Current Account Balance: Real Problem Is Financing Side
According to official statistics agency Turkstat, Turkey’s current account deficit (CAD) widened to $4.8 bn in March vs. (revised) $4.5bn in February, reaching $55.4 bn YoY, the highest since February 2014.
While some moderation is possible over the summer months, thanks to buoyant tourist arrivals, AKP’s plans to stimulate the economy through March 2019 municipal elections pose an upside risk to current forecasts. Approximately at 5.5-6% of estimated 2018 GDP, CAD is clearly unsustainable, because it is financed by Central Bank (CBRT) F/X reserves and unidentified inflows, which begs the question of how long?
Gold and energy drive CAD, but so what?
“The deterioration in the monthly deficit versus the same period of 2017 is mainly attributable to the ongoing expansion in the trade deficit with accelerating imports on the back of rising gold and energy prices; the pace of the deterioration in core balance has further slowed down in March. Services income, which has continued to improve on the back of a sharp recovery in net tourism revenues by 32% year on year, offset the cumulative impact of an expansion in the primary income deficit and decline in secondary income surplus”, writes ING Bank research, pointing to “core” deficits of only 1% of GDP, a view echoed by many analysts.
With most forecast heralding even higher energy prices in the months ahead, driven by geo-political tensions, tight supply and vibrant global growth, it is hard to see Turkey’s energy bill going down. Since growth and exports need energy, why one should treat it as a special or temporary item is not clear.
Gold imports are not temporary, either. It is driven by three secular trends. First, CBRT is shifting its F/X reserve base from dollar-based assets to gold. Secondly, Turks being gold bugs, are increasing their holdings in parallel to F/X deposits, as high inflation and political uncertainty reduces trust in the TL. Finally, Turkey’s mining output fell from 33.5 tons in 2012 to 21 tons in 2017. Again, it is a folly to treat CAD as exaggerated by gold imports.
Turkey’s tourist arrivals are soaring to pre-crisis levels, but per tourist revenues is still $150 behind 2016, the last stellar year of the industry, as ample spare capacity and the depreciation of the TL forces operators and resort owner to cut hard currency prices.
Unless domestic demand takes a nose dive reducing imports and energy demand, CAD shall hover around %5 of GDP for the foreseeable future.
Economy decelerating, but AKP committed to stimulus
March-April survey data reveals a sharp deceleration in economic activity and confidence, which bodes well for a narrower CAD. However, believed to be losing altitude in polls and determined to win March 2019 municipal elections, AKP is determined to add fiscal and quasi-fiscal stimulus (through state banks and Credit Guarantee Fund) to the economy, which poses upside risk to the CAD view.
Financing gets trickier, Turkey vulnerable to rate shocks and risk-off episodes
As CAD widens, financing becomes more volatile. Economist Hilmi Yavas of Yatirim Finansman brokerage house notes:
“On the financing side, monthly figures suggested CA deficit in March was financed by retrievals of resident deposits in foreign jurisdictions (about USD2.0bn), significant decline in the CBRT FX reserves (about USD5.0bn), and USD3.0bn of NE&Os (unidentified money inflows). The reason for such a dramatic increase in external financing pressures were not only due to a relatively high CA deficit (USD4.8bn) and noticeable portfolio outflows of near USD2.5bn, but also due to Turkish banks’ decision to pay back a net USD2.0bn in external credit, and Turkish businesses that extended USD2.0bn in additional trade finance to the rest of the world”.
“According to 12-month cumulative data, long-term debt roll-over ratios in the banking sector and nonbanking sector in March became 102% and 131%, respectively” (dropping substantially vs February), adds Is Bank research team.
ING Bank research team writes the conclusion: “Overall, higher energy prices and unexpectedly strong gold imports led to a wider current account deficit in March. In addition to the risk posed by the widening c/a deficit and continuing large financing needs, the quality of financing has deteriorated with reliance on portfolio flows last year, though this has lost momentum lately. As a result, the capital flow outlook will remain in the spotlight this year, leaving little room for policy complacency”.
This is right on the money, with no puns intended. As money departs EM funds, a prolonged risk-off episode becomes more likely in the second half of the year, which would expose CBRT to a dangerous run-down of its $30 bn in net F/X reserves. Additionally, Fed is expected to remain on tightening schedule through 2019, meaning that Turkey’s external borrowing costs will go up. With TL loan rates at 10-year highs, dollar-TL swaps priced at 16.5% and loan demand decelerating visibly, it is doubtful whether Turkey’s banks would want to borrow at higher dollar rates.
Turkey needs “rebalancing” but no one thinks it is possible before the current election cycle is over. There seems little upside for the beleaguered TL, which will bear the brunt of CAD troubles.