Turkey: Current account deficit widens less than expected in December
The current account deficit widened to USD 3.2 billion in December from USD 2.7 billion in the same month a year prior (November 2020: USD -3.6 billion). While the result marked the 14th consecutive month of a deficit, the print beat market expectations of a USD 3.6 billion deficit in December. Meanwhile, the 12-month moving sum of the current account balance deteriorated from a USD 36.3 billion deficit in November to a USD 36.7 billion shortfall, marking the most pronounced deficit since September 2018.
The annual deterioration came chiefly on the back of a markedly smaller services trade surplus amid the lingering impact of the global pandemic, with the tourism sector continuing to suffer from restrictive measures. In December, tourist arrivals were down over 62% compared to the same month a year earlier. On the merchandise trade front, a smaller deficit supported the headline reading. This was partly due to a softer rise in imports, which grew 10.4% year-on-year in December and were outpaced by exports; outbound shipments grew 15.1% year-on-year in December.
On the financial front, there was a net inflow of USD 9.2 billion in December, markedly up from the USD 0.5 billion net inflow recorded in December 2019 (November 2020: USD 0.9 billion). This was in part driven by non-residents’ acquisition of local debt and equity amid new bank and government debt creation. In addition, banks reduced their currency and deposits within their foreign counterparts and domestic bank deposits of non-residents increased. This was likely buttressed by the lira regaining lost ground against the USD on the heels of a return to more orthodox economic and monetary policies. Lastly, official reserves rose by USD 6.7 billion in December as the Central Bank pursued the restoration of foreign liquidity.
Looking at last year as a whole, Turkey recorded its biggest current account deficit since 2017—the year prior to the currency crisis. The global health crisis has dealt a blow to the economy and the current account balance, and the balance of risks remains tilted to the downside going forward. Although the currency has regained some lost ground against the greenback since the appointment of a new Central Bank governor and finance minister, the lira remains under pressure and a largely USD-denominated debt stock hangs over the private sector. Moreover, the government has relied on credit growth to spur consumption and investment, which, combined with a large current account deficit, increases pressure on the balance of payments. That said, the Central Bank’s focus on rebuilding its foreign currency reserves should ease pressure to an extent.