External Debt in Turkey

Turkey - External Debt

Current account deficit widens in May

Turkey’s current account recorded a USD 6.5 billion deficit in May, deteriorating from the USD 2.9 billion deficit recorded in April (May 2021: USD -3.3 billion). Moreover, the 12-month rolling deficit rose to USD 29.4 billion in May from April’s USD 25.7 billion deficit.

The deterioration came on the back of a wider merchandise trade deficit, which rose to USD 8.8 billion in May from 4.5 billion in April (May 2021: USD -3.1 billion). Merchandise exports expanded at a softer clip of 16.1% year on year in May, moderating from the prior month’s 26.4% expansion. At the same time, merchandise imports growth rose to 42.9% in May, accelerating from May’s 37.6%. A greater import bill amid elevated commodity prices due to the war in Ukraine weighed on the current account: Data excluding gold and energy showed a surplus. Meanwhile, placing upward pressure on the current account was a greater services trade surplus, which has been supported by a recovery of the tourism sector: Tourist arrivals jumped over 300% in May.

Meanwhile, the financial account showed a net outflow of USD 2.3 billion (April 2022: USD 3.3 billion net inflow; May 2021: USD 4.5 billion net outflow). Outflows were driven by non-residents decreasing their holdings of Turkish equity and debt, while domestic banks increased their currency and deposits within their foreign counterparts. Lastly, official reserves fell by USD 5.9 billion in May, following April’s USD 3.2 billion increase (May 2021: USD 1.3 billion increase).

The current account deficit is forecast to widen this year compared to last year, driven by the fallout of the Ukraine-war. The war has pushed up energy prices and thus Turkey’s import bill as it is a net importer of oil and gas. The lira’s volatility remains a downside risk.

Clemens Grafe, analyst at Goldman Sachs, commented:

“For 2022 as a whole, we forecast a current account deficit of 4.7% of GDP. The risk to our forecast is to the upside since domestic demand is well-supported by credit expansion and possibly by the recent hike to the minimum wage given that the outlook for Euro area growth (which accounts for a major chunk of external demand for Turkey) has deteriorated.”

FocusEconomics Consensus Forecast panelists expect Turkey to record a current account deficit of 4.5% of GDP in 2022. In 2023, the panel sees the current account deficit narrowing to 3.1% of GDP.