Turkey: Current account deficit triples compared to last year due to energy impact

The current account deficit in Turkey increased by 191% in June compared to last year due to the rising cost of energy imports, highlighting the impact of Russia's invasion of Ukraine on the economy. The current account deficit, which was announced as $3.46 billion on a monthly basis, was realized in line with the market median expectation of $3.4 billion deficit. The current account deficit was $1.2 billion in June 2021. The 12-month total current account deficit widened from $30.4 billion in May to $32.7 billion. The deficit in the first 6-month period is already 32.4 billion dollars, which indicates a 2.5 times increase compared to the same period of the previous year. Core current account surplus excluding gold and energy reached $39.6 billion from $37.3 billion.

When we look at the most determining factors in the current account; The worsening of the foreign trade deficit, led by a global rise in food and energy following the February 24 invasion of Russia, seems to have been effective. The deficit in goods trade increased to $6.43 billion from $1.63 billion a year ago. Despite the increase in exports, imports have shown a stronger increase. Based on the first 6-month period, it is seen that the goods deficit, which was 13.4 billion dollars last year, has now reached 41 billion dollars. The rising bill due to import pressure, mainly the rise in energy and raw material prices and gold imports, adversely affects the current account balance.

Services posted a surplus of $4.02 billion in June with the support of tourism, which generated $2.73 billion. Along with the strong increase in tourism in this period, there was a high increase of 165.9% in travel revenues compared to the previous year. While the increase in transportation revenues remained somewhat lower than in tourism, it is observed that the revenue increase in the related transportation item was realized as 79.9%. The increase in services revenues does not provide a complete neutralization, although it somewhat closes the gap from goods trade. Looking at the goods and services balance together, it is seen that the deficit level, which was 7.4 billion dollars in the 6-month period of last year, increased to 26.5 billion dollars this year. Although the strong balance in service revenues partially reduces the foreign trade deficit, it is not enough to close it.

Excluding energy and gold items, which are heavily affected by volatile prices, some improvement is observed in the core current account balance. The current account surplus excluding energy increased by 1.4 billion dollars compared to the previous year and reached 3.1 billion dollars, revealing the disruptive role of energy in the current account balance. Gold imports, on the other hand, seem to have been slightly higher this month compared to last year and previous months. There is a current account deficit excluding gold, which widened to 2.3 billion dollars from a deficit of 1 billion dollars last year. On a monthly basis, the core current account balance excluding both gold and energy shows an improvement from the level of 1.9 billion dollars in June 2021 to 4.3 billion dollars. We calculate that energy imports will reach 94 billion dollars in total by the end of the year, which will mean an increase almost double the total amount in 2021.

While net inflows originating from direct investments on the financing side were 950 million dollars in June, there was a net outflow of 1.58 billion dollars on the portfolio side. While net sales of stocks were 509 million dollars, net sales of debt instruments were 218 million dollars. In the sub-details of direct investments, it is seen that foreigners have invested 1.14 billion dollars in real estate. Since the net inflows arising from direct investments are below this amount, foreigners do not show interest in factory-type investments that will have a better effect on growth and continuous foreign currency inflows, and in fact, there is a capital outflow. The effect of portfolio exits continues, albeit at a slower rate than last month.

Although the loans used by banks and other sectors and deposit movements are the determining factors in the formation of net liabilities in other investments, it is observed that the outflow tendency is stronger in general. Under other investments, the effective and deposit assets of domestic banks in foreign correspondents increased by 416 million dollars. Domestic deposits of foreign banks recorded a net increase of $643 million. Regarding the loans obtained from abroad; banks, General Government and other sectors realized net repayments of USD 1.04 billion, USD 67 million and USD 264 million, respectively. The long-term roll-over ratio in banking was 99%, while the long-term external debt rollover ratio in other sectors and in total was 70.1% and 92.6%, respectively. Foreign borrowing appetite of Turkish companies is decreasing. Banks realized a net borrowing of 16 million dollars in bond issuances abroad.

Net errors, omissions or capital movements of unknown origin (luggage trade, tourism, money transfers from abroad, unrecorded, difficult-to-predict items that may result from accounting delays) increased the inflows to 17.5 billion dollars in the January-June period, showing a monthly inflow of 3.98 billion dollars. Official reserves, on the other hand, fell by $1.96 billion in June. In the first 6 months, the Central Bank's reserve loss in the balance of payments was 12.3 billion dollars.

Considering all these results, the cumulative deterioration in the financial account compared to the previous year continues. There was a use of 13.8 billion dollars in the financial account against the current account deficit, which was 13.4 billion dollars in the first 6 months of last year. As of the first 6 months of 2022, the current account deficit was 32.4 billion dollars, while the financial account was able to cover 2.6 billion dollars of this. Financing the remaining $29.8 billion deficit was predominantly loaded on the Central Bank's reserves with net errors and omissions. Despite the export revenues, the fact that the Central Bank reserves are on a downward trend excluding the increases in the last 1-2 weeks and the reserves excluding swaps are around minus 50 billion dollars, will be a fundamental factor that increases the financing problems and risks and makes it difficult to finance the increasing foreign exchange deficit.

We expect to see the increasing effect of the deficit in the current account balance and foreign trade balance in the coming months. A high increase in imports may delay the improvement in the external balance. Along with the autumn, with the decrease in the contribution from tourism towards the end of the year, a deficit may increase in the current account balance. On the export side, we are at a very hesitant point in terms of foreign demand, so even if the decline in global commodity prices and the pullback in domestic demand ease the import bill, the effects of the global recession may cause the external deficit to remain higher than last year.

The Central Bank will hold its next interest-setting meeting on August 18. The bank has kept its policy rate at 14% for the last seven months, despite inflation approaching 80%. The central bank will release its inflation report on July 28. Although the projection of a current account surplus is the basis of the liraization strategy, no change has been made in the policy perspective despite the deterioration in the current account deficit. We expect the current account deficit to GDP ratio to be around 6.2% throughout the year.

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