Turkey: External deficit sees its first strong fall

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.

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).