Turkey: Current account posts narrower deficit in August, but outlook darkens
The current account posted a USD 3.1 billion deficit in August, improving from the USD 4.1 billion deficit clocked in July (August 2021: USD 1.1 billion surplus). Meanwhile, the 12-month trailing current account deficit deteriorated, coming in at USD 40.9 billion in August (July: USD 36.7 billion deficit). This marked the highest level since September 2018 and highlights the increased risk of a balance of payments crisis in Turkey.
The merchandise trade balance worsened from the previous month, recording a USD 9.7 billion deficit in August (July 2022: USD 9.4 billion deficit). Merchandise exports shot up 12.4% on an annual basis in August, on the heels of July’s 13.0% jump. August’s figure marked the softest expansion since July 2021. Meanwhile, merchandise imports increased 42.1% on an annual basis in August (July: +42.6% yoy) due to a greater energy import bill and stronger gold imports. Meanwhile, the services trade surplus rose to USD 7.3 billion in the month from USD 5.8 billion in July (August 2021: USD 4.7 billion), largely due to tourist arrivals rising over 58% year on year.
On the financial front, there was a USD 9.9 billion net inflow (August 2021: USD 9.7 billion net inflow), up from the prior month’s USD 3.0 billion net inflow. August’s strong inflows were driven by non-resident debt-creating flows. Lastly, international reserves rose by USD 10.8 billion in the month.
Despite the monthly headline improvement, current account balance pressures rose in the month as the risks of a crisis increased. The import bill has gone up due to the war in Ukraine, while the Central Bank pursues an accommodative monetary policy stance at a time of red-hot inflation. Looming recessions in the European Union and the United States further cloud the outlook. Moreover, the volatility of the country’s currency remains a key risk.
Muhammet Mercan, chief Turkey economist at ING, added:
“Current account pressures did not abate in August [and] will likely continue in September given the monthly trade deficit is one of the highest on record. We expect the current account to remain under pressure in the near term given the marked deterioration in the terms of trade, accommodative policy stance, and less supportive global outlook with increasing growth concerns.”