Turkey: The current account balance gives a deficit for 11 consecutive months in October

In October, the current account balance in Turkey, gave USD 273 million deficit. While the monthly current account deficit was realized slightly above the market expectations of USD 100 million USD, it seems to have narrowed from the revised level of 2.56 billion USD in September. On an annualized basis, on the current account balance side, as of October, there was an increase from 30.8 billion USD in September to 33.8 billion USD. In the current account balance, there was a deficit for 11 consecutive months due to the deterioration in the foreign trade balance.

Since we reached a current account deficit of 33.8 billion USD in October on an annualized basis, we have guaranteed to end the year between 35-40 billion USD with possible high current account deficits in November and December. When we look at the trade deficit data published by the Ministry of Commerce and TURKSTAT, it is seen that the increase in imports was much higher than exports, in line with the trend throughout the year. The foreign trade deficit growth was the main driver of the current account deficit growth throughout the year. While the tightening financial conditions and restrictive measures on the import side were the factors that could limit the increase, gold imports caused the imports to continue to increase in October.

On the financing side, direct investment-driven net inflows were realized as 27 million USD in October, while a net inflow of 2.9 billion USD on the portfolio side. While net sales were 146 million USD in stocks, a net sales of 270 million USD was made in debt instruments. While the government's eurobond sales amounted to USD 2.5 billion during the month, private companies, including banks, issued a total of USD 700 million of bonds abroad. Official reserves increased by 4.2 billion USD in this period. In the January - October 2020 period, the current account balance had a deficit of 31.06 billion USD, while net errors and omissions or capital movements of unknown origin showed a monthly inflow of 1.6 billion USD, indicating a net outflow of 5.83 billion USD in the first 10 months of this year.

With the change in the management of the economy and the priority of inflation, monetary policy has been tightened. The impact of the policy tightening will continue to be seen in the coming months. At this stage, allowing interest rates to be high enough and achieving reasonable real interest levels can positively affect portfolio flows in the short term. There is hot money inflow with foreign investor side, but the trend of dollarization continues in the local. It is seen that the inflation that reached 14% weakened the real interest position. For this reason, the Central Bank, which is now creating and implementing a new communication and strategy, will probably make an interest rate hike of at least 150 basis points and preferably more on December 24, will increase the hot money effect from foreign inflows. Tightening financial conditions will have a limiting effect on imports in terms of keeping the demand level in the economy under control. However, exports are not in a strong position due to the pandemic. During the pandemic period, the current account deficit financing, which did not come mostly from the investment or hot money area, caused it to come from reserves.

In the pandemic year, the foreign trade deficit is growing as a reflection of the rapid increase in imports compared to exports, while exports are likely to be suppressed due to the fragility of the main export markets affected by Covid conditions. We expect to end 2020 with a current account deficit of 37 billion USD. The course of imports and exports for the next year depends on many variables. Factors such as pandemic, vaccine developments, the recovery process of the economy and financial conditions will be determinant.

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