Turkey: Current account deficit widens in March
Turkey’s current account deficit widened to USD 5.6 billion in March from a USD 3.3 billion shortfall a year prior (February 2022: USD 5.4 billion deficit). The headline print marked the widest deficit since May 2018. Consequently, the 12-month rolling current account balance registered a USD 24.2 billion shortfall (March 2021: USD -35.0 billion; February 2022: USD -22.0 billion).
The annual deterioration in the headline reading came on the back of a marked widening of the merchandise trade deficit. Goods exports expanded 21.7% year on year in March (February 2022: +25.5% yoy), down from 39.9% a year prior. On the other hand, merchandise imports jumped from a 22.4% increase in March 2021 to 34.2% in March 2022 (February: +45.4% yoy). This reflected a greater energy import bill amid spiking oil and gas prices due to the war in Ukraine. Consequently, the merchandise trade deficit rose to USD 6.3 billion in March 2022 from USD 3.0 billion in the same month a year prior. This more than offset a wider services trade balance of USD 2.3 billion in March 2022, from USD 0.9 billion in the same month a year earlier. Another jump in tourist arrivals buoyed services exports, with arrivals increasing 113% year on year.
On the financial front, there was a net outflow of USD 0.5 billion (February 2022: USD 3.4 billion net inflow; March 2021: USD 4.7 billion net outflow). This was driven by residents acquiring external assets through deposits in Turkish banks abroad. Further, debt-creating non-resident inflows were unable to offset outflows. Lastly, official reserves dropped by USD 4.5 billion. This has likely been driven by the Central Bank’s emphasis on fostering greater liraization of the economy, against the backdrop of a firming U.S. dollar amid a more hawkish Fed, while Turkey’s Central Bank has remained passive in the face of red-hot domestic inflation.
The current account deficit is expected to widen this year as the fallout from the war in Ukraine keeps energy costs high; Turkey is a net importer of oil and gas. Moreover, the war in Ukraine will likely be weighing on the tourism sector as arrivals from Russia are affected: Russian tourists accounted for roughly a fifth of all arrivals in 2021. Furthermore, the lira’s volatility remains a downside risk as well.
Commenting on the outlook for Turkey’s current account balance, Muhammet Mercan, chief Turkey economist at ING, stated:
“The outlook for the whole year will be determined by tourism revenues and energy prices given the uncertainty, while signals of a slowdown in economic activity hint that core imports can weaken in the period ahead. On the financing side, the global backdrop turning less supportive should also add challenges given high external financing requirements as well as heavy reliance on financial flows rather than long-term finance like FDI, which is low relative to peer countries.”