Current account

The December current account deficit print points to a high deficit. Yearly deficit rose to USD 48.8bn, the highest since 2013. In January preliminary data show that foreign trade deficit rose to USD 14.3bn, which suggests that, a high current account deficit should be expected again.

Before the earthquake it was possible to think that the deficit would be curtailed this year because China could recover fast and Europe wouldn’t perhaps be in very bad shape. However, the earthquake regions accounts for 8.5% of total exports, and that is lost in the short term.

The financial account is all that matters in the short run. Already the government stopped gold imports. In December gold imports were USD 5.1bn. There will be international aid after the earthquake but these will most likely be targeted, projectbased relief funds.

Half of the annual current account has been financed through net errors & omissions and borrowings. This is a mix that is unlikely to persist after the elections.

Portfolio outflows reached USD 13.4bn. Borrowings stand at USD 42.3bn. Suppose the short run deterioration in the balance of payments is financed through the same mix and with help of the relief funds.

Since there will be a huge construction investment, and after that one can expect a rebound in growth and imports, say, in Q4, the current account deficit would rise anew. If the impetus to keep the Lira overvalued, then the pressure on the currency will likely cause a sharp increase.

Inflation will surely speed up. Indirect taxes will be raised in order to finance the costs of the earthquake and that will add insult to injury on the inflation front. All expectations should be revised now.

Before the GDP rebound begins possibly in 6-9 months, GDP would fall by possibly 1% (direct impact) or more, there will be pressure on the Lira, inflation would rise, and balance of payments problems won’t ease much.