Snaps
11 May 2021

Turkey: External deficit sees its first strong fall

March data shows a strong fall in the external deficit and hints at the start of an improvement trend in the period ahead, as confirmed by early indicators for April. This improvement will likely be driven by falls in gold imports and a surge in exports, and despite strength in commodity prices.

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Shoppers in Istanbul

The 12M rolling current account deficit has remained relatively flat in recent months - reflecting an uptrend in commodity prices and continuing recovery in domestic demand - but printed its first pronounced fall in March, to US$35.7bn (roughly 4.5% of GDP) from US$37.8bn. This could well be the start of the expected recovery trend from its cyclical peak.

The monthly figure at US$3.3bn was better than consensus (and our call, both at US$3.8bn), while the improvement over the same month of 2020 was driven by a narrowing goods deficit and initial signs of recovery in tourism income. The net gold deficit that has signalled direction change in recent months moderated further in March and turned out to be the biggest driver of the reduced trade deficit.

Breakdown of current account (US$ bn, on YtD basis)

 - Source: CBT, ING
Source: CBT, ING

The capital account turned negative again in March for the first time since September. The change at the helm of the Central Bank leading to a reversal of portfolio inflows in recent months was one of the reasons for this. The monthly c/a balance in deficit at US$3.3 bn and capital outflows at US$4.4 bn caused a marked US$6.2 bn drop in official reserves. Another significant positive net errors & omissions at US$1.6 bn limited the decline in reserves.

In the breakdown, residents posted US$5.6bn in outflows. The capital account outlook in March was driven mainly by locals’ expanding deposits abroad and the extension of trade credits to foreign companies.

Non-resident flows were slightly positive at US$1.2bn despite the foreign investor sell-off in both bond and equity markets as well as the Treasury’s eurobond repayment, together amounting to US$5.8bn. However, i) continuing strength in trade credits standing at US$4.1bn supported by high domestic rates and strong growth abroad, and ii) a US$1.9bn increase in non-residents’ deposits at local banks, meant that debt creating items were positive in March. It is also worth noting that we saw healthy debt rollover rates for both banks and corporates, standing at 145% and 108% on a monthly basis (translating into 86% and 84% on a 12M rolling basis).

Breakdown of the capital account (US$bn, YTD)

 - Source: CBT, ING
Source: CBT, ING

Overall, the March data suggests the start of an improvement trend in the current account. This is supported by early indicators for April, driven by a fall in gold imports and an uptrend in exports despite strength in commodity prices. The capital account that saw significant outflows last year will likely face challenges in the period ahead - reflecting reviving weakness in portfolio flows. Real estate related inflows, government borrowing and the level of corporate rollovers should help ease pressures.