Turkish Lira Faces Risks Despite Trade Improvements

Key Moments

Trade Headline Gains Seen as Largely Optical

Commerzbank strategist Tatha Ghose contends that the latest Turkish trade figures, although superficially stronger, do not signal a genuine improvement in Turkey’s external dynamics.

According to Ghose, the reported narrowing in the headline trade deficit stems mainly from transient factors. He notes that disruptions linked to the Iran war have faded and oil prices have retreated to calmer levels, temporarily reducing the energy import bill and delivering what he describes as a “good” month for the trade balance.

Seasonally-Adjusted Data Point to Ongoing Imbalances

Ghose highlights that the more telling seasonally-adjusted data present a less reassuring picture. He states that there is no discernible trend improvement in the trade deficit on this basis. Instead, import momentum remains robust while export momentum is flat, underlining sustained strength in demand for foreign goods.

In his assessment, this strong pull for imported products is inconsistent with a genuine adjustment process, signaling that underlying imbalances in Turkey’s external accounts remain unresolved.

Balance of Payments Remains a Pressure Point for TRY

Ghose emphasizes that the core vulnerability for the Turkish Lira lies in the balance of payments. In his view, monetary policy has not been sufficiently tight to restrain excess domestic demand, which he believes would require the economy to operate below trend for an extended period.

As long as domestic demand stays overheated, he argues, the current account will remain exposed to any renewed upswing in energy prices or adverse external shock. In this context, Turkey will need capital inflows to shoulder the main burden of financing the current-account gap, which Ghose characterizes as a risky setup in what he calls a jittery emerging market environment.

FX Defense Seen as Unsustainable

Ghose adds that foreign exchange interventions have helped obscure underlying imbalances for a time. However, he regards this approach as inherently unsustainable and expects the Turkish Lira to remain under depreciation pressure as these structural issues persist.

“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.”