* Part I here
* Part II
* Part III
* Part V

Our Outlook 2019 Turkey report noted: “By mid-November [2018] analysts were describing Turkey as in the midst of an ultra-intensive economic rebalancing with the latest trade data showing the country recording a second straight monthly current account surplus... Not since 2015 had Turkey seen a current account surplus in two consecutive months. The October current account surplus showed the trend had accelerated, coming in at a record monthly high of $2.77bn. Turkey's trade deficit shrank by 93.8% to $456mn in October, to hit its lowest monthly level since 2001, official data confirming preliminary figures showed on November 30”...

Atilla Yesilada of Istanbul Analytics wrote of “rebalancing by anorexia”, adding: “Core deficit shrinks at an incredible pace. This may be good news for the lira, but augurs very poorly for the consumer [and ruling party] AKP in local elections [scheduled for March 2019]...

"Turkey, hooked on foreign-currency debt, is usually talked of as enduring one of the worst current account deficits in the world, with its economic health dangerously reliant on hot inflows of foreign external financing to enable growth. Over the long term, the political and economic outlook in the country has not been secure enough to attract sufficient longer-term stable foreign investment capital."

Fitch Ratings said in late November that Turkey’s current account balance strengthened to a surplus of $5.9bn in the 12 months to September 2019. The rating agency at the same time forecast a gradual worsening to a deficit of 0.3% of GDP in 2019 and 0.9% of GDP in 2020, but those ratios would still be well below 2018’s deficit of 3.5% and 2017's 5.6%. The country’s external financing requirement had continued to ease somewhat, but remained large and a source of vulnerability at close to $170bn due to private sector debt repayments, said Fitch, adding that Turkey’s gross FX reserves had risen $8.1bn so far in 2019 but remained relatively low.

TURKEY -Trade (USD mn)	2013	2014	2015	2016	2017	2018	Q1/19	H1	Jan-Sep
Balance on goods & services	-56,299	-36,918	-23,900	-25,629	-39,017	-16,085	324	2,974	11,850
(% of GDP)	-5.92	-3.95	-2.78	-2.97	-4.58	-2.12	-	-	-
Goods exports (BoP)	161,789	168,926	151,970	150,161	166,159	174,599	44,817	89,078	133,962
Goods imports (BoP)	241,706	232,519	200,098	191,053	225,114	216,515	47,851	97,187	147,059
Current account balance	-63,642	-43,610	-32,145	-33,139	-47,347	-27,031	-1,658	-2,729	3,687
(% of GDP)	-6.7	-4.67	-3.74	-3.84	-5.56	-3.63	-	-	-
Source: IntelliNews, national statistics, IMF

The BoP sudden stop and a lira credit crunch

Turkey's credit crunch—which started with the balance of payments sudden stop on August 13, 2018—morphed from a complete shutdown in FX-denominated lending to a credit crunch in TRY-denominated new lending, with the contraction in TRY-denominated lending worse in Q4 2018 than Q3, Robin Brooks of the International Institute of Finance (IIF) noted at the end of last year.

Previously, on November 13, Brooks had observed: “Rollover of medium- and long-term external debt in Turkey's financial system fell to 43% in Q3, down from 103% in Q2 and 88% in Q1. This was widely expected and ‘isn't news.’ In fact, it's just a lagging reflection of the credit crunch playing out since early August. The credit crunch in Turkey has been unlike any other, in that the BoP sudden stop in August caused credit flow to turn negative, after a large positive credit impulse in 2017. We estimate the negative credit impulse to be around -3% of GDP, bigger than in 2008/9.”

Turkey's Balance of Payments
USD mn	Jan-Sep/2018	Jan-Sep/2019	y/y
CURRENT ACCOUNT	-29,240	3,687	-
Exports	128,083	133,962	5%
Imports	169,271	147,059	-13%
Balance on Goods	-41,188	-13,097	-68%
Balance on Goods and Services	-21,199	11,850	-
Primary Income: Credit	4,529	4,554	1%
Primary Income: Debit	12,964	13,423	4%
FINANCIAL ACCOUNT	5,453	1,303	-76%
FDI: Net incurrence of liabilities	8,609	6,294	-27%
Portfolio Invesment: Net incurrence of liabilities	-2,049	4,565	-
Equity Securities	-1,352	554	-
Debt Securities	-697	4,011	-
Loans	3,611	10,759	198%
NET ERRORS AND OMISSSIONS	17,746	1,842	-90%
RESERVE ASSETS	-16,886	4,249	-
source: tcmb

It was due to the sudden stop in capital flows that the 12-month rolling current account turned positive during the summer months of 2019. However, since October, a rise in imports has been observed along with a renewed loan growth cycle.

Due to lira depreciation, talk of a recovery in exports dominated analysis across 2019 but a distinct recovery in the export performance has not in fact been visible.

Given the deteriorating global outlook for 2020, it is expected that export growth will remain limited. Even a contraction may be seen. The EU remains the biggest export market for Turkey, buying around one-half of its exports. Germany is the top buyer within Europe.

	2017		2018		Jan-Nov/19
	USD bn	y/y (%)	USD bn	y/y (%)	USD bn	y/y (%)
Trade Balance	-77	37	-55	-28	-27	-49
Exports	157	10	168	7	157	2
Imports	234	18	223	-5	184	-11
Capital Goods	33	-8	29	-12	23	-14
Intermediate	171	28	170	-1	144	-9
Consumption	28	2	23	-20	17	-22
source: tuik, trade ministry

The government has targeted 5% growth for Turkey in 2020 and no current account deficit.

Under the current economic structure, this is not a possible outcome, but the economic management of the country counts with a “transformation” campaign following the “rebalancing” story. That might seem deliberately vague. Serious economic reform, countenancing some short-term pain for long-term gain, is in no way on the cards. So it’s time to watch out for more jiggery-pokery from national statistical institute TUIK and regulatory officials. Growth of 5% may well be announced, but at the same time the official treatment of the balance of payments numbers should be placed squarely under the microscope.

Under the present conditions, the current account must inevitably deteriorate in 2020.

You can fairly anticipate that the financing of the resultant deficit wil be conducted through Turkish President Recep Tayyip Erdogan’s swap deals, unidentified inflows through the net errors and omissions account and the real sector’s short-term trade credits.

The government and corporates have, meanwhile, retained their ability to raise funds via eurobond sales. This situation is expected to endure in 2020.

Turkish banks remained net debt payers across 2019 and their willingness to increase their external borrowing exposure in the present economic environment is expected to remain weak in 2020.

Capital inflows are also expected to remain weak due to worsened market conditions on the Borsa Istanbul and on the government bond markets.

FDI inflows remained weak in 2019 and a radical change is not visible on the 2020 horizon.

External financing needs for 2020 remain high. Turkey will be obliged to repay or refinance more than $150bn in external debt. The magnitude of the current account deficit to be added to this figure will depend on the direction of economic policymaking across the year.