Turkish economy begins to slow down; current account deficit likely to widen this year

The Turkish economy is starting to slow down, based on certain signs. The Turkish economy grew 4.8 percent year-on-year in the first quarter of this year, as compared with the previous quarter’s 5.7 percent growth. On a sequential basis, the Turkish GDP grew 0.8 percent in the first quarter of 2016, a slowdown from the last quarter of 2015’s 1.2 percent. The year-on-year print for the first quarter came in above consensus projections of 4.4 percent year-on-year as private consumption and industrial production continued to grow.

The Turkish economy is beginning to witness certain spillover from deceleration of the tourism sector and Russia’s sanctions that might reduce Turkey’s export revenues by USD 10 billion. In the January to April period, tourists from Russia declined nearly 70 percent year-on-year. Meanwhile, terrorist attacks are a drag on sentiment. Tourists from the OECD dropped 25 percent year-on-year.

Even if Turkey’s current account balance continued to be in deficit, April’s USD 3 billion deficit was a slight rebound from March’s deficit of USD 3.7 billion as mineral fuels’ imports declined 33 percent year-on-year to USD 2 billion.

“While it is providing temporary relief for the TRY, we expect the CA deficit to expand to around 5% of GDP in 2016 from 4.5% in 2015 as rising oil prices and shrinking exports (mainly of services) will weigh on the balance," noted Danske Bank in a research report.

Meanwhile, Turkish inflation was at around 6.6 percent year-on-year in May due to the high base effect. The central bank, in May, kept the policy rate on hold at 7.5 percent as widely expected, whereas the overnight lending rate was lowered by 50 basis points. The decision to keep rates on hold indicates that the central bank is rooted strongly in its independence after the new governor took over in April, said Danske Bank.

“Given the decreased political uncertainty as the new government was formed successfully and the proven independence of the central bank, we cut our USD/TRY short and medium-term forecasts to 2.98 in 1M (previously 3.03), 3.03 in 3M (previously 3.05), 3.05 in 6M (previously 3.10) while keeping 12M unchanged at 3.12,” added Danske Bank.