Turkey: Current account deficit greater than anticipated in June
August 9, 2019
Turkey recorded a USD 0.6 billion current account deficit in June (May: USD +0.3 billion) that overshot market expectations of a USD 0.3 billion deficit, closing the second quarter on a slightly sour note; however, the figure was a stark improvement from the USD 3.0 billion shortfall that was recorded in June 2018.
On the other hand, on a 12-month rolling basis, the current account balance registered a USD 0.5 billion surplus, eking out its first surplus in nearly 17 years and contrasting May’s USD 1.9 billion shortfall. In the wake of last year’s currency crisis and ongoing economic hardship, limp domestic demand has been a key element in the recovery of external imbalances. However, Muhammet Mercan, chief economist at ING Turkey, noted that “the improvement in the current account deficit is about to end in the second half given the likely recovery in the credit impulse with new credit guarantee fund package and ongoing rate cut cycle.”
May’s improvement came on the back of a narrowing merchandise trade deficit in annual terms and a widening services trade surplus owing to tourism sector benefiting from the weak lira. The improvement in the trade balance mainly reflects imports continuing to drop at staggering rate due to currency weakness and frail domestic demand, especially considering that exports dropped at a steep rate in June as well. Imports fell 19.4% over the same month a year prior, the strongest contraction since January this year, while exports fell 12.3%, the first decrease since December last year.
On the financing front, a net inflow of 0.9 billion was recorded in June (May: USD +1.1 billion), contrasting the USD 4.9 billion net outflow in June last year. The net inflow in June was driven by a drop in foreign currency and deposit assets of banks held abroad while non-residents’ holdings at Turkish banks rose. However, net inflows were limited due to reduced portfolio investments as well as bond and debt repayments.
Meanwhile, the Central Bank’s foreign exchange reserves fell USD 2.5 billion in June following a USD 3.0 billion increase in May, but significantly less than the USD 7.0 billion drop in reserves in June 2018.
Author: Jan Lammersen, Economist