Turkey: Current account deficit narrows in April as domestic demand remains frail
June 14, 2019
Turkey recorded a USD 1.3 billion current account shortfall in April, a noticeable narrowing from the USD 5.6 billion deficit recorded in April 2018 and better than the USD 1.5 billion gap market analysts had expected. The deficit in April, however, widened from March’s revised USD 610 million gap (previously reported: USD 589 million deficit) and marked the largest deficit since December last year. Nonetheless, the 12-month rolling sum of the current account balance narrowed from a USD 12.9 billion deficit in March to a USD 8.6 billion shortfall in April. This marked the smallest deficit since January 2004.
April’s improvement was mainly attributable to a further narrowing in the merchandise trade deficit, as imports fell again amid limp domestic demand due to high unemployment, elevated inflation and a weak currency in the month. Although the trade deficit doubled from the prior month, the data provides some potential upshot for domestic demand: imports fell at the softest pace since July amid a recent recovery of the Turkish lira and a general downward inflation path since October 2018. This suggests that domestic demand might be getting back on its feet slowly. Meanwhile, a small increase in the services trade surplus also supported the overall print.
A net outflow of USD 5.2 billion was recorded on the financial account in April, swinging from a net inflow of USD 7.7 billion in the same month last year and up from the USD 1.3 billion outflow in March. Outflows in April were driven by sizeable portfolio outflows as investors shed Turkish bonds and stocks and Turkish companies acquiried foreign financial assets. Muhammet Mercan, chief economist at ING Turkey, noted that “it seems residents have kept acquiring assets abroad, amounting to a US$32 billion on a 12-month rolling basis, mainly driven by transfer of FX by banks to their corresponding banks abroad at US$23.4 billion.” In April, banks continued to accrue foreign currency and deposits, although they remained net payers due to debt repayment and some borrowing from the corporate sector.
Meanwhile, the Central Bank’s foreign exchange reserves shrank by USD 2.8 billion in April in a bid to support the Turkish lira. This, however, is increasingly worrisome for investors who are concerned that the Central Bank’s foreign reserves are inadequate to support the currency in the event of a financial shock.
Author: Jan Lammersen, Economist