Current Account Deficit Continues to Give Pain to Turkish Economy
Bottom Line: Turkiye continues to struggle due to high current account deficits (CAD) in the recent years as it has been a structural feature of Turkiye's economy for far longer. Annualized CAD stood at $49.6 billion as of November 2023, partly due to trade deficit that slightly improved in 2023. We envisage CAD will likely be remedied by the continuing improvement in the services trade balance and tourism revenues in 2024, while cutting persistent trade deficit and attracting foreign direct investment (FDI) will be top agenda items for Turkiye in 2024.
Figure 1: Turkish Foreign Trade (Thousand USD), January – December, 2023
Source: Turkish Statistical Institute, Continuum Economics
Turkiye has continued to record CAD every year since 2012, largely due to soaring trade deficit driven by imports growing more than exports, which has been the case for 2023 as well. Despite CAD was partly offset by an improvement in the services trade balance along with an improved secondary income balance and tourism revenues in 2023, annualized CAD stood at $49.6 billion as of November 2023, which is higher than the government’s year-end forecast of $42.5 billion outlined in 2023 Medium Term Program, putting pressure on the weakening Turkish Lira (TRY). (Note: Current account figures for the 2023 calendar year will be announced on February 13). The IMF estimated that the net international investment position is in deficit at 31% of GDP.
On the foreign trade front, there was a slight amelioration in the trade balance in 2023. According to Turkish Statistical Institute data on January 31, Turkish exports amounted to $255.8 billion with a 0.6% increase and imports were $361.8 billion with a 0.5% decrease in 2023 when compared to 2022. Exports coverage imports ratio was a 70.7% in 2023, while it was 69.9% the year before.
We estimate CAD to record around $45 billion in 2023 while we foresee 2024 deficit will be around $33-35 billion. Despite increasing geopolitical risks and volatile global energy prices which could put further pressure on Turkish current account balance (CAB) in 2024, we think slowing domestic demand thanks to strong monetary tightening coupled with strong services trade balance and tourism revenues in 2024 likely heal CAD. As regards to tourism, Minister of Culture and Tourism Mehmet Nuri Ersoy announced on January 31 that Turkiye's number of visitors in 2023 increased by 10% compared to the previous year, and added that tourism revenues amounted to $54.3 billion in 2023 and 2024 target is $60 billion, which also would help relieve CAD.
Looking forward, it appears the main path to a healthier CAB 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. As noted, we project 2024 could be a better year in decreasing CAD, but unlikely to bring significant relief to Turkiye's CAB or competitiveness as continued volatility in energy prices combined with pre-local election stimulus spending will likely compound Turkiye's economic challenges.
Additionally, we foresee continued CAD and international debt service requirements would likely exacerbate the need for the foreign exchange in the country in 2024. As mentioned above, the government hopes to fill in the gap by tourism revenues or via a possible hike in the export revenues following TRY weakening, but these would likely have limited impacts. Attracting consistent FDI inflows, winning back investors’ credibility and cutting persistent trade deficit would continue to be key agenda items for Turkiye in 2024.