TRY: Capital flows quieten down as current-account improves – Commerzbank

The Turkish lira exchange rate has mildly depreciated against the US dollar in recent days, but not noticeably so. This is all the more impressive because the dollar itself has been rallying, which has put most emerging market currencies in the region – eastern European currencies in particular – on the backfoot. The steadiness of the lira is pertinent because policymakers have taken pains to highlight Turkey’s improving current-account fundamentals in recent months, and there is an implication that this must help the exchange rate, Commerzbank’s FX analyst Tatha Ghose notes.

Current account improves in Turkey

“At the same time, we must not forget that just a quarter ago, we were hearing a lot in the media about large capital inflows into Turkey, driven by optimism about the new policy setup – this was supposedly helping the lira at that time, but we are not hearing much about that these days. The figure below recapitulates the actual data on these issues. The current-account balance, in seasonally-adjusted terms, has indeed been averaging better in recent months.”

“But it is worth remembering that the current-account balance also recorded surpluses historically when the economy had to slow down. At present, presumably it is higher interest rates which are beginning to have their desired contractionary effect. The ongoing improvement is encouraging alright, but not yet massive by comparison. Historically, the problem always proved to be sustainability – the current-account improvement was driven by an economic downturn, and policymakers were inevitably reluctant to accept the downturn for very long.”

“If the economy incurs a narrower current account deficit, it needs to import less foreign capital. In this sense, the drop-off in inflow is consistent with the current-account surplus, and should not be a source of concern. But there is one difference. On certain rare occasions, both current and capital accounts can move positively together – which constitutes a disequilibrium by definition – the country’s FX reserves would rise at this time and the currency is likely to appreciate.”