Turkey slashes current account gap by 84%

Alev Takil/Unsplash

• Deficit drops by $6bn in a year
• Goods deficit for May was $4bn
• FDI slumps 58% month on month

Turkey has cut its current account gap by more than 80 percent in a year, with improved trade data and strong portfolio inflows. 

However, a slowing of foreign direct investment points to underlying caution by outsiders.

The current account deficit for May was $1.2 billion, a report issued by the Turkish Central Bank on July 12 showed, the lowest monthly level since October.

---

---

The deficit was less than a quarter of the $5.4 billion for April and far below the $7.8 billion for May 2023. 

The five-month current account deficit was $17.6 billion, down from $32.4 billion last year.

Stripping gold and energy imports out of the equation, Turkey posted a surplus in the goods category of $3.2 billion in May, the central bank reported. With gold and energy imports factored in, the goods deficit for the month was $4.1 billion.

The main force driving the narrowing of the current account gap was Turkey’s improved trade data, with the five-month trade deficit of $26.3 billion being almost $21 billion less than the total for the January-May period in 2023. 

There was also an uptick in portfolio investments, with net inflows of $5.6 billion in May, taking the five-month total to $11.5 billion, reversing the $2.9 billion outflow for the same period last year. 

While May’s total deficit was smaller than expected, and continued a shrinking of the current account gap, economist Evren Devrim Zelyut of Avrasya Investment told AGBI that at least part of the narrowing was a result of a weakening in economic activity caused by high interest rates. The central bank’s key lending rate stands at 50 percent. 

Slowing production

“This result is the outcome of slowing of Turkish industrial production,” Zeylut said.

“The Turkish economy is dependent on the outside, it is based on inputs from abroad, processing and manufacturing the final end product. When you increase interest rates, these wheels turn less.”

With a slowing of production, imports have fallen, resulting in a temporary drop in the current account deficit, Zeylut said.

Another area of concern is likely to be the continued poor performance of foreign direct investments, with inflows in May of $361 million, down 58 percent from April’s figure of $859 million. Between January and May, Turkey attracted $1.5 billion in FDI, well short of the $2.1 billion in the first five months of 2023. 

“Investors aren’t coming to Turkey to build factories, they are coming for some of the highest interest rates in the world,” Zelyut said.

“If the economy does not rally production and savings, it is bound to have problems.”