One of the major concerns about the economy this year was the risk of double deficits (current account deficit and budget deficit) reaching destabilizing levels. However, as the economic management has evolved towards a rational basis after the elections, we observe a decrease in these risks. The data so far indicate that although the deficits continue, they are less likely to rise to disruptive levels.
First of all, in the September balance of payments figures released at the beginning of the week, we saw that the current account balance gave a surplus of USD 1.9 billion. Of course, the 12-month current account deficit is still quite high at USD 51.5 billion. However, let’s remember that this figure was USD 59.7 billion in May. In September, thanks to the current account surplus and a net inflow of USD 5.6 billion from the financial account, official reserves increased by USD 7.7 billion. (The net errors and omissions figure, which showed very high plus or minus values in previous months, gave a surplus of only 208 million dollars this month.)
Foreign trade data and official reserve figures for October also suggest that even if there is a current account deficit this month, its size will be quite small. The fact that exports increased by 7.4 percent this month while imports rose by 1.3 percent is also positive, especially given the prevailing global conditions.
Yesterday’s October budget figures show that the budget deficit continues to remain below forecasts. When I say forecasts, I am of course referring to the realization estimate of 1.6 trillion in the Medium-Term-Plan. Otherwise, the deficit target of TRY 659 billion at the beginning of the year will be exceeded. At the end of the first 10 months, the cumulative deficit has already reached TRY 608 billion.
The main reason why the budget came in better than expected is that tax revenues continued to increase at high rates. Almost all of the sub-items of tax revenues, which increased by 125 percent this month, showed high-rated increases. (The highest increase is in oil and natural gas SCT.)
In November, another high corporate tax will prevent the deficit from increasing. On the other hand, the 100 percent increase in expenditures is not very favorable. However, let’s not forget that some of these expenditures are necessary expenditures due to the earthquake disaster. Nevertheless, it seems that the budget deficit projected in the MTP for this year and next year will not be as high as 6.4 percent of GDP.
In the meantime, for a few days now, we have been seeing reports that “exchange rates are rising”. However, I have not seen any serious deviation from the now almost official managed float regime, which is based on the depreciation of the TL over time. Since the introduction of this regime in early September, the basket exchange rate has increased by 7 percent. This devaluation rate, although below the inflation rate in the same period, will have some stabilizing effect on both export pricing and import demand.
Moreover, this controlled devaluation also eliminates the expectation of a “sharp” correction in exchange rates after the local elections. On the other hand, even if the continued, albeit slow, depreciation of the TRY delays the return to TRY of investors who are still positioned in FX, at least the transition from TRY to these assets has been blocked with rising TRY interest rates. At the same time, it will not be surprising that foreign investor inflows will begin as TRY interest rates increase to rational levels.