External Debt in Turkey

Turkey - External Debt

Current account deficit narrows in March

Turkey’s current account deficit narrowed from USD 4.7 billion in March 2018 to USD 589 million in March 2019, which marked the smallest shortfall since November 2018 and an improvement from February’s revised USD 739 million gap (previously reported: USD 718 million deficit). This brought the 12-month rolling sum of the trade balance down to a USD 12.8 billion shortfall from a USD 17.0 billion gap in February; the March print represent the smallest deficit since January 2010. A weak currency following last year’s currency crisis has supported price competitiveness and tourism, which, combined with numb domestic demand, has helped to close the large current account gap.

March’s improvement was again underpinned by a smaller merchandise trade deficit, although it picked up from a month prior. This likely linked to imports continuing to drop noticeably, albeit at the softest pace since July 2018, and softer growth in exports despite Turkish goods becoming markedly more affordable due to the significant lira depreciation year-on-year. The trade surplus in services continued to benefit from the weak lira as tourism continued to increase.

Regarding the financial account, there was a net outflow of USD 835 million in March on the back of sizeable currency and asset acquisition by banks totaling USD 4.7 billion. “It seems that banks continued to transfer FX to their corresponding banks abroad”, Muhammet Mercan, chief economist at ING Turkey, added. Foreign exchange reserves, meanwhile, dropped USD 5.7 billion in March.

Looking ahead, Muhammet Mercan noted that the outlook remains challenging as underlined by stronger outflows. Moreover, “sizeable financing needs will likely keep Turkey sensitive to shifts in global risk appetite”, Mercan continued. Moreover, the Turkish lira has come under renewed pressure leading up to and in the aftermath of the 31 March local elections while the depletion of foreign reserves has also been a cause of concern among investors. In order to stabilize to the currency and pull the economy out of a recession, news has broken that the Treasury ministry is looking at ways to transfer the Central Bank’s legal reserves—which differ from the foreign exchange reserves—to the government’s budget. This would mark the second time this year funds are transferred from the Central Bank to the government.

Turkey is expected to record a current account deficit of 1.8% of GDP in 2019, according to FocusEconomics Consensus Forecast panelists; this would be the smallest deficit in over a decade and largely thanks to a weak lira depressing domestic demand and supporting exports and tourist arrivals. Next year, FocusEconomics panelists see the current account deficit widening to 2.6% of GDP.