank announced on January 11. November was in positive territory to the tune of $986mn.

The figure slightly beat the forecast of a Reuters poll of 17 economists that on January 8 anticipated a surplus of $965mn. The current account would likely show an overall deficit of $28bn in 2018, the respondents added, down from the $29.5bn forecast in the previous poll.

A median forecast for a $900mn November surplus was produced by a Bloomberg survey.

The mounting evidence that the Turkish economy is in the midst of a severe recession, as well as signs that the government is trying to get credit flowing again ahead of the March 31 local elections, added to the reasons why the central bank rate-setters should be expected to cut interest rates by 50bp at their upcoming meeting on January 16 although the expectation of the consensus was that rates would be held, Jason Tuvey of Capital Economics said in a research note.

Bleak picture
Tuvey added: “The recent improvement in [the November] external position was driven by a slump in imports—import volumes fell by 23% y/y in November. The weakness of imports mirrors other recently released data that suggests domestic demand has slumped since August’s currency crisis, pushing the economy into a deep recession. Our GDP Tracker points to a contraction of around 3.5% y/y at the start of Q4. Industrial output data due on [January 14] are likely to add to this bleak picture.”

As Tuvey noted, the market consensus was currently to bet that Turkey’s executive president, Recep Tayyip Erdogan, would not want to gamble on a rate cut at the monetary policy committee (MPC) meeting. The second MPC meeting of 2019 will take place three and a half weeks before the elections on March 6 and the third one will be held on April 25.

“In our view, the country needs predictable/credible/transparent policies to gain the confidence of foreign investors and attract foreign capital. Unfortunately, the track record since the monetary policy tightening on Sept. 13 (which has lured carry trade inflows) has primarily included ad hoc policies,” Berna Bayazitoglu of Credit Suisse said on January 11 in a research note, Reuters reported.

Due to the lira crisis and subsequent economic ill-effects, Turkey’s growth slowed to 1.6% in the third quarter of last year.

“The country accumulated a sizable current account deficit and a large foreign currency-denominated debt load, leaving it vulnerable to shifting investor sentiment and currency depreciation. Output shrank by 1.1 percent from the second quarter to the third quarter amid plummeting consumer confidence and credit scarcity. Despite this contraction, strong growth in the first half of the year will bring Turkish growth to an estimated 3.5 percent for 2018,” the World Bank bank said in the January 2019 edition of its Global Economic Prospects report released earlier this week.

Since August and the trough reached during the collapse of the Turkish lira (TRY), Turkey has seen monthly current account surplus records broken, namely in August and October. The four-month cumulative surplus recorded for August to November amounted to $7.43bn.

Consequently, the 11-month cumulative deficit contracted by 34% y/y to $26bn in January-November from $40bn a year ago.

Thanks to the surplus in the current account coupled with the government’s €1.5bn eurobond issue in the month, official reserves recovered by $4.4bn in November. That brought the 11-month cumulative decline to $11bn across January-November while inflows observed in the net errors and omissions item amounted to $20bn across the period.

Unidentified inflows
Unidentified capital inflows via the net errors and omissions item of the balance of payments have under Erdogan’s rule generally tended to rise when Turkey faces external financing problems.

The central bank’s gross international reserves, which stood at $111bn as of January 5, 2018, rose to $93bn as of January 4, 2019 from $92bn as of December 28, 2018 while its gold reserves, which stood at $24bn a year ago, rose to $20.2bn from $19.95bn and its gross FX reserves, which stood at $87bn a year ago, rose to $73bn from $72bn, according to the latest weekly data from the central bank.

Net FDI inflows also rose slightly. They were up 2% y/y to $10bn in January-November while portfolio inflows declined by 95% y/y to only $1bn thanks to $2bn of inflows in debt securities versus a $1bn outflow in equities, BoP data also showed.

Borsa Istanbul experienced total outflows worth $960mn in 2018 in shares held by non-residents, versus the strong inflow of $3.55bn in 2017. Outflows from domestic government bonds amounted to $1.06bn versus a strong inflow of $7.17bn a year ago, weekly regular data from the central bank showed on January 10.

“Direct investments made a net contribution of 1 billion USD to the financial account in November. 648 million USD of this amount was net capital investments, while 333 million USD of it was net real estate investments. In the January-November period, real estate investments stood out in the foreign direct investments. During this period, real estate investments accounted for 43% of foreign residents’ direct investments,” Isbank Research said on January 11 in a note on the November BoP figures.

The 12-month cumulative deficit stood as high as $58.1bn in May, when 2018’s first currency shock was observed. It has since followed a declining path, reaching as low as $34bn in November, or 4.2% of GDP, according to calculations released by Ozlem Bayraktar Goksen of Tacirler Investment in a research note.

Much improved tourism performance
“I would add in here much improved performance from the tourism sector, with annualised net revenues up by USD3bn, plus the fact that Turkey should be a big winner from lower oil prices (to the tune of around USD4bn on an annualised basis where oil prices currently stand). So on an annualised basis the current account deficit… is likely on track to end the year well below USD30bn. Indeed, it’s possible to see the annualised deficit to be close to balance by mid-2019… and the adjustment looks even more extreme than 2001/02 and even 2008/09… Other investment showed a net pay-down of debts of USD9.7bn for Jan-November, and compared to a net accumulation of USD7.5bn over the same period of 2017,” Timothy Ash of Bluebay Asset Management, a devoted lira bull since the beginning of September, said in a note to investors.

“Biggest EM beneficiaries from falling oil prices are China and Turkey,” Robin Brooks of the International Institute of Finance (IIF) said on December 26 on Twitter, adding: “Turkey's BoP is seeing positives from many sources: (i) the credit crunch is turning the current account positive, shrinking foreign borrowing needs; (ii) falling oil prices add to that shift; and (iii) the global growth scare makes Turkey's negative growth shock look less bad.”

The banking system posted a net loan outflow of $2.15bn in November, the seventh monthly outflow in a row, an indication that there is less appetite for credit, Bloomberg reported.

“In addition, banks’ currency and deposits within their foreign correspondent banks diminished significantly by USD2.8bn in November. However, in ytd terms the mentioned item showed a cumulative USD10bn increase, despite the decline registered in November,” Goksen said.

Turkey’s overall exports, which the government initially forecast at $170bn, rose 7.1% y/y to an all-time high of $168bn last year thanks to the severe lira depreciation while the country’s imports fell by 4.6% to $223bn as economic activity slowed, preliminary data from the Trade Ministry showed on January 4.

As a result, the country’s foreign trade deficit narrowed 28.4% in 2018 from 2017 to stand at $55bn.

The government expects exports to rise to $182bn and imports to rise to $244bn in 2019, according to its new economic programme, announced in September.

CAD seen at 3.5% of GDP
“For December, the figures released by the Trade Ministry implied a monthly CAD at around USD1.5bn. Hence we expect the annual CAD to close the year at USD27.7bn, 3.5% of GDP. For 2019, the adjustment will continue especially throughout the first half, while expect rather flat annual CAD trend in the latter part of the year. We foresee 2019YE CAD at USD16.7bn (2% of GDP),” Goksen also said, adding: “We believe that, (i) weaker domestic demand activity, (ii) further normalization in gold trade (25% of the ease in annual CAD stems from lower gold imports since May), (iii) lower global oil prices, (iv) last but not least a strong tourism sector performance, will pave the way for a gradual narrowing trend in CAD in the coming period.”

Turkey’s gold imports declined by 44% y/y to 202 tonnes in 2018 from a record high of 361 tonnes in 2017, data from Borsa Istanbul showed on January 10.

“Provisional data of Ministry of Trade showed that the current account balance gave a deficit in December after four months of surplus. In the upcoming period, course of the domestic economic activity, oil prices and demand conditions in our main export markets will continue to be decisive on current account balance. Current account deficit/GDP ratio, which is forecast to be around 3.3% in 2018, will be at 2-2.5% range in 2019,” Isbank Research also said.

The central bank’s survey of expectations also showed on January 11 that participants expect a $25bn current account deficit in 2019 and a sharp slowdown in GDP growth to 1.4% y/y from 3% y/y in 2018 while they foresee end-2019 CPI inflation at 16.45% y/y.

“The nosedive of the foreign trade deficit continued in November with a mere USD0.6bn from USD6.4bn in the same month of 2017, which suggests that the 12-month rolling C/A deficit is likely to retreat to below USD34bn in November (down from the USD58bn May peak). We might see the C/A deficit edging further to USD26-27bn in December. If the pace of the past few months is maintained, it would not be surprising to see the C/A deficit below USD20bn (actually close to USD15bn) in 1Q. This downward trend in the C/A deficit might continue to support TRY stabilization (ceteris paribus),” Seker Invest said last week in its Macro Outlook for January.