Turkey: Capital outflows in March

The current account deficit in March came in at US$4.9 billion compared with the US$4.0 billion market consensus (and our call of US$4.8 billion), mainly on the back of a deficit in the goods balance (-US$4.3 billion). The widening in the trade deficit is mainly because of a plunge in exports (-17.8% year-on-year) given the severe lockdown measures in major export markets - namely European countries - introduced earlier than Turkey in an attempt to slow the spread of the virus. Imports recorded growth (+3.1% YoY) as Turkey closed its borders at a relatively later date. We also saw an impact from tourism income falling more than 50% YoY on the back of a collapse in tourist arrivals, while another big ticket item, transport revenues, recorded a smaller contraction of 29% YoY.

Despite the widening deficit, the 12M rolling current account balance remained in surplus, at US$1.5 billion, though it declined over the previous month's US$6.3 billion figure, which indicates that the deterioration has gathered pace due to the Covid-19 impact.

On the capital account, March showed a significant US$7.7 billion of outflows mainly due to the sharp decline in debt creating flows. With the c/a deficit and large negative net errors & omissions reading at US$-4.0 billion, official reserves plunged by US$16.6 billion.

In the breakdown, debt creating outflows were attributable to 1) foreign banks’ reducing their deposits in Turkey by US$2.6 billion 2) non-residents cutting their exposure to domestic debt by US$2.1 billion 3) US$0.7 billion drop in trade credits and 4) long-term debt repayments of banks (US$-0.4 billion) and corporates (US$-0.1 billion). In March alone, the long-term rollover ratio for banks was at 77% vs 94% of corporates, while the ratios were at 74% and 84%, respectively on a 12M rolling basis. So, the data shows that Turkish banks and companies weathered the market volatility in March reasonably well.

Regarding non-debt creating flows, gross foreign direct investment flows at US$0.9 billion matched to a great extent the outflows from the equity market at US$1.1 billion. Finally, residents transferred US$1.5 million abroad driven by financial investments of local banks.