Turkish imports loom large as lira slides to record

Turkey’s trade deficit, widened by a big increase in imports, is looming large for both the Turkish government and investors in its beleaguered currency.

Figures published by the state statistics institute, TÜİK, over the Easter break may have gone unnoticed by many investors. But they showed the trade deficit in February widening a whopping 54 percent to $5.8 billion. Imports for the month surged 20 percent to $18.9 billion, outpacing a 9 percent increase in exports to $13.2 billion.

Data published by the Turkish Exporters Assembly (TIM) two days later showed exports for the month of March rising 11.5 percent $15.1 billion, a pace little changed from previous months.

TIM Chairman Mehmet Buyukeksi, never at a loss for words to talk up Turkey’s export performance, announced that the March data was “the highest in the history of the Turkish Republic.” It was also the first time in Turkish history that exports had exceeded $15 billion in a single month, he said.

But the reality is that the government is struggling to contain a current account deficit that is being swollen by imports of energy and unfinished goods. President Recep Tayyip Erdoğan is refusing to consider the option of increasing interest rates to reverse growing imbalances in the economy – inflation is now stuck in double figures and the central bank’s highest interest rate of 12.75 percent is now below 10-year yields on government debt. Core inflation, which strips out items such as petrol, stood at 11.4 percent in March about three times the emerging market average.

Because of its low-tech economy, Turkey needs imports to convert into exported goods. So, whenever exports rise, imports tend to follow.

Turkish trade balance

Turkish President Recep Tayyip Erdoğan wants Turkey to be known as an export-driven economy. He is financing exporters with subsidized credit schemes to help boost an economy that grew 7.6 percent in 2017. His rhetoric is full of references to the country’s export performance in new markets such as Africa and the Middle East.

But concern about Turkey’s widening current account deficit – it was about 5.6 percent of gross domestic product as of January -- is hitting the Turkish lira. The currency’s 6 percent drop this year is greater than any other major emerging market currency apart from the Argentinian peso.

The lira slipped to a record low of 4.04 to the dollar on Friday. Its level against the euro dipped to 4.97, also an all-time low.

Erdoğan, who is taking an increasingly authoritarian approach to economic decision-making, is banking on export-driven economic growth to secure a clear win in presidential elections, slated for November 2019. Parliamentary elections are also due the same month, and local elections eight months earlier in March.

But the increase in exports draws in more imports. Consumer demand, and indeed economic growth, would need to shrink markedly for the picture to change significantly in the remainder of 2018.

In an article entitled “How low can the lira go?” this week, Ahval contributor Guldem Atabay, former general manager at Turkish investment firm Egeli & Co., said:

“Looking forward there is no possibility of a contraction in Turkey’s external deficit levels since the government is inducing domestic demand growth.

“Combining such a trend with the strengthening market in the European Union for Turkish goods, the continuing increase in intermediary goods imports used for export purposes means the current account deficit to GDP ratio will continue to push towards 6 percent by the end of 2018.”  

With elections in mind, Erdoğan’s government has announced a 128 billion-lira ($32 billion) package for project-based financing. The measure is designed to help Turkey beat a target of 5 percent economic growth for this year. The government is also continuing to finance a portion of restructured loans for small and medium-sized enterprises that contributed more than 200 billion liras in 2017.

Tax cuts may also be on the way. Furthermore, a slowdown in price increases for housing in major Turkish cities may prompt Erdoğan to announce some sort of package for the construction industry, most likely via financial help for homebuyers.

All these measures, if implemented, would be designed to stimulate the economy, but would also threaten to increase the dangers of overheating just when emerging markets in general are starting to feel the pinch from a slowdown in portfolio inflow increases that provide them with a flood of cheap money.

Turkey relies on portfolio inflows to finance a large portion of its current account deficit because foreign direct investment in the country has slumped after a failed military coup in July 2016, the consequent state of emergency announced by the government and a slump in relations with the European Union – European firms are by the biggest investors in the country’s economy.

And it is demand for Turkish goods in Europe that may prove to be the government’s undoing as it chases its economic growth targets.

Hence the decline in the lira.

The slide in the currency’s value is hitting Turkish firms holding foreign debts particularly hard. The financing gap for the companies currently totals about $222 billion. Larger firms such as Yildiz Holding, the maker of Godiva chocolates, have already announced they are looking to refinance their huge debt loads. Yildiz owes more than $7 billion after several buyouts. Others, such as appliance maker Vestel, are also said to be facing severe pressure from their foreign currency liabilities. The plight of smaller companies may be just as great but is unquantifiable by data.

The cost of financing this private debt has surged in lira terms as the currency weakened. Faik Oztrak, the former undersecretary of the Treasury who now runs economic policy for the main opposition Republican People’s Party (CHP), said on Twitter on Friday that the foreign debts of firms are now equivalent to 900 billion liras compared with 842 billion liras in January. The difference of 58 billion liras will now have to be financed by unemployment and inflation, he said.

As Tim Ash, senior emerging markets strategist for Blue Bay Asset Management in London said this week, the risks of a major market correction in Turkey are very significant.

“The Erdoğan administration is going for growth and broke and the central bank will not be given enough freedom to hike rates,” Ash said in a report to investors following a trip to Istanbul this week. “The lira will have to take the strain and with it inflation.”

Ash pointed out that Turkey is cosying up to Iran and Russia “just as the U.S. relationship with both is going into a tailspin”. He also said that the chief executives of Turkey’s banks, who appeared in public to speak to investors at a conference in Istanbul, appeared to be towing Erdoğan’s line by saying economic growth should be given priority over the fight against inflation.

“Turkey is running a huge current account deficit and financing gap and is not prepared to rebalance by hiking rates,” he said. “This does not add up. You cannot play in dollar markets and be totally dependent on dollar financing but not want to play by the rules.”