Turkey's Current Account: Sustainability of Recent Improvements Under Scrutiny

Turkey's October 2024 current account report showed a $0.5 billion surplus, a sharp contraction from the $2.3 billion surplus recorded a year earlier, according to official data. This weakening result was primarily driven by a widening trade deficit, which ballooned to $6.0 billion versus $3.5 billion a year ago. While services income, notably from transportation and tourism, helped cushion the decline, the core trade balance deteriorated significantly.

Policymakers credit aggressive measures like the 50% interest rate and gold import restrictions for curbing the foreign trade deficit, achieving a 10.5% reduction to $5.91 billion this month. These actions are also projected to narrow the annual current account deficit substantially in 2024. However, the resilience of these policy-driven improvements remains uncertain.

Underlying vulnerabilities persist. The 12-month rolling current account deficit has climbed to $22.0 billion, equivalent to 1.6% of GDP, reflecting an ongoing deterioration trend since late 2023. Capital account inflows also weakened significantly in October to just $1.1 billion. Elevated non-resident borrowing ($4.7 billion) only partially offset resident outflows, while a $3.2 billion outflow in errors and omissions led to a $1.6 billion drop in official reserves. Persistent external financing risks, geopolitical tensions, and domestic demand weakness continue to pressure the account heading into 2025.

Structural Vulnerabilities & Financing Risks

Turkey's persistent external financing gap remains a core vulnerability, highlighted by its $22.0 billion 12-month rolling current account deficit – equivalent to 1.6% of GDP – which has been trending upward since late 2023. According to analysis, this chronic shortfall forces heavy reliance on external borrowing, with $42.6 billion in financing needed for 2024 alone, including $26.2 billion sourced from loans. Reuters reports that the acute dependency on loan flows creates fragility, particularly as global risk aversion or rising U.S. Treasury yields could sharply curtail such capital inflows.

While recent policy tightening delivered measurable improvement – notably reducing the annual 2023 current account deficit from nearly $40 billion to $9.97 billion in 2024 – the underlying structural deficit pressures remain. Gold trade restrictions contributed significantly to this narrowing, yet gold imports stayed elevated at $13.6 billion in 2024, representing a 50% decline but still posing a substantial outflow risk. The combination of a persistent current account shortfall and concentrated loan dependency means Turkey remains exposed to external shocks and shifts in investor sentiment.

Risks & Downside Scenarios

Turkey's external position remains precarious despite recent improvements. The October 2024 current account swung sharply to a $0.5 billion surplus from a $2.3 billion surplus a year earlier, driven by a widening trade deficit ($-6.0 billion versus $-3.5 billion) due to weaker core trade and gold balances. While services income softened the blow, a persistent drift toward deficit is evident, with the 12-month rolling current account now $22.0 billion (1.6% of GDP). Capital inflows evaporated in October 2024, reaching just $1.1 billion. This thin flow, coupled with elevated non-resident borrowing ($4.7 billion) and a $1.6 billion drain on official reserves, highlights acute vulnerability to sudden stops.

The outlook for 2025 deepens these concerns. A Reuters poll projects the annual current account deficit swelling to $18 billion- a stark reversal from the 2024 deficit of $9.97 billion. Energy and gold imports remain critical weak points, even as net gold/energy imports fell 50% to $13.6 billion in 2024. Policy-driven optimism must contend with structural risks: persistent external financing needs, geopolitical tensions, and domestic demand weakness. Any reversal of recent monetary tightening or capital controls could trigger volatility, given the fragile reliance on volatile short-term flows. With official reserves already under pressure, the $1.1 billion October inflow threshold underscores how little margin exists for error.

Catalysts & Decision Triggers

Recent data shows Turkey's critical economic thresholds remain fragile. The 12-month rolling current account deficit hit $22 billion (1.6% of GDP) according to analysis-precisely at the danger zone identified in our policy triggers. This mirrors persistent external financing risks amid geopolitical tensions and domestic weakness. Compounding concerns, October's capital inflows collapsed to just $1.1 billion, well below the $1 billion threshold where policy reversal risks spike.

Market analysts remain cautious, projecting a $1.32 billion surplus for October 2024 and a narrowed annual deficit of $10.25 billion (0.6% of GDP) for 2024. This optimism hinges on aggressive policy measures: Turkey's 50% interest rates and fiscal tightening have already reduced the trade deficit by 10.5% to $5.91 billion. However, October's $1.1 billion capital inflow remains dangerously low, with elevated non-resident borrowing offsetting resident outflows.

The $18 billion 2025 deficit forecast underscores how fragile this recovery is. Capital inflows below $1 billion could trigger policy backtracking as foreign reserves absorbed $1.6 billion in outflows. While services income currently cushions trade weakness, this remains vulnerable to external shocks. The central bank's high rates may suppress inflation but simultaneously crush domestic demand, creating a policy trap where any reversal could reignite capital flight. Investors should watch for: 1) Persistent capital inflow weakness below $1B, 2) Expansion of the 12-month deficit beyond 1.6% of GDP, and 3) Signs of non-resident borrowing drying up.