Turkey’s foreign trade deficit shrank by 93% y/y to $529mn in October, marking the lowest monthly shortfall registered since the country’s 2001 economic crisis and coming in the wake of the 77% y/y plunge recorded in September, preliminary customs ministry data showed on November 1.

“The slowdown [across Emerging Europe] will be most dramatic in Turkey,” Capital Economics said on October 31 in its latest Emerging Europe economic outlook report.

It added: “The currency crisis in [Turkey] in August has pushed inflation up to a 15-year high. It is likely to remain around current levels for the next year, continuing to squeeze households’ real incomes. Meanwhile, interest rates have risen sharply and financial conditions have tightened. The banking sector should avoid a crisis, but rising bad loans will cause a severe credit crunch. The upshot is that the economy is likely to fall into recession in the coming quarters and we think that the slump will be deeper than most currently envisage.” 

The macroeconomic research consultancy expects the Turkish economy to contract by up to 5% y/y in the final quarter of 2018 and early 2019. It forecasts that the country will grow by 3% y/y in 2018 as a whole—following 2017’s growth of 7.4% y/y—and will register a contraction of 0.5% y/y in 2019.

Wound back sharply
The European Bank of Reconstruction and Development (EBRD) said on November 1 in its latest Regional Economic Prospects report that the economic outlook was broadly stable in its investment regions with the main exception being Turkey, for which its forecasts have been wound back sharply on the back of the severe depreciation of the Turkish lira (TRY), which is weighing on investor confidence, and higher interest rates.

The EBRD cut its 2018 growth forecast for Turkey to 3.6% y/y from 4.4% in the April edition of its report and its 2019 growth forecast to as little as 1% from 4.2%.

The development bank is a major investor in Turkey. Since 2009, the Bank has invested almost €11bn in various sectors of the Turkish economy. Of international lenders, the EBRD also had the largest exposure—some $9.8bn—to the Turkish private sector’s outstanding long-term foreign loans as of the end of August, according to the latest data from the Turkish central bank.

Spillovers from the projected deceleration of growth in Turkey to the economies in the EBRD regions are expected to be limited owing to the relatively modest extent of economic linkages via trade, cross-border investment and remittances.

The EBRD also said economic rebalancing forced by the weak TRY should help reduce large external imbalances in the Turkish economy, but it noted that the short term external financing requirement remains high, in excess of 25% of the country’s GDP. The lira thus remains vulnerable because of the Turkish economy’s heavy dependence on foreign capital.

Impact on confidence in the system
The bank’s report also noted that Turkish banking watchdog BDDK had introduced several measures to address issues faced by the banks but that there were concerns about the impact of these measures on balance sheet transparency and confidence in the system.

An initial sign of the rebalancing to come amid Turkey’s economic turmoil—the country is mired in a currency collapse that threatens to bring about a banking crisis, and a recession appears to be setting in—emerged in May when growth in the year on year foreign trade gap fell sharply to 6% given the fast depreciation experienced by the TRY during the month. Prior to that, the trade deficit widened alarmingly across the first four months of this year when Turkey was still experiencing credit-fuelled economic growth running at ‘warp speed’.

The first contraction seen in the trade shortfall for a year, measured at 9% y/y, was recorded in June. Subsequently, the July data brought an acceleration in the pace of the rebalancing seen in the Turkish economy with the trade deficit shrinking by 32.5% y/y. Thereafter, the contraction moved up to 59% y/y in August.

Consequently, Turkey’s current account swung to a surplus of $2.59bn in August, the highest Turkish monthly surplus ever and the first seen since September 2015, the central bank announced on October 11.

The latest trade data from the customs ministry showed that exports rose by 13% y/y to $15.7bn in October, the highest monthly exports volume registered in Turkish history, while imports fell 24% y/y to $16.3bn on weakening domestic demand.

Imports of consumer goods fell by 50% y/y to $1.37bn in October while intermediate goods imports fell 17% y/y to $12.8bn and capital goods imports declined by 36% y/y to $2bn. Imports of consumer goods fell by 41% y/y to $1.39bn in September while intermediate goods imports declined 14% y/y to $12.9bn and capital goods imports decreased by 26% y/y to $2bn.

On the back of the October data, the accumulated foreign trade deficit contracted by 16% y/y to $52bn for January-October. The first contraction in the accumalated foreign deficit for 2018 was observed a month ago with the trade gap declining 5% y/y across January-September.

Exports increased by 8% y/y to $139bn in the first 10 months but imports only edged up by 0.1% y/y to $190bn.

The foreign trade gap rose by 37% y/y to $77bn in 2017. Exports were up 10% y/y to $157bn but imports rose at the faster pace of 18% y/y to reach $234bn.

The government is forecasting a foreign trade deficit of $66bn for 2018 (its previous forecast was for $68bn) with exports reaching $170bn (previous forecast $169bn) and imports amounting to $236bn (previous forecast $237bn), according to the latest medium-term economic programme.

The government also forecasts that the average Brent oil price will be $72.8 per barrel in 2018, driving Turkey’s energy import bill to $46bn from $37.2bn in 2017.

In the central bank’s latest inflation report released on October 31, the average oil price estimate for 2018 was revised up to $75 per barrel from $73.