Turkey’s economic imbalances persist as stimulus fuels inflation

Turkey’s economic imbalances, underscored by a widening current account deficit and inflation, are persisting, during government efforts to fuel activity.

The current account was expected to post a deficit of $4 billion in May compared with a surplus of $151 million reported a year earlier, according to a Reuters poll of economists published this week. Estimates for the year-end deficit increased to $18 billion, Reuters said.

Meanwhile, industrial production was seen contracting by 23 percent in May following a larger-than-expected decline of 31 percent in April, Reuters said. President Recep Tayyip Erdoğan has said he expects the economy to outperform in the second half of the year.

The negative economic data, due to be published on Monday, would come on the back of surging inflation in the country – consumer prices increased by an annual 12.6 percent in June, up from 11.4 percent in April. CPI had stood at 8.6 percent in October.

Some economists following Turkey are concerned that the widening current account and surging inflation may lead to renewed weakness in the Turkish lira, which slid to a record low of 7.269 per dollar in early May. A surge in the current account deficit in mid-2018 had helped spark a currency crisis that plunged the economy into recession.

Investors are now becoming more discerning about where they place cash around the world after a tentative decline in cases of COVID-19, which has prompted many countries to ease population lockdowns but which has yet to dispel fears of a second wave of the pandemic.

Turkey’s central bank, which has spent tens of billions of dollars of its foreign currency reserves supporting the lira, has slashed interest rates to help the government boost economic activity. Its lending rate now stands at 8.25 percent, well below inflation. Monetary policymakers may now be forced to raise their year-end inflation estimate from 7.4 percent after lowering it from 8.2 percent in April.

Concerns about government policy have led foreign investors to sell Turkish shares and bonds in droves. The share of foreign capital in the Istanbul Stock Exchange has dropped to below 50 percent for the first time in more than a decade and a half, according to official data.

Meanwhile curbs on short selling of the lira and efforts to stifle trading in the offshore swaps market mean many foreign investors have given up trading in the currency.

The lira fell 0.1 percent to 6.86 per dollar in late morning trading on Thursday.