57% of Turkey's trade deficit can be explained by the price oil price over the past five years, but the September trade deficit was around double what the oil price would predict.

Turkey’s September trade deficit came in at $US8.14 billion, or nearly 12% of GDP at an annual rate. That isn’t sustainable.

The jump in the deficit from a range of $4 to $6 billion a month in 2016 to $6 to $8 billion a month during 2017 probably reflects higher prices paid by Turks after the 2016 devaluation of the Turkish lira, which fell from 3.1 to the dollar a year ago to about 3.8 to the dollar today.

Turkish consumers continue to increase their debt at a 15% annual rate, more than keeping up with inflation (now at 11.2% year-on-year). Turkey has been relying on “carry trade” flows from hedge funds and other hot money investors, who borrow in low interest currencies and invest in high-yielding Turkish assets. The carry traders got crushed during the past two months as the Turkish lira swung from around 3.4 to the dollar to 3.8.

In the long-term, Turkey’s burgeoning economic relationship with China and Central Asia in the context of Beijing’s Belt and Road Initiative should help growth. But it is hard to see how the Turks can continue to borrow and consume at present levels. As the chart shows, most (57%) of Turkey’s trade deficit can be explained by variations in the oil price during the past five years.  But the September trade deficit was about twice as large as the oil price would predict.

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