In a remarkable turn of events, Turkey’s economy has secured a current account surplus for the first time in 20 months, driven by a robust surge in tourism and a strategic pivot in economic management under the leadership of President Recep Tayyip Erdoğan.

Official data released by the central bank on Friday revealed that Turkey’s balance of payments, encompassing trade in goods and services, posted a surplus of $674 million in June. This pivotal shift marks the country’s first surplus since October 2021, signaling a significant economic achievement. Notably, the tourism sector played a pivotal role, contributing to a net inflow of $4.2 billion.

During the initial half of 2023, Turkey welcomed an impressive 20% increase in foreign visitors, drawn by the allure of affordable holiday options facilitated by the Turkish lira’s 30% depreciation against the US dollar earlier in the year. Additionally, a global reduction in oil and gas prices, crucial commodities that Turkey predominantly imports, played a key role in reinforcing the country’s current account throughout the summer.

However, despite the positive strides in the tourism sector, Turkey’s $900 billion economy remains exposed to risks due to the cumulative deficit of $36.8 billion recorded in the first half of the year. This vulnerability was exacerbated in the lead-up to the general election in May, as President Erdoğan sought to stimulate economic growth by maintaining low credit rates, inadvertently fueling inflation.

Since securing his third presidential term, Erdoğan has spearheaded a comprehensive shift in economic governance, appointing new policymakers and implementing strategies to address the mounting cost of living crisis. A notable initiative has been the gradual elevation of the benchmark interest rate by 9 percentage points, resulting in a current rate of 17.5%. Spearheaded by the newly appointed central bank governor, Hafize Gaye Erkan, this decision, however, still falls considerably short of the nearly 50% inflation rate.

Roger Kelly, an economist at the European Bank for Reconstruction and Development, emphasized that “while the policy changes have yet to fully impact the current account, the substantial depreciation of the lira should facilitate the envisioned rebalancing over time.” He elaborated that a significant decline in domestic demand would promptly affect imports, thereby influencing the current account.

Financial institution Barclays, in a communication to its clientele, predicted a reduction of the deficit to $15 billion in the upcoming year, citing expectations of slowed economic activity and loan growth. This economic transformation is further reflected in recent data showcasing a slight increase in unemployment, reaching 9.6%, and a slowdown in industrial production growth at 0.6% during June.

Notably, the financial markets responded favorably to Erdoğan’s recalibration efforts, particularly the appointments of former Wall Street banker Mehmet Şimşek as finance minister and the new central bank governor, Erkan. Moody’s Investors Service extended commendations to the revamped economic team, hinting at a potential credit rating elevation if the present trajectory persists.

Şimşek affirmed the team’s commitment to international norms, expressing, “We are resolute in implementing rule-based policies to ensure macro-financial stability and bolster our nation’s resilience against unforeseen shocks.” While an upward adjustment in the credit rating is anticipated, it is expected that Turkey will remain beneath the investment grade threshold due to previous hesitations from foreign investors, stemming from President Erdoğan’s interference in policies aimed at economic expansion.

By: Montel Kamau
Serrari Financial Analyst
15th August, 2023

photo source Google