A need to rebuild trust


The current account deficit (CAD) totaled USD 3.5bn in June as expected. The 6-month CAD reached USD 32.4bn. The 1-year CAD amounted to USD 32.7bn. The CAD totaled USD 223m in the second half (H2) of 2021. The same trend will continue this year albeit not as much as last year. The current account balance (CAB) will post a surplus, at least in the summer. However, it seems impossible that CAD in H2 2022 will remain at the same level as in H2 2021.

The course of foreign trade will determine the course of the CAB. The foreign trade deficit will rise as long as energy imports increase. This will raise the CAD.

The finance item is also another factor determining the level of the CAB. The approach of ‘what if we can’t finance’ for the CAB is wrong. The quality of finance is determined from this approach.

If no foreign exchange (FX) is found to meet the CAD, then the CAB won’t post a deficit.

If there is a CAD, it has already been financed. But how?

Will it be financed through the FX from foreign direct investment (FDI), portfolio investment, or borrowing ? Or will it be financed through FX from the reserves? This is also an ideal way to find FX.

The FX obtained from FDI totals USD 7.7bn. Although the gross revenue amounts to USD 14.8bn, residents invested USD 7.1bn abroad. Although USD 14.8bn has flowed to Turkey over the last year, USD 6.9bn of this figure has consisted of real estate sales. The remaining USD 7.9bn is FDI alone. FDI outflows from Turkey totaled USD 7.1bn. There is almost no contribution!

The second option to finance the CAD is the FX obtained from portfolio investments. However, there is an outflow from this item. What if there wasn’t a USD 11.4bn outflow and there was a USD 11.4bn inflow? There would be a difference of USD 22.8bn… Let’s see what happens if this money doesn’t come…

As finding money is necessary and foreigners don’t bring money for portfolio investments, taking away the money instead, either borrowing or using the Central Bank’s reserves are necessary steps to close the CAD. This is what we are doing now.

When trust, which is intangible but has a strong effect on the economy, disappears, foreigners exit.

We don’t need to worry. Because there is not much money left for foreigners to take away from Turkey. Almost all of it is gone.

Foreign investors held USD 15.8bn in equity, only USD 2bn in government debt securities, and USD 99m in corporate bonds as of August 5, according to the Central Bank. The amount of Eurobond held by those parties has hovered around USD 43bn as of May.

We are posting a deficit and have issues financing it. As long as we don’t rebuild trust, we’ll continue to post a deficit and we won’t have an opportunity to finance it without issue.

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