Turkey: Current account records six-month low deficit in April
Turkey’s current account recorded the smallest deficit in six months at the outset of the second quarter, with the shortfall falling to USD 1.7 billion in April (April 2020: -5.3 USD billion; March 2021: USD -3.3 USD billion). The print beat market analysts’ expectations of a larger deficit, although it benefited from a supportive base effect. Moreover, on a 12-month rolling sum, the current account deficit fell to a seven-month low of USD 32.7 billion (March: -36.2 USD billion).
The improvement came on the back of a smaller merchandise trade deficit and a wider services trade surplus. Goods exports skyrocketed 109.6% year-on-year in April (March: +40.1% yoy), marking the best result on record. Merchandise exports benefited from strengthening foreign trade and a weakened currency, increasing the competitiveness of Turkish goods. Imports, meanwhile, rose 58.2% year-on-year in April (March: +22.5% yoy), marking the best result since November 2004 and pointing to firming domestic demand. Furthermore, the services trade surplus widened in the month, partly reflecting a surging influx of tourists amid the gradual easing of movement restrictions abroad and domestically. In April, tourist arrivals jumped over 3,000% year-on-year. However, this was also partly due to a supportive base effect, as many countries, including Turkey, were in lockdown in April last year amid the first wave of Covid-19.
On the financial front, there was a net inflow of USD 0.3 billion in April, swinging from a net outflow of USD 3.0 billion in the same month a year prior (March 2021: USD 4.4 billion net outflow). Non-resident inflows supported the reading and were driven by an extension of trade credits to foreign companies and foreign direct investment. This was partly offset by residents increasing their deposit holdings in foreign countries. Lastly, official reserves decreased by USD 1.2 billion.
Reflecting on April’s reading, Muhammet Mercan, chief Turkey economist at ING, commented:
“Overall, the improvement in the current account accelerated in April given the fall in gold imports and an improvement in exports, despite strength in commodity prices. Going forward, not only exports but also subdued prospects for core imports, driven by an expected moderation in domestic demand, should be supportive of the external deficit. Capital account on the other hand will likely remain challenging in the period ahead given the weakness in portfolio flows, though any improvement in geopolitics should be supportive of the flow outlook.”
Analysts at the EIU added:
“Still-subdued domestic demand and a weak lira will temper imports in 2021, while tourism earnings will partly recover. The current account deficit will narrow sharply to 2% of GDP this year as the economy begins to rebalance. Attracting sufficient capital inflows to cover the deficit and to service foreign debt, without further drawdowns of already inadequate foreign-exchange reserves, will be complicated by the renewed uncertainties relating to monetary and foreign policy. We expect conditions for borrowing from abroad to deteriorate, given a lack of investor confidence.”