J.P. Morgan has published a report on Turkey's short-term external debt and current account balance. The institution points out that Turkey's persistent current account deficit has raised concerns about external financing needs in the first quarter of 2023, as the 12-month current account deficit, which was $48.4 billion in 2022, increased to $57.8 billion (5.9% of GDP) as of April 2023.
The bank highlights that Turkey's gross reserves, including gold reserves, decreased by $30.3 billion to $98.5 billion due to the current account deficit and local factors. However, it also notes that foreign exchange reserves have started to increase since June.
The report predicts a $19 billion external financing gap for the next 12 months. However, it suggests that stronger inflows of foreign direct investments and certain portfolio inflows under the new economic management could further reduce this gap.
J.P. Morgan emphasizes that Turkey's short-term external debt due within the next 12 months, regardless of its original maturity, amounted to $202.9 billion as of April 2023. It categorizes short-term debts into three groups: sensitive to country risk and global financial conditions, sensitive to deposit confidence, and sensitive to economic activity.
The report states that the payments of eurobond by the Treasury to non-residents, outstanding loans taken from abroad by local banks and companies account for $55.2 billion of the $202.9 billion short-term external debt, which is sensitive to both global financial conditions and country risk perception.
Furthermore, it mentions that $95.3 billion ($16.3 billion in Turkish lira) of the debt is sensitive to deposit confidence, and there is a perceived risk of non-renewal for these deposit liabilities.
On the other hand, for the $52.4 billion of trade credits consisting of import debts of $49.7 billion and pre-export financing of $2.7 billion, no renewal risk is seen as they will automatically balance over time based on the course of economic activity.
The bank forecasts that the monthly debt payments for Turkey will range between $2.4 billion and $3.5 billion during the period of July-October 2023, and there will be a moderate current account surplus in this period due to strong tourism and low energy imports. Therefore, limited pressure from the external sector is expected in the near term.
However, the report highlights the possibility of a significant expansion in the current account deficit between November 2023 and March 2024 due to adverse seasonality, as well as the heavy external debt payments to be made in December 2023 and March 2024.
The report states that the interest rate hike on June 22nd was deemed insufficient. It also mentions that inflation, growth, and current account balance forecasts have been revised upward. However, a current account adjustment, although to a lesser extent, is still expected.
According to the bank, the annual current account deficit, which was $57.8 billion as of April 2023, is projected to decrease to $46.4 billion this year and $32.8 billion next year. The expected figure for the 12-month period from July 2023 to June 2024 is $29.7 billion.
J.P. Morgan estimates that there will be $8.9 billion of foreign direct investment in the next 12 months as of April 2023 when calculating Turkey's short-term external financial gap. It emphasizes the belief that the new economic management will halt ongoing portfolio outflows despite the challenging global environment. It also expects that foreign currency and lira deposits in the Central Bank of the Republic of Turkey (CBRT) and Turkish banks will continue to remain in the system, leading to the extension of all deposits' maturity.
Regarding Turkey's external debt, the report mentions that the Treasury has utilized $7.5 billion of its $10 billion external borrowing target for this year, and it is expected to renew 100% of the $2.8 billion external debt to non-residents. It underlines that as of June 23rd, only 35% of the total external debt of the Treasury belongs to non-residents.
The bank states that commercial and corporate loans will be automatically adjusted based on domestic demand and import demand, therefore expecting a 100% renewal rate. It uses a 95% foreign debt rollover rate for banks and a 116% rate for non-bank sectors.
The report indicates that a $19 billion external financing gap is projected for the upcoming period, but due to the likely increase in net errors and omissions, the risks may lead to a smaller external financing gap.
Furthermore, it suggests that if the new economic management returns to orthodox policies faster than expected, Turkey could attract stronger foreign direct investments and portfolio inflows compared to the Gulf Cooperation Council countries.
J.P. Morgan highlights that the CBRT's $66.2 billion foreign exchange reserves will be sufficient to cover the $19 billion external financing gap for the next 12 months, and it emphasizes that the Central Bank's foreign exchange reserves have continued to increase in recent weeks. The bank also underlines that the CBRT has $41.3 billion of gold reserves that can be used under difficult conditions.
According to the bank's evaluation, Turkey's external sector dynamics have a constructive outlook for the period of July-October 2023 due to the expected moderate current account surplus and slight debt repayments. It suggests that Turkey's external debt for the next 12 months is considered manageable.
However, the report also mentions that the potential pressure on the Turkish lira may likely come from residents' demand for foreign currency, rather than from the dynamics of the external sector, due to the calculation of the Central Bank's accounts, which amounted to $108.8 billion as of June 23rd. It further adds that this pressure is expected to increase in the coming months.
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