Turkey: Current account deficit narrows again in July, supported by services exports
Turkey’s current account deficit continued to narrow at the outset of the third quarter, with the shortfall dropping to USD 0.7 billion in July from USD 2.0 billion in July 2020 (June 2021: USD -1.1 billion). The print slightly undershot market expectations of a narrower deficit, however. Meanwhile, in the 12 months up to July, the current account deficit came in at a 12-month low of USD 27.8 billion, down from USD 29.1 billion in June.
The annual improvement came mainly on the back of a greater services trade surplus in the month compared to a year prior. This development was made possible by the easing of movement restrictions and the partial resumption of international travel— tourist arrivals in the month were up over 360% year-on-year. On the other hand, the merchandise trade deficit widened markedly in July as growth in goods imports (+16.8% year-on-year) outpaced the expansion in goods exports (+12.2% year-on-year).
On the financial front, there was a net inflow of USD 4.9 billion in July (July 2020: USD 0.6 billion inflow). This came on the back of external borrowing by the government, trade credit inflows, net direct investment, and local banks’ increased currency and deposit liabilities. Lastly, official reserves rose by USD 6.7 billion in the month.
Turkey’s external position has improved on the back of the gradual relaxation of lockdown measures globally, buoying the important tourism sector, while the country’s cheaper currency should have enhanced the competitiveness of merchandise exports. However, risks remain tilted to the downside ahead amid firming domestic demand spurring stronger growth in goods imports, which will weigh on the external balance. That said, healthier external demand should help the current account balance to narrow notably this year compared to last.
Commenting on the data, analysts at Goldman Sachs added:
“We maintain our current account deficit forecast of 2.2% of GDP for the whole year. Overall, we think that the Turkish economy has been supported by the strength of external demand and been able to achieve a high growth rate without a deterioration in its current account balance. This is also reflected in our forecasts—we’ve revised up our growth estimates over the year (currently 9.5% year-on-year for 2021) without a major adjustment to our current account forecasts.”