Improvement in Turkey’s current account likely to end, September core inflation slows to 7.7 pct

The trade and tourism data of Turkey released last week made it evident that improvement in current account is about  to come to an end. Fall in energy prices has been leading to a narrowing of current-account. The excluding energy current-account balance has remained flat. Energy prices now are no longer declining. Furthermore, fall in tourism revenue is impacting even the non-energy balance since there is no sign of turnaround in foreign tourist arrivals, noted Commerzbank in a research note. Arrivals of foreign tourist dropped 38 percent year-on-year on a 12 month rolling basis.

Last week, Deputy PM Mehmet Simsek noted that the current account deficit would miss the official estimates. He also mentioned that the decline in tourism alone is negative contributing 1 percentage point to the GDP growth. Simsek hinted that official growth projections and mid-term economic targets might have to be downwardly revised.

“While the official 4.5 percent GDP growth target for 2016 was long considered by markets to be unachievable, the current market consensus of 3.2 percent is also unrealistic – we forecast 2.3 percent growth this year and 1.9 percent next year”, stated Commerzbank.

The September CPI data for Turkey surprised on the downside. The nation’s core inflation slowed to 7.7 percent. Given this, the Turkey central bank is expected to speed rate cuts. The effective CBT funding rate is likely to drop to 6.5 percent by the end of 2016 from almost 8 percent, according to Commerzbank. Thus, the USD/TRY currency pair is expected to trade higher at around 3.20 by the end of this year, added Commerzbank.