Turkish Lira: Structural external gaps keep TRY under pressure – Commerzbank

Commerzbank’s Tatha Ghose highlights that Turkey’s current-account deficit widened in May and remains structurally driven by savings-investment imbalances. Portfolio inflows are muted, with May showing renewed outflows and signs of capital flight. Net FX reserves excluding swaps are estimated around USD 30bn after heavy interventions, leading Ghose to conclude that the Turkish Lira (TRY) is likely to continue facing depreciation pressure.

Deficit, weak inflows strain FX reserves

"Turkey’s latest balance of payments data confirm that the external re-balancing story is far from firmly established. The current-account deficit widened by 32% yoy to USD 1.5bn in May, taking the cumulative Jan-May gap to USD 30.7bn and lifting the 12-month rolling deficit to USD 37.3bn (-2.3% of GDP)."

"In any case, the excluding gold and energy measure is rather nonsensical – only a ‘convenient’ distraction policymakers of many countries use – in reality, the current-account gap is a rather structural one in the medium-term, driven by twin gaps elsewhere in the economy (the savings-investment gap being an often-cited component)."

"On the financing side, portfolio inflow remains muted, which reflects lack of positive investor sentiment. After a brief USD 4.1bn inflow in April, May saw a USD 3.1bn net outflow, with non-residents selling USD 2.8bn of equities and investment fund shares and reducing exposure to domestic government debt."

"The relevant buffer for defending the lira is net FX reserves excluding swaps, which stand at only about USD 30bn by our calculation, not high as officials sometimes claim. This modest cushion follows a USD 33.3bn reserve drawdown over the first five months, largely caused by FX interventions trying to smooth the lira’s depreciation path."

"FX interventions and cosmetic reserve narratives cannot resolve the underlying imbalance between a still-sizeable current-account deficit and hesitant capital inflow. We think that the lira is likely to keep facing pressure."