Turkey: Rebalancing is losing pace

Turkey: Rebalancing is losing pace

At USD 2.7bn, current account deficit was below the market consensus and our forecast (USD 3.0bn) in September. As a result, 12-month cumulative c/a deficit declined to USD 55.8bn from USD 59.5bn in August. Similarly, 12-month cumulative non-energy c/a deficit fell to USD 4.0bn, from USD 7.7bn. Net gold exports continued to support the narrowing in the current account deficit. 12-month cumulative net gold exports amounted to USD 3.7bn, from USD 1.4bn in August.

Despite the improvement in the 12-month cumulative current account balance, seasonally adjusted data paints a less encouraging picture. According to our calculations, seasonally adjusted current account deficit excluding gold and energy remained broadly flat at USD 0.6bn in September. Therefore, the narrowing in the 12-month cumulative current account deficit is unlikely to be sustained once the favourable base effects wear off towards the year-end. We maintain our year-end c/a deficit forecast at USD 58bn or 7% of GDP. We expect net gold exports to lose pace and to be limited to USD 0.5bn till year-end. Further increase in net gold exports could lead to a lower c/a deficit relative to our forecast.

On the financing side, private sector and public sector borrowing were the main financing sources in September. Private sector's medium- and long-term borrowing was USD 4.4bn, implying a roll-over ratio of 182%. Treasury's eurobond issuance was USD 1.5bn and inflows to domestic bond market amounted to USD 1.8bn. FDI remained muted at USD 0.1bn, whereas unidentified inflows were USD 2.0bn in September.

Similar to several other leading indicators, October central government budget data signalled a pickup in domestic demand. Budget revenues increased by 20.8% y/y to TRY 27.3bn mostly driven by the 35% y/y increase in domestic consumption taxes. VAT on imports increased by 13.1% y/y and hinted a pickup in imports. On the expenditure side, primary spending posted a 28.2% y/y increase and remained elevated at TRY 28.0bn. The increase in expenditures was mostly driven by the increase in payments to contractors and transfers to Social Security Institutions. As a result, October's primary balance was TRY -0.7bn, which brought the primary balance during January-October to TRY 24.5.

Labour market data showed that job creation continued at a moderate pace in August. Nevertheless, due to a 0.1pp increase in labour force participation rate, seasonally adjusted unemployment rate increased by 0.1 pp to 9.2% and non-farm unemployment rate increased by 0.2pp to 11.5%. The unadjusted unemployment rate increased to 8.8% from 8.4% in July and non-farm unemployment rate increased 0.6pp to 11.3%.

Non-farm employment increased by 59k by our calculations mostly driven by construction sector which added 51k in August following a decline of 41k in July. Wholesale/retail trade employment increased by 10k. On the other hand, manufacturing, transportation and storage sector employment decreased by 36k.

Labour market data showed that job creation was moderate and the slight increase in the unemployment rate was due to a higher labour force participation rate. We expect unemployment rate to remain steady till Q4 and thereafter decline gradually in parallel to the pick up in economic activity.