Turkey: Current account deficit widens on greater goods trade deficit in July
The current account posted a USD 4.0 billion deficit in July, increasing from the USD 3.5 billion deficit posted in June (July 2021: USD 0.3 billion deficit). Meanwhile, in the 12 months leading up to July, the current account recorded a USD 36.6 billion deficit, compared to the USD 32.9 billion deficit recorded in June and marking the largest shortfall in 17 months.
The widening current account deficit was driven by merchandise trade. The merchandise trade balance worsened from the previous month, recording a USD 9.3 billion deficit in July (June 2022: USD 6.4 billion deficit; July 2021: USD 3.1 billion deficit). Merchandise exports jumped 13.2% on an annual basis in July (June: +18.9% year on year). July’s outturn marked the softest growth since July 2021. Meanwhile, merchandise imports shot up 42.6% over the same month last year in July (June: +39.8% yoy). This was in part driven by a near annual doubling of the energy import bill due to the war in Ukraine. More positively, the services trade surplus increased on the back of sustained tourist inflows, with arrivals jumping over 52% year on year.
On the financial front, there was a net inflow of USD 3.0 billion (June 2022: USD 2.4 billion net outflow; July 2021: USD 3.7 billion net inflow) due to debt-creating non-resident flows. This offset continued resident outflows. Turkish banks’ currency and deposits within their foreign counterparts rose by nearly USD 1.0 billion, and residents increased their foreign assets by USD 2.9 billion. Lastly, official reserves increased by USD 4.4 billion.
The current account deficit is expected to rise this year due to the consequences from the conflict in Ukraine. The conflict has driven up energy costs and Turkey’s import bill as a net importer of oil and gas. The volatility of the lira remains a risk.
Muhammet Mercan, chief Turkey economist at ING, added:
“The current account deficit has been on a rapid expansionary path since early this year […] and the latest indicators suggest that this trend will likely continue in August with an across-the-board deterioration in foreign trade. […] On the financing side, we see an increasing reliance on unidentified flows and reserves while the global backdrop turning less supportive in recent months also adds challenges given high external financing requirements.”
Goldman Sach’s Clemens Grafe was more optimistic regarding Turkey’s external financing needs:
“We think the recent foreign inflows into Turkey substantially relax the external funding constraint on Turkish growth. Given the consequent reduction in the need to tighten policy in H2, we raised our forecast for 2022 current account deficit to US$45.0bn.”