Turkey’s March current account: Pressures on lira not likely to ease

Turkey posted USD4.9bn current account deficit in March 2020 that stands at the upper end of the expectations coming from USD0.1bn deficit in last year’s March.  Thus, the 12-month rolling current account surplus is now reduced to USD1.5bn. During the 1Q20, Turkey’s current account deficit now adds to USD7.4bn.

The huge jump in Turkey’s March 2020 current account deficit of course has roots in the collapse of exports designated to its main market Europe, added the shock on its tourism sector. With Turkey’s first diagnosis on COVID-19 made in almost mid-March, the domestic demand was slower to start its free-fall thus the pace of slowdown in imports has lagged behind.

The ailing foreign trade along with the global lockdowns related to COVID-19 has pushed up by USD3.6bn recording net outflow of USD4.3bn and USD1.0bn drop in the services inflow recording net inflow of USD0.8bn.

Gold and energy excluded current account also showed USD1.2bn deficit which highly contrasts with the USD3.9bn surplus recorded back in March 2019.

Travel income was USD0.5bn which is almost half of last year’s same term. 

Investment revenues again pointed to a net outflow of USD1.1bn which is been the main trend as it stands flat compared to last March.    

Capital flight speeds up

Good news is that the direct investment recorded a net inflow of USD0.8bn which is again rather flat compared to last year; yet the bigger picture is that Turkey has been able to atract so little direct investments from abroad that the ongoing economic crisis on a global scale so far failed to hurt the mentioned flows.   

Along with the sell-off in the emerging markets Turkey’s portfolio investment posted an immense net outflow of USD5.5bn; with both non-residents’ equity securities and government domestic debt securities transactions recording USD1.1bn and USD2.1bn of net sales, respectively.

As for the bond issues in international capital markets, “other sectors” managed net repayments of USD81mn.

Under other investment, banks’ currency and deposits within their foreign correspondent banks and nonresident banks’ deposits held within domestic banks decreased by USD0.6bn and USD2.6bn on net basis, respectively.

There was not much to tell regarding the loans provided from abroad.  Banks, General Government and other sectors posted net repayments of USD0.5bn,  USD0.1bn and USD3mn, respectively.

Under the net errors and omissions, some USD4.0bn also fled the country.

Skockingly, Turkey’s official reserves showed a net outflow of USD16.6bn in March 2020.

Pressures on lira will continue

Looking at the pace of widening in Turkey’s current account deficit and the fragility stemming from the fast depletion of Turkey’s fx reserves, the pressures on the Turkish lira are no surprise. The April and May foreign trade numbers point to a worsened performance compared to March.

As of June 2020, the Turkish government is trying hard to get the economy back on track with gradual re-openings scheduled. Yet, a lost tourism season appears in the cards with a contracting domestic demand amidst the virus slump. Export growth will hardly resume as it had already flattened ahead of the virus related lockdowns in Turkey’s main exports markets while the contraction in imports will gain pace compared to March. 

The level of capital from Turkey, notable with USD5.5 portfolio and USD4.0bn net errors and omissions outflows will hardly recover; at least not before a second wave of disease seems averted-if at all.

The level of central bank intervention exhausting its reserves by USD16.6bn only in March appears unsustainable.

Thus, looking forward, the current external accounts looks like very though on Turkey.  For the April-June period portfolio outflows will continue yet with less momentum, and can turn positive only slightly given the lasting COVID-19 threats.  The very recent BRSA actions -although reversed later- to to ban three foreign banks from swap operations will hardly ease the capital flight pains.  

Turkey is striving to get a swap line from the Fed yet that does not seem feasible.  With the peak of the initial wave of COVID-19 left behind “successfully” in the eyes of the AKP government, an approach to the IMF within a couple of months’ time looks also out of reach.  With the central bank insistint on continuing with rate cuts and the current account deficit heading to USD30bn, all combined, it translated to the fact that pressures on the Lira will continue and the currency will be prone to more weakness down the year.