Turkey faces financing challenges as current account gap widens - ING

Turkey may face problems financing its burgeoning current account deficit because foreign direct investment remains low compared with peers and it relies heavily on short-term capital inflows, Dutch bank ING said.

The current account deficit grew by an annual 67 percent to $5.55 billion in March as imports jumped, the central bank reported on Monday. It was the fifth-straight month of deficits. The 12-month rolling current account gap increased to $24.2 billion, well beyond a government goal for 2022 of $18.6 billion in its three-year economic programme.

“Overall, the current account deficit has remained on an expansionary path in March, driven by commodity imports and particularly higher energy bills. As oil prices are expected to remain elevated, the current account will likely maintain the widening trend in the near term,” ING chief economist for Turkey Muhammet Mercan said in a report.

Turkey’s economic programme, focused on manufacturing and exports, foresees current account surpluses, but a surge in global energy prices and the rising cost of imports have undermined that goal. Meanwhile, the lira has slumped against major currencies, dissuading foreign investment, after the government ordered the central bank to cut interest rates late last year despite higher inflation. The rate reductions have stoked price increases in the country, which accelerated to an annual 70 percent in April, the highest in two decades.

“The outlook for the whole year will be determined by tourism revenues and energy prices given the uncertainty, while signals of a slowdown in economic activity hint that core imports can weaken in the period ahead,” Mercan said. “On the financing side, the global backdrop turning less supportive should also add challenges given high external financing requirements as well as heavy reliance on financial flows rather than long-term finance like FDI, which is low relative to peer countries.”

Turkey needs to finance the current account deficit with foreign capital inflows or risk more weakness in the lira, which slumped by 44 percent against the dollar last year. The currency has lost almost 15 percent of its value in 2022 on global dollar strength and concerns about economic policy.

The country’s official reserves fell by $4.51 billion in March, the central bank said. The bank intervened in the foreign exchange markets with state-run banks to defend the lira and help arrest the surge in inflation, which has accelerated partly due to higher import costs.

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