Is Turkey’s Current Account Adjustment Coming to a Halt?
Author: Emre Deliveli
But as they say, the devil is in the details, and the details paint a rather ugly picture.
The first thing to note is that the fall in the deficit is due to the sharp decrease in imports. Since the Turkish growth model is dependent on external financing, the imports figure might be hinting at a slowdown, and as I argue in a recent post, other indicators are pointing in this direction as well. Coming in weaker than expectations of 3.5 percent yoy, yesterday’s June industrial production print, at 2.7 percent yoy, confirmed softer economic activity in the second quarter as well.
Well, then you might tell me this development is at least good for the adjustment. But I am not sure how the recent plunge in the Central Bank’s effective funding rate (see the end of that same post) as well as the capital inflows since June ($ 14bn of hot money plus $ 5-6 syndicated loan & bond issues) will feed into the economy and the lira.
Besides, preliminary exports from the Turkish Exporters Association contracted 5.6 percent in July. And that is not surprising, given Europe still more than half of Turkey’s export market (share of exports to EU is 41 percent). An appreciated lira, reheating economy and weak external demand is probably the worst possible combination for the current account.
Moreover, as I argue in my latest Hürriyet Daily News column, tourism is not doing well, as evidenced from the most recent official figures as well as my observations from the field. The contribution from tourism is likely to be smaller than expected in July and August if I am right.
Finally, loyal readers would know that gold exports to Iran have recently started playing an important role in Turkey’s trade picture. For that reason, my friend Murat Üçer of Turkey Data Monitor and GloabalSource Partners has developed the concept of “core exports and imports”, similar to core inflation, where he excludes gold as well as energy exports and imports.
He argues that the core deficit, seasonally adjusted, has stabilized around $ 6bn per month, which may mean that the pace of the current account adjustment may slow in the second half of the year. Also interesting to note is that exports look to be oscillating around $ 11bn per month (the data in the graph are not seasonally-adjusted)- showing that the surge in exports in the last few months was mainly coming from gold exports. BTW, you can also see the drop in imports in June.
Bottom Line: If imports are pointing to a slowdown, this is adjustment-positive, but tourism and export developments as well as the possibility of a strong recovery fueled by low interest rates and capital flows should not be overlooked, either.
Note that this was originally posted as part of the latest Economonitor Weekly, which was published Sunday night (EST). I updated the text with yesterday’s industrial production print and added extra charts to make my points clearer.