Turkey has posted a third straight monthly current account deficit but the year on year comparison showed a big shrinkage in the gap given the major impact on import volumes of the Turkish lira crisis. The country’s central bank announced on March 11 that in February the account was in negative territory to the tune of $718mn. However, that was a stark reduction on the deficit of $4.49bn seen in February 2018.

The February 2019 figure is lower than the figure that was anticipated by a Reuters poll of 15 economists, the median of which on April 8 estimated a deficit of $850mn, with estimates ranging from $500mn to $1.48bn. Turkey’s annual current account deficit is expected to stand at $18.5bn this year, according to the median produced by a separate Reuters poll of 12 economists. Estimates in that survey ranged between $11.7bn and $23.3bn. The median estimate in the previous Reuters poll for 2019 was $19bn.

The Institute of International Finance (IIF), on the other hand, forecasts that Turkey’s current account deficit will decline to $4.8bn in 2019 from $27.8bn in 2018. If that holds true, the recession-plagued country’s GDP contraction this year would exceed the current IIF forecast of 0.9% y/y. The IIF noted on April 9 in a research note that high private sector external debt would keep Turkey’s financing needs and vulnerability high, despite a large swing in the current account.

External vulnerability
Moody’s Investors Service lately upgraded Turkey’s external vulnerability risk to High+ from High due to its high external financing requirements. The rating agency announced the change on March 19 in a non-rating credit opinion report. Moody’s said it expected Turkey’s current account deficit to contract because of declining consumption and investments, but that the external financing requirement would remain high because of the external debt stock level. It was also concerned by the country’s relatively low FX reserves.

“Despite the turnaround in the current account, balance-of-payments risks persist due to the sizable stock of external debt with a front-loaded maturity schedule,” S&P Global Ratings said in February when it affirmed its unsolicited long-term foreign currency sovereign credit rating on Turkey at 'B+' with a stable outlook.

The annual current account deficit shrank significantly last year, falling to $27.8bn from $47.35bn in 2017. The lira crisis that peaked in August caused a sudden stop in inflows via the country’s balance of payments.

Consequently, Turkey posted a cumulative current account surplus of $7.55bn for an interrupted four months from August to November. It fell into recession in the second half of the year.

Dramatically lower cumulatively
Since December, the country’s cumulative current account deficit amounts to $2.81bn due to the limited recovery in economic activity financed by fiscal easing and lending by public banks in the run-up to the March 31 municipal elections. In January-February, the cumulative deficit in the current account amounted to $1.31bn. That’s dramatically lower than the $11.5bn seen a year ago when GDP growth was still booming.

The 12-month rolling cumulative deficit has declined for a ninth consecutive month since the $57.9bn seen in May 2018. It reached $17bn in February from $20.8bn in January.

“External balances continued to improve rapidly [in February] due to weaker domestic demand and increased price competitiveness, along with a contribution from the recovery in tourism,” Muhammet Mercan of ING Bank said in a research note, adding: “The government’s increasing external bond issuance has remained supportive for the capital flow outlook [in February].”

“The improvement over the same month of 2018 is again attributable to a contraction in foreign trade while the impact of other items was relatively small,” Mercan also said.

He concluded: “The challenging picture for external financing continues, with less borrowing by corporates and especially banks.”

Elevated external financing requirements
Going forward, ING Bank expects external financing requirements to remain elevated given the hefty external debt repayment schedule. This means that Turkey will remain sensitive to shifts in global risk appetite for emerging markets.

On April 5, the customs ministry released initial data on March’s foreign trade. The figures showed that the foreign trade deficit continued to contract, at a clip of 68% y/y in March to $1.97bn, while the Q1 contraction was recorded at 72% y/y, producing a figure of $5.95bn.

On the external debt roll-over front, Akbank, Ziraat Bank and Eximbank concluded syndicated loan renewals since last month despite the latest turmoil on the domestic financial markets prior to the local polls. Roll-over news from Garanti Bank and the others is awaited.

Also on April 11, state-owned Ziraat Bank’s Islamic banking unit Ziraat Katilim announced that it has obtained a $250mn, 367-day syndicated loan from a consortium of 17 lenders, including Bank ABC, Dubai Islamic Bank PJSC, Emirates NBD Capital Limited, Standard Chartered Bank and Warba Bank. It did not provide further details.

“Sensational quarter”
Prior to the Turkish financial markets turmoil that broke out during the last week of March as the Erdogan administration attempted to restrain the depreciation of the lira in advance of polling day, Lewis McLellan of Global Capital noted that “Turkey has had a sensational quarter, with borrowers from the country raising more than $10.2bn in the market—the highest total in history.”

Serkan Gonencler of Seker Invest observed in a research note entitled “C/A deficit continues to shrink with the ongoing deleveraging process” that “in February, major capital inflows were realized through the Treasury’s USD2.0bn net Eurobond issuance, the real sector’s USD0.5bn Eurobond issuance, a USD0.5bn net FDI inflow and a USD1.3bn inflow through trade loans. Meanwhile, banks continued to reduce debt, but to a much lesser extent compared to the previous few months, by USD0.2bn, or with an 87% rollover ratio.”

He added: “Another USD0.4bn outflow from banks came from non-residents’ deposits. The corporate sector also paid a total USD0.7bn net debt in February, marking the largest outflow through this channel since early 2017. There was also a USD0.5bn outflow from TRY bonds. Banks’ total net debt (loan) redemptions over the past 12 months stand at USD17.8bn, a large portion (USD15.5bn) of which has materialized since August. Banks also reduced debt over the past 12 months by USD1.6bn through Eurobond issuance. This deleveraging process helps explain ongoing growth deceleration.”

V-shaped recovery less likely
The constraints in external funding also make a V-shaped recovery less likely going forward, in Seker’s view.

Turkey’s current account deficit is expected to continue shrinking over the next few months, albeit at a slower pace, possibly reaching a small surplus by July 2019. Recently rising oil prices are bad news.

The Turkish central bank’s net international reserves declined to $27.9bn as of April 4 from $29.7bn as of March 29, according to Reuters’ calculations based on its latest IMF-defined weekly central bank balance sheet. The national lender’s reserves fell to $26.1bn as of March 22 from $35.2bn as of March 1. The dramatic fall has triggered turbulence on the domestic financial markets.

The central bank’s swap volume grew by $2.6bn in the week ending on April 4 despite the decline in net reserves while $1.4bn worth of the fall in reserves was due to external debt repayments, one unnamed banker told Reuters.

The central bank’s gross FX reserves seen in its regular banking bulletin rose to $76.7bn as of April 4 from $75.4bn as of March 29 while the gold reserves declined to $20.6bn from $20.8bn.

Conflicting figures in the gross and external reserves coupled with no satisfactory explanation for the confusing data from the central bank could fuel market anxiety as market players have recently begun to chatter about a “cooking of the books”.

“Turkey—back to focus on net reserves which were again down USD1.8bn to USD27.9bn in week to April 5. Feb current account continued to show improvement though, 12mma down to 17bn from 57.8bn peak last year - recession working there,” Timothy Ash of BlueBay Asset Management wrote on Twitter.

Steering clear
The USD/TRY rate was also back in the wars on April 11. The lira tripped into the 5.75s against the dollar as investors, underwhelmed by the economic reform plan announced the previous day by finance minister Berat Albayrak, steered clear of Turkey’s assets. They saw them as remaining vulnerable to a sell-off given the economy’s waning fundamentals, Bloomberg reported in a story entitled “Lira Traders on Edge as Reform Plan Underwhelms”.

Traders were also getting the jitters over the ruling AKP party’s continued push for a rerun of the Istanbul vote, which could give way to a protracted period of political uncertainty. The AKP wants the loss to the opposition annulled because of supposed irregularities. Should that happen questions will be asked as to whether Turkey’s core democratic values are shot. The lira’s fall was also compounded by the broad-based strength seen in the USD. The TRY led losses among EM currencies, according to the Bloomberg report.

Market commentators are habitually connecting the lira’s moves with the daily newsflow. However, it is notable that the lira was already undermined by enough vulnerabilities to find itself wearing the dunce’s cap in a global sell-off—it did not need the unsurprisingly disappointing economic reforms announcement to take it to the bottom of the league. It was headed there anyway.

“I think the right question would be, ‘Why will the (Turkish lira) appreciate?’ I don’t see any positive news that could support an appreciation,” Guillaume Tresca of Credit Agricole told Reuters.

Teflon domestic government bond rates
The benchmark 5-year bond jumped 178 basis points on April 11, the first time the note has traded this week, Bloomberg also reported. Bloomberg’s note was another indication of what lies behind the teflon domestic government bond rates that catch the eye. When there is a transaction the rates show visible signs of life, even if that life is rather limited, because the public lenders are closely marking the domestic government bonds market and the FX market, including the lira swaps market in London.

Turkey’s 5-year credit default swaps (CDS) also widened for a fourth day on April 11, touching a high of 431.7bp. The “invisible hand” kept the lira below the 5.70 rate for four days and its impact on the local currency could be tracked against the rise in the CDS figures, set based on free market rules unlike the lira and bond rates.

“I think the reserves are becoming the Achilles heel of Turkey and poor handling of political or economic issues could cause a run on the lira,” Lorenzo Gallenga of Quaestio Capital Management told Bloomberg.

Gallenga has no exposure to Turkish debt. “I invested in some of the new issuance that came at the beginning of the year in USD and EUR, but came out fairly early at good levels. Because of the reserves issue and the expectation of a political price to be paid by AK Party we sold local currency debt to 0 around the election,” he added.

“Lower net reserve data, the S400 [Russian missiles row with Washington] story, plus the Istanbul election saga all weighing. Plus thus far just not enough detail on Albayrak reform plan to convince...,” Ash wrote in an emailed note to investors.

Meanwhile, the central bank’s regular weekly banking bulletin showed on April 11 that residents’ FX deposits declined by $800mn to $181.3bn as of April 5. It was the first w/w decline since October 5. Observers should look into whether local deposit holders turned to the lira or whether the decline in FX deposits was the result of them leaving the banking system.