Commerzbank’s Tatha Ghose argues that Turkey’s seemingly improved trade data are largely optical, with seasonally-adjusted figures showing no real trend improvement and strong import momentum. He stresses that an overheated domestic economy and insufficiently tight monetary policy keep the current account vulnerable, making the Turkish Lira (TRY) reliant on risky capital inflows and leaving it under persistent depreciation pressure.

Balance of payments keeps Lira vulnerable

"Turkey’s latest trade data, published yesterday, appeared somewhat better, but the improvement was mostly optical. The headline deficit narrowed as Iran war disruptions faded, and the oil price fell back to calmer levels. This temporary easing of the energy import bill delivered a “good” month for the trade balance."

"On a seasonally-adjusted basis, however, the picture was less comforting: the trade deficit is not improving in trend terms, and import momentum is running quite strong (while export momentum is flat). Strong demand for imported goods continues to pull in foreign products at a pace inconsistent with a genuine adjustment story."

"This matters because the balance of payments remain the pressure point for the lira. Monetary policy was never tight enough to curb excess demand, which requires the economy to decelerate to sub-trend for a protracted period."

"As long as domestic demand stays overheated, the current-account gap will be vulnerable to any renewed energy price upswing or an external shock, and capital inflow will have to do the heavy lifting in financing – a risky proposition in a jittery EM environment."

"FX interventions have masked the imbalance for a while, but such a defence is inherently unsustainable. We think that the lira will continue to face pressure."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)