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5.2.2 Current account dynamics
Turkey’s current account gap contracts 88% y/y in Q1 as lira crisis crushes imports. Turkey has posted a fourth straight monthly current account deficit but the year on year comparison again shows a big shrinkage in the gap given the major impact on import volumes of the Turkish lira crisis. The country’s central bank announced on May 13 that in March the account was in negative territory to the tune of $589mn. However, that was a stark reduction on the deficit of $4.73bn seen in March 2018. The March 2019 figure was lower than the figure anticipated by a May 10 Reuters poll of 16 economists, the median of which estimated a deficit of $984mn, with estimates ranging from $400mn to $1.2bn. Turkey’s annual current account deficit is expected to stand at $13bn this year, according to the median produced by a separate Reuters poll of 11 economists. Estimates in that survey ranged between $5.3bn and $23.3bn. The median estimate in the previous Reuters poll for 2019 was $18.5bn. The Institute of International Finance (IIF), on the other hand, forecasts that Turkey’s current account deficit will decline to $4.8bn in 2019 from $27.8bn in 2018. If that holds true, the recession-plagued country’s GDP contraction this year would exceed the current IIF forecast of 0.9% y/y.
High external debt keeps vulnerability high. The IIF noted on April 9 in a research note that high private sector external debt would keep Turkey’s financing needs and vulnerability high, despite a large swing in the current account. The IIF then on May 6 observed in its EM Growth Tracker that “the recent credit expansion in Turkey has undone a lot of progress made last year in reducing the current account deficit and external vulnerability”. Fitch Ratings forecasts weak domestic demand and a further improvement in services exports to underpin a current account deficit of 0.7% of GDP in 2019 (the smallest figure since 2002), amounting to less than projected net FDI inflows (1.2% of GDP). “Nonetheless, the external financing requirement will remain large due to private sector debt repayments,” Fitch said on May 6 when it affirmed Turkey at BB/Negative. The rating agency estimated Turkey’s total external financial requirement (including short-term debt) at $173bn in 2019, down from $212bn in 2018. “The financing requirement means Turkey will remain vulnerable to global investor sentiment and financial conditions, domestic political and economic policy uncertainty and a pronounced deterioration in relations with the US,” it said. Capital Economics sees the country’s gross external financing requirement (the current account deficit and maturing external debt over the next 12 months) at about $190bn, Jason Tuvey of the economic research company said on May 13 in a research note entitled “A closer look at Turkey’s FX reserves”.
Wide gaps in forecasting show uncertainties. The wide gaps in the forecast ranges, which are not specific to current account estimates, show the impact of the current uncertainties as regards Turkey’s economic outlook. The annual current account deficit shrank significantly last year, falling to $27.8bn from
38 TURKEY Country Report June 2019 www.intellinews.com