Summer turbulence is visible in numbers

Current account balance in July registered US$5.8bn deficit; higher than market consensus of US$5.1bn and our expectation of US$4.8bn. 12-month rolling deficit rose to US$55.8bn (6.7% of GDP) from US$54bn (6.5%). Apart from backward revisions, weak tourism revenues as well as widening non-energy have been the main triggers of higher than expected monthly deficit. Tourism revenues as the main source of FX inflows in summer months posted only 1.8% growth over previous year, remaining almost flat at US$23.8bn in 12-month rolling basis. Non-energy deficit widened by US$1.7bn against last year July’s US$0.1bn, yielding a 12-month rolling deficit of US$5.1bn, up from US$ 3.5bn. Current account deficit excluding energy and gold also deteriorated to US$0.8bn from US$0.5bn in 12-month rolling basis.

Higher than expected current account deficit is likely to pressurize exchange rates as capital inflows are getting slower in the second half of the year in line with other emerging markets mainly due to Fed tapering concerns. We expect current account deficit to remain above 6.5% in the next couple of months but stabilize around US$54.4bn (6.5% of GDP) by the end of the year, mainly due to slight recovery in exports and moderate increase in imports. We will see the financing squeeze continue in post-July data which was confirmed by the exchange rate developments since then. Despite expected leveling off in current account deficit, still high level of external financing need creates upside risk for the stability in the currency, inflation, GDP growth and fiscal balances via rising interest rates.

Capital account was considerably weaker than last year, generating US$0.8bn outflow, in July against US$6.8bn last year. Thanks to Yapı Kredi Insurance and Pension  sale to Allianz for some US$1bn and Alternatifbank’s 71% share’s sale to Commercial Bank of Qatar for some US$40.45bn, FDI inflow in July was US$1.8bn partly offsetting US$3bn outflows from portfolio investment, of which US$2.5bn from foreigners’ holding of government securities. Net errors and omissions seem to save the day with US$4.8bn unspecified inflows. Though we cannot see the source of net errors and it is subject to significant revisions once their origination has been determined, July’s inflows may be due to inflows from wealth amnesty which is not recorded as FX deposits yet. If this is the case, we will see the inflows registered in the corresponding account of balance of payments in the following months. Despite the surplus in net errors and omissions, reserves were down US$1.8bn as it was not sufficient to covering US$5.8bn current account deficit and US$0.8bn capital outflows.

In 12-month rolling terms, capital inflows further declined to US$72.7bn in July from US$80.3bn in June, dragging reserve build up to US$16.7bn from US$21bn. Thanks to FDI inflows in July, share of portfolio investments (excluding government eurobonds), short term loans and non-residents’ currency and deposits in total financing slightly improved to 85.5% from 92.3% a month ago. Improvement is unlikely to sustain as Fed related uncertainty leads investors to remain in risk off mode in emerging markets. Though current account deficit is expected to ease by the final quarter of the year as financing squeeze led pressure over exchange rate is unlikely to ease soon.