Turkey: External deficit narrows further

External balances have continued to improve rapidly due to weaker domestic demand and increased price competitiveness, along with a contribution from the recovery in tourism. In February, the monthly deficit stood at US$0.7 billion, slightly better than the market consensus at US$0.85 billion, while the 12M rolling current account deficit narrowed further to US$17.6 billion, the lowest in the last 10 years. The downtrend in the deficit has been rapid, dropping from US$58.1 billion over a period of just nine months.

The improvement over the same month of 2018 is again attributable to a contraction in foreign trade while the impact of other items was relatively small.

On the financing front, following a relatively better flows outlook in January, helped by the Treasury’s issuances, capital flows remained in positive territory in February at US$2.1 billion. Given the mild external deficit and US$1.4 billion of inflows via net errors & omissions, official reserves recorded a US$2.8 billion increase.

In the breakdown, capital inflows are mainly attributable to: 1) US$0.6 billion gross FDI 2) bond issuance by the Treasury of US$2.0 billion 3) US$1.1 billion trade credits despite drags from increasing assets of residents held abroad by US$0.5 billion, and more importantly, continuing debt repayments at US$0.8 billion (the lowest monthly loan repayments in the last seven months, mainly driven by short-term payments of the corporate sector at US$0.5 billion, while long-term debt payments for both banks and corporates were negative). Accordingly, capital account data shows that the banking sector rollover ratio stands at 86% on a monthly basis, translating into a 12M rolling figure at 73%. For the corporate sector, this ratio stood at 80% in February and 122% on a 12M rolling basis.