Turkey’s trade deficit falls 35% in sign of cooling economy

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Turkey’s trade deficit contracted by 35 per cent in June as both imports and exports declined in a sign that economic activity may be slowing as President Recep Tayyip Erdoğan returns to more orthodox economic policies since his re-election victory.

Trade ministry data on Monday showed Turkey’s trade imbalance narrowed to $5.4bn last month after imports fell 16.8 per cent from the same period a year earlier to $26.3bn, trade ministry data showed. That was the lowest level since October 2021, according to official statistics.

The fall in the value of imports in June reflects a sharp devaluation in the lira, which has lost almost a quarter of its value against the dollar since the election in late May. Monday’s trade data helped send the currency to a fresh record low, falling 0.5 per cent on Monday to TL26.07 against the dollar.

Exports declined 10.5 per cent to $20.9bn in June, which included a long religious holiday that may have reduced manufacturing activity. The trade deficit for the first half of the year still grew 19 per cent compared with the first six months of 2022, the ministry said.

“Turkey’s economy has been running quite hot in recent months, [with] strong domestic demand that has fed through into import growth. With the currency depreciation, imports coming down happens quite quickly, and that’s what’s playing out now,” said Liam Peach, senior emerging markets economist at Capital Economics.

In an effort to boost Turkey’s growth ahead of a bitterly contested vote, Erdoğan had forced his central bank to keep interest rates in the single digits despite an inflation rate of about 40 per cent. But since securing a five-year term after a runoff vote in late May, he has signalled his willingness to pursue more conventional economic policies, appointing two former investment bankers to run the finance ministry and the central bank.

The central bank raised rates by 650 basis points to 15 per cent on June 23 and has also eased off of interventions in the currency markets to prop up the lira after previous governors depleted the bank’s foreign currency reserves to stabilise the currency.

The weaker lira should make Turkish exports more competitive, with the trade deficit likely to continue narrowing in the coming months, Peach said. This should help tame Turkey’s ballooning current account deficit, which stood at $54.2bn in March, or 5.9 per cent of gross domestic product, a key vulnerability for the $800bn economy.

But the weaker lira is likely to cause more problems for Turkish households, driving up costs at the supermarket and eroding the value of bank deposits. Inflation data for June is due to be released on Wednesday.

“The first impact of the currency depreciation will be on prices, and inflation is going to end this year at a higher level than it otherwise would have,” said Peach.

Turkey may still avoid a recession as it tightens monetary policy gradually and as foreign investors who had fled amid Erdoğan’s unconventional policies begin to return, he added.