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October 12, 2018 www.intellinews.com I Page 6
the middle of the year due to stronger tourism receipts, Tuvey also noted, adding that the break- down of the data showed that the narrowing of the current account deficit was driven by an improve- ment in the goods trade balance.
“Worryingly, there’s no evidence yet that a weaker lira — which is down by more than 35% since
the start of this year — has provided a significant boost to exports,” Tuvey added.
Capital Economics expects the current account deficit to narrow further over the coming months. Domestic demand will continue to weaken, in- creasingly weighing on imports. As some spare capacity opens up in the domestic economy, Capi- tal Economics sees Turkish exports picking up on the back of a boost to competitiveness from the weaker lira.
On the financial account, the data highlight the key drivers of the extent of the currency crisis in Au- gust, according to Tuvey. Turkey recorded net capi- tal outflows of $14.4bn last month alone and, on a 12-month basis, net inflows slowed from $20.8bn to just $10.8bn. That was driven by much weaker “other” investment — i.e., banking sector — flows as banks struggled to roll over external financing.
Consequently, the country’s official reserves declined by $8.1bn in August alone and $13.4bn in January-August. Inflows through the net er- rors and omissions account of unidentified capital inflows, amounted to $3.7bn in August alone and to $15.1bn across the first eight months.
Net FDI inflows stood at $737mn in the month while net portfolio outflows amounted to $1.79bn.
Rebalancing gathering pace
The annual contraction in June's current account gap confirmed that the expected rebalancing is gathering pace just as the full-blown currency crisis is expanding into the real economy. The widening gap across the first four months of 2018 was a serious concern for those trying to get a grip on Turkey's overheating economy, which other data released on June 11 showed grew at the stellar rate of 7.4% in the first quarter of this year. The initial signs of re-balancing came in May.
Turkey’s current account deficit widened by 42% y/y to $47.1bn in 2017, driven by rising gold im- ports and energy prices.
Fitch expects Turkey's current account deficit to narrow significantly, to $12bn in 2019 from $47bn in 2017, as slowing economic growth and a materially weaker lira suppress imports and boost exports. However, the country's financing requirement will remain large as
a proportion of liquid foreign assets due to maturing external debt.
The contraction in Turkey’s foreign trade gap raced to 77% y/y in September after falling 59% y/y in August, preliminary data from the customs ministry showed on October 1.
Turkey, hooked on foreign-currency debt, has endured one of the worst current account deficits in the world. Its economic health is dangerously reliant on hot inflows of foreign external financing to enable growth. The political and economic outlook in the country is not secure enough to attract sufficient longer-term stable foreign investment capital.