Depending on external finance has been the case for almost any emerging market, but in Turkey it is life-sustaining given the country’s external balance profile, which has always had a bad title due to being an energy importer and demographics that fuel consumption.
Speaking of external balance, Turkey is also known for its banks’ ability to provide foreign borrowings as syndication loans for a while has been the most important source for banks to finance the growth. To cut a long story short, we present the following which shows the relationship between FX denominated asset growth in banks and GDP growth. For the period we analyze, an average GDP growth rate of 4.6% was calculated and each series of multiple quarters with growth rates above that was assumed to be the below par economic activity period, also shown in red areas.
Shortly, Turkey has been increasingly dependent on foreign cash flows, and the situation is touch-and-go, and, for sure we will see banks downsizing their balance sheets in FX terms.
Turkish lira has been particularly weak as of the beginning of October. As prospects of a Federal Reserve rate in December hike boosted again, many emerging market currencies is doomed to be weak in the remainder of this year. However, Turkish lira has seemed to be high-beta asset class in EMFX space so far.
Looking at the domestic factors that resulted in a weaker lira, Moody’s downgrade that deprived Turkey of IG is the primary reason in our view. Apart from that investors started to pay attention to Turkish corporate sector that holds a big chunk of debt in hard currencies.
After consecutive rate cuts, Turkish central bank went for lowering rates for require reserve maintained in terms of FX in an attempt to increase liquidity to boost the economic activity. This has caused a decline in the bank’s gross reserves account, placing downward pressure on lira.
The chart above shows Turkey’s gross FX reserves in months of imports where exports are calculated by taking the average of 12-month trailing total imports. Apparently, Turkey’s pocket has been deep enough to cover 4-7 months of imports for almost over the past two decades. 2016 also marked an improvement. That said, Turkey’s ability to meet the FX requirements is lower when compared to, let’s say, India, whose reserves are 10 times larger than its monthly imports.
Second, the rebound in global oil prices is starting to reserve the oil-price driven external adjustment. Coupled with the fall in tourism revenues, this is very likely to hurt lira in the upcoming period. Each $1 rise in oil price per barrel approximately adds $200 million in Turkey’s energy bill. It’s disputable whether the recent bullish oil market is driven by market forces, but a recovery in energy commodities enlarging Turkey’s current account deficit is not an element of surprise.
Lira weakness will also have consequences on the macroeconomic front including declining consumer confidence, accelerated inflation, and earnings recession for Turkish corporates owing to the high level of foreign debt. While we attach importance on domestic factors, it is still global market sentiment that drives EMFX markets.
Gross Domestic Product
Turkey GDP grew by more than expected (2.3% versus 1.6%) in the first three months of 2015, data from Turkstats showed on Wednesday. Despite the fact that the reported figure signaled a below par growth in the country, we saw the pressure on Turkish assets easing for a while following the economic data. However, a rethinking about the country’s growth regime is needed given that for the last thirteen quarters it has been posting growth numbers below historical levels.
The strongest component of GDP was consumption in 1Q15 which was up 4.5%. The positive impact of boosted consumption was offset by the decline in net exports. The below is a visualized form of contribution of each components to GDP that shows consumption in Turkey has a strong (reverse) correlation with imports (net exports). At industry level, financial services sector appeared to the best performer in 1Q15.
Current Account Balance
From Dogan News Agency:
Turkey’s current account deficit fell by $1.52 billion to $3.41 billion in April, yet exceeded the expectations of $3 billion.
The unaccredited inflow of foreign currency rose to USD 2.89 billion in the same period, more than 10 times the USD 258 million registered a month prior, rising to USD 6.98 billion in the first four months of the year.
Other important reason that limited the rise in the current account deficit in April was gold exports of USD 1.82 billion, compared to USD 307 million of net imports in the same month of last year.
The 12-month rolling deficit fell to USD 44.26 billion at the end of April, down from USD 45.78 billion at the same period of last year. Current account stood at USD 2.0 billion in January, at USD 3.2 billion in February and USD 4.96 billion in March.
Another reason was direct investment outflows involving distributed profits under primary income item increased by USD 595 million to USD 892 million in April.
Portfolio investment recorded a net inflow of USD 755 million as an increase in net liabilities. As regards to sub items through liabilities, non-residents’ equity security transactions recorded net purchases of USD 652 million, as government domestic debt securities recorded net sales of USD 1.02 billion.
The country just printed another bad current account deficit which was 5.7% of the country’s total GDP. The following chart shows the ratio by countries where Turkey is shown red.
Ultimately, macro data shows that the structural reforms are needed for the future of Turkish economy. As the country is headed to a change in politics, we may also see a shift in economic