Turkiye Struggles its Way out of Current Account Deficits
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Bottom Line: Turkiye continues to record current account deficits in recent years as it has been a structural feature of Turkiye's economy for far longer. The current account balance regressed to a $48.4 billion deficit in 2022 from $7.2 billion deficit the year before, mostly due to soaring trade deficit driven by imports growing more than exports, as the trend strongly continues in 2023. Despite current account deficit is partly reduced by improvement in the services trade balance, along with an improved secondary income balance and tourism revenues, we foresee cutting the trade deficit and attracting foreign direct investment will be top agenda items for Turkiye in 2024 to deal with current account pain.
Figure 1: Decomposition of Current Account Balance (% of GDP), 2022
Source: Turkish Statistical Institute (Turkstat), Central Bank of Republic of Turkiye (CBRT)
Figure 2: Turkish Foreign Trade (Thousand USD), January – August, 2023
Source: Turkish Statistical Institute
Turkiye has continued to record current account deficit every year since 2012. Turkiye's highest current account deficit in the last decade was $55.8 billion in 2013 while the balance regressed to a $48.4 billion deficit in 2022, mostly due to soaring trade deficit driven by imports growing more than exports, partly offset by an improvement in the services trade balance along with an improved secondary income balance and tourism revenues (Figure 1).The IMF estimated that the net international investment position is in deficit at 31% of GDP.
According to the latest figures announced by CBRT on September 11, it appears Turkiye continues to feel the current account pain acutely in 2023 so far. The current account balance registered a $42.3 billion deficit in January-July, 2023 nearly matching the government’s year-end forecast of $42.5 billion that was outlined in the Medium Term Program published on September 6, which puts more pressure on the Turkish Lira (TRY).
It is worth mentioning that CAD is mostly triggered by the surging foreign trade deficit. As per Turkstat data on September 29, in January-August 2023 period, exports amounted to $164.7 billion with a 0.4% decrease and imports were $247 billion with a 3.4% increase when compared with January-August 2022, showing deterioration in the trade balance (Figure 2). (Note: In the same period, exports coverage imports ratio was a mere 66.7%, while it was 69.2% the year before). In August 2023, the automotive sector took the lead in the exports with $2.7 billion followed by chemicals ($2.6 billion), and textiles and ready wear ($1.7 billion) in August 2023.
In addition to the ongoing tightening process to cool off inflation, CBRT continues to fight against CAD by taking additional actions. To illustrate it, CBRT announced on September 12 that the daily limit has been raised to TRY 3 billion from TRY 1.5 billion in order to support selective credit utilization and exporters' access to finance. This is an important step to provide funds for the exporters in a tightening lending environment but the transition will take time.
Looking forward, the main path to a healthier current account balance is likely a decrease in domestic consumption and associated high inflation, and a decline in imports and additionally medium-term a switch to domestic based production to replace imports. A continued recession in Europe would likely prompt Turkish imports of raw materials and intermediate goods to decrease, which would take strain off the current account balance but also reduce exports to Europe.
We expect CBRT to continue the tightening cycle in the remainder of 2023 and 2024 until domestic demand will be suppressed, a weakening pace of TRY decline is evident, and CAD is under better control. We project 2023 could be a year of record CAD which will be further strained due to global energy prices in the reminder of the year and high dependence on imported energy. 2024 is unlikely to bring significant relief to Turkiye's current account balance or competitiveness as continued high energy prices combined with pre-local election stimulus spending will likely compound Turkiye's economic challenges.
We think ballooning CAD and international debt service requirements would likely exacerbate the need for the foreign exchange in the country in 2024. The government hopes to fill in the gap by tourism revenues or via a possible hike in the export revenues following the devaluation, but these would likely have limited impacts. Attracting foreign direct investment (hitting historical low levels in the last three years), and winning back investors’ credibility continue to be a top agenda item for Turkiye in 2024.