Turkey’s Record Current-Account Gap Piles Pressure on Simsek

June 12, 2023 admin-dominor

(Bloomberg) — Turkey’s current-account gap unexpectedly widened in April, adding to a record deficit and underscoring the challenge facing President Recep Tayyip Erdogan and new Finance Minister Mehmet Simsek after last month’s elections.

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The deficit reached $5.4 billion, central-bank data showed on Monday. Economists surveyed by Bloomberg had expected the gap to narrow from a revised $4.9 billion in March.

Official reserves have been used mostly to finance the deficit. They dropped by $8.2 billion in April, bringing the total decline in the first four months of this year to $22.4 billion. Goldman Sachs Group Inc. said the pressure on the reserves was “mostly coming from the current account.”

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“While the summer months will relieve some of this pressure as tourism income rises and debt repayments fall, we think this reprieve will be short-lived and a sizable depreciation of the exchange rate and a tightening in policy is necessary,” Goldman economists Clemens Grafe and Basak Edizgil said in a report before the data release.

The imbalance creates urgency for Erdogan’s new economy team, which includes ex-Merrill Lynch strategist Simsek and former Wall Street banker Hafize Gaye Erkan as central bank governor. Pressure for a policy reset has grown after last month’s elections in which Erdogan won another five years in office, after previous measures depleted foreign reserves and kept the lira artificially stable.

Currency Low

Turkey’s currency is already down almost 21% against the US dollar this year, weakening especially following the elections. The lira hit a fresh record low on Monday, trading at 23.6566 at 12:20 p.m. in Istanbul.

Up until the vote, the central bank, under former Governor Sahap Kavcioglu, tried to keep the lira relatively stable by burning through reserves and implementing an array of measures to limit demand for foreign exchange.

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Turkey’s trade gap was $7 billion in April, and preliminary data from the trade ministry for May signals a continued imbalance.

Istanbul-based economist Haluk Burumcekci said the median forecast for the year-end current-account deficit is around $45 billion, but there are risks of an overshoot. Possible changes in economic policy could help if the outcome is to slow internal demand, he said.

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The central bank is scheduled to hold its next rate-setting meeting on June 22 and major banks, including JPMorgan Chase & Co, expect a hefty interest rate hike.

–With assistance from Joel Rinneby.