Turkey’s current account balance recorded USD 683 million deficit indicating a decrease of USD 1,306 million compared to July of the previous year, bringing the 12-month rolling deficit to USD 27,832 million.
The monthly deficit at $683 million is $1.4 billion below the $2.0 billion recorded in July 2020. The main reason for this strong performance is that the “services” item that increased by $2.7 billion to $2.9 billion from $0.3 billion in July of the previous year. Net inflow in tourism revenues is $2.1 billion this time around versus as low as $0.4 billion in July 2020 that was hit by the pandemic.
The jump in exports and, of course, the fact that tourism has partly returned to life contribute significantly to the growth of the Turkish economy this year as the two main also help in narrowing the current account deficit .
On the other hand, while the performance on the export side is still strong, the fact that imports are gaining momentum is also a factor that widens the foreign trade deficit. The foreign trade deficit has increased from $2.0 billion in July 2020 to $3.0 billion in July this year. Total goods exports increased from $14.7 billion to $16.5 billion, while imports increased from $16.7 billion to $19.5 billion.
Hence, the deficit decreased from $23.2 billion in the first seven months of last year to $13.7 billion in the period January-July 2021. But on annual basis, the picture is not similarly bright. The current account deficit at$17.6 billion in July 2020 on a 12-month basis now compares to $27.8 billion on a 12-month basis in July 2021. Although it is a consolation that it has fallen from $37.3 billion at the end of 2020 to $27.8 billion now, the current account deficit growth cycle of the Turkish economy remains a fundamental structural problem.
It is also important to look for any significant improvements in the financing side. The direct investments item has been able to finance a very limited share of the current account deficit for a long time. Portfolio investments and unspecified inflows of money, mostly dependent on interest movements, have been predominantly financing the current account deficit. This, of course keeps the Turkish Lira fragile and prone to global volatilities.
Compared to the current account deficit of 13.7 billion in the period January-July 2021, the total inflows from the financial account were $19.7 billion. Of this total, $8.0 billion is due to the “net error and ommissions”; that is, currency inflows whose origin is not clearly disclosed. The increase in the central bank’s official reserves in the first seven months of the year was $13.9 billion.
In his recent statements Central Bank Governor Kavcioglu, there was the impression that the monthly current account balance could turn into a surplus in the the coming quarter. The current account deficit in fact narrowed compared to the end of 2020; and it will continue to contract, but a surplus on monthly basis is hardly in the horizon. By contrast, according to the recently announced Medium Term program, the current account deficit of $13.7 billion will rise to $21.0 billion at 2021 year-end, which means a current account deficit of around $1.0 million per month should be expected in 2H21.
Although exports are strong, they are still dependent on import growth. Moreover, due to supply problems, transportation costs are working in a direction that increases the import bill. Contrary to expectations, the tourist season will not be able to maintain its summer performance in winter due to the delta variant. On the financing side, unspecified inflows average about $2.0 billion per month which is hardly comforting as they could as well leave the country. Direct investments are low and portfolio investments are -by nature-volatile.
In summary, the current account deficit to GDP rate will drop from around 5.2% in the pandemic year to the range of 2.5-3.0% by the end of 2021. Unlike the rosy picture in the MTP, however, no further recovery is possible. Even if the Program’s assumed GDP growth rate of 5.0-5.5% is achieved for 2022-2023, the current account deficit is not likely to ease towards 1.0% of GDP as assumed by the government. A more realistic current account deficit of around 3.5% in 2022 and beyond is a more realistic expectation with GDP growth also lower at 3.0-3.5%.
Below are the monthly details:
- This development is mainly driven by the net inflow of USD 2,948 million in services item increasing by USD 2,653 million compared to July of the previous year.
- Goods deficit recorded USD 2,984 million deficit increasing by USD 1,022 million compared to the same month of the previous year.
- Gold and energy excluded current account indicated USD 2,749 million surplus which was recorded USD 1,924 million surplus in the same month of the previous year.
- Under services, travel item recorded a net inflow of USD 2,118 million.
- Primary income outflow increased by USD 306 million on net basis compared to the same month of the previous year, realizing USD 702 million.
- Secondary income item recorded USD 55 million net inflow, decreasing by USD 19 million compared to the same month of the previous year.
- Direct investment recorded net inflow of USD 1,030 million.
- Portfolio investment recorded a net inflow of USD 1,933 million. As regards to sub-items through liabilities, non-residents’ transactions on equity securities recorded net sales of USD 93 million and government domestic debt securities recorded net purchases of USD 439 million.
- Regarding the bond issues in international capital markets, banks realized net repayments of USD 499 million, while General Government and other sectors realized net borrowing of USD 1,774 million and USD 195 million, respectively.
- Under other investment, Turkish banks’ currency and deposits within their foreign correspondent banks decreased by USD 467 million.
- Non-resident banks’ deposit accounts held within domestic banks increased by USD 301 million, with an increase of USD 217 million in foreign currency and USD 84 million in Turkish lira accounts.
- Regarding the loans provided from abroad, banks and General Government realized net borrowing of USD 43 million and USD 231 million respectively, while other sectors realized net repayments of USD 176 million.