Balance of payments and foreign currency flight

Dunya Executive - - COMMENTARY - İsmet OZKUL Columnist

In August, the current balance was a surplus of $2.59 billion. This is a record. Turkey’s economy usually gives a current account surplus while entering into a crisis in which it is shrinking. But there is a lot more to the August current account surplus.

Increases in tourism and transportation compared to last year made a contribution to the current surplus in August. The main factor, however, was the foreign trade deficit, which was $ 4.35 billion last year but dropped to $ 1.28 billion this year.

Soaring currencies and the resulting suspension of imports had a direct effect on reducing the foreign trade deficit. We will see the extent to which this effect will continue, and how long it will last.

If the contraction in imports continues like this, it will be a sign of a severe contraction in the economy.

That much of a surplus in the current account balance was not the only astonishing side of August balance of payments data. The other was the meltdown of the foreign exchange reserve by $8.08 billion in one month, despite the current account surplus. August has, ironically, also become the most severe month for 2018 in terms of losses in reserves.

There are more surprising points because in addition to the record current surplus, the unaccredited foreign exchange inflow in August also reached one of the highest levels in its history. There was an unaccredited foreign exchange inflow of $3.67 billion. The positive effect of the current surplus and unaccredited foreign exchange inflows, which totaled $ 6.26 billion, make the meltdown of the foreign exchange reserves even more surprising.

As for the cause, the usual suspect that comes to mind is hot money outflow. But there was no hot money outflow in August; there was even a small hot money entry of $47 million.

In August, foreigners sold a little stock, a lot of bonds. But they kept money in deposits due to high interest rates. In other words, the money stayed in Turkey. When we add direct investments, there was a net foreign investment inflow of $1.02 billion.

This result leads us to the most striking point of the August balance of payments: The reason for the sharp decline in the foreign exchange reserves was residents taking their foreign exchange abroad. In August, residents took out a total of $11.62 billion in the form of direct investments, portfolio investments and deposits.

In addition, there was also a $4.26 billion reduction in external loans, due to net external debt payments. The sum of these two items was $15.88 billion. The main contributing factor was that banks invested $10.37 billion in a month as deposits abroad. This is also a record.

At a time of foreign currency shortages, which banks were able to deposit so much currency abroad? Are these public banks or private banks? What was behind the decision to take out such a large amount? Will there be more moves like this?

These questions will be among the points that need to be closely monitored on the balance of payments side in the coming period.

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