Turkish economy sizzling along

Published: February 28, 2018

Easy capital market funding for Turkey’s banks and companies both a boon and a worry. 

Turkey’s trade deficit widened by 108.8% year on year to $9.07bn in January, according to Trading Economics. 

Imports rocketed to $21.52bn, a 38% year on year increase, with more purchases of semi-finished products known as intermediate goods, capital goods and consumption goods responsible for the bulk of the increase.

“Underscores the over-heating story,” said Tim Ash, senior emerging market sovereign strategist at Bluebay Asset Management. {mprestriction ids=“*”}

The International Monetary Fund also agrees that the economy is at risk from overheating. 

“Such has been the strength of the recovery that the economy now faces signs of overheating,” the Fund said in its February 2018 review of the country. “A positive output gap, inflation well above target, and a wider current account deficit. This increases Turkey’s potential exposure to changing global conditions and underscores the need to address vulnerabilities.”

There may be a novel way of looking at the trade data that explains why imports of gold, precious gems and metals has risen more than three times year on year.

“Now either more Turkish couples are getting married -gold is typically a gift given for weddings in Turkish culture,” said Ash, “or Turks are nervous about the future and are accumulating gold as an insurance mechanism/along with FX deposits.”

Ash continued: “The [Central Bank of Turkey] seems to have been building gold reserves in recent months also - perhaps concern therein over the international geopolitical setting.”

The Turkish central bank gold reserves have ratcheted up since the start of last year from 377.05 tonnes in January 2017 to 525.79 tonnes in January 2018, according to Trading Economics. This is remarkably close to the central bank’s all time high of 529.10 tonnes, seen towards the end of 2014. The central bank did not respond to requests for comment.

Turkey stands at something of a precipice. It’s companies’ easy access to capital markets is both a boon and a worry, as if conditions change it could send the stack of cards tumbling.

“Banks rely heavily on wholesale FX funding and the corporate FX debt burden is high,” said the IMF, “a source of vulnerability in the economy”.{/mprestriction}