The CAD is big and its financing is bad!


March was a relieving month in terms of the current account balance. The current account deficit (CAD), which hit USD 5.6bn in March 2022, decreased to USD 4.5bn in March this year. However, the single-month realization doesn’t matter that much. The deficit in the first quarter and the last year are well above the previous period. The increase in the annualized CAD is particularly evident. The annual CAD, which was USD 18bn in March 2022, decreased to USD 54bn in March 2023.

However, there is another problem in the balance of payments as important as the size of the CAD. The quality of financing of the CAD is also poor.

Let’s look at the March data first. An important item destabilized the balance of payments in March that should be noted. Net errors and omissions were minus USD 2.4bn in March, meaning an outflow from this item. The net errors and omissions amounted to negative USD 800m in the first quarter (Q1). The net errors and omissions are normally expected to approach zero over time. But it is also known that this can’t be achieved every time. 

Now let’s go back to the financing in March when the CAD totaled USD 4.5bn, and the financing amounted to USD 6.9bn. A loan of USD 7.5bn achieved this financing. However, the size of the foreign direct investment and portfolio investment reveals the quality of the financing item. However, let alone the inflow through portfolio investments, there was a USD 1bn outflow in a month.

The money that comes as a direct investment is only USD 238m. The foreign exchange (FX) from real estate sales totaled USD 453m in March. In other words, there would be an outflow of USD 215m if the FX didn’t come from real estate sales.

There was a financing of USD 24.4bn versus the CAD of USD 23.6bn in the first quarter. This amount does not include portfolio investment and direct investment. The Central Bank’s reserves were used the most, with USD 14.3bn, in financing the CAD in three months. In this period, USD 9.6bn was provided through borrowing.

Borrowing is a method that can be used to finance the CAD if direct investments or portfolio investments are not enough. However, the quality of borrowing is also important in this financing. Turkey has recently been borrowing with high-interest rates. There is no doubt that this is not an option to choose, but an option that was accepted out of desperation.

Of course, Turkey’s priority is to reduce the CAD and post a surplus if possible. However, it is not possible to achieve this in a few years. Therefore, reducing the gap over time should be aimed. But it’s clear what can be done in the short term. The deficit will not suddenly decrease, but the financing quality can be improved. The way to do this is to increase foreign currency inflows through direct investments and portfolio investment, and if these are not enough, borrowing on more favorable terms is possible.

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