Turkey's ballooning current-account deficit is connected to its massive gold imports
(Kitco News) Turkey's surge in gold imports and rising energy costs have widened the current-account deficit, which reached the highest level since mid-2018. And there were mystery inflows that helped to cover the shortfall.
Turkey saw a significant deterioration of its current-account balance last year, led by a wider goods deficit.
"This was due to surging energy bills, gold imports swinging to a large deficit and strength in core imports (excluding gold and energy) amid demand management policies," ING's chief economist on Turkey Muhammet Mercan.
The gap in the current account in 2022 reached $48.8 billion for the full year — the largest since mid-2018, according to the data published on Monday. In December alone, the deficit widened to $5.9 billion, which was higher than expected.
Gold imports accounted for $20.4 billion in 2022, which weighed heavily on the current-account balance. Turkish investors embraced gold last year as a hedge against inflation, currency devaluation, and general uncertainty.
Central bank Governor Sahap Kavcioglu's speech last month stated that a massive increase in gold imports led to the current-account shortfall. And if bullion and energy imports were to be excluded, Turkey would have seen a surplus.
"In the second half of the year, gold imports also increased significantly and gold foreign trade made a negative contribution to the current account balance of 2022," Kavcioglu said.
For example, Turkey's gold imports shot up 543% to $3.1 billion in September as annual inflation accelerated to a 24-year high of 83.45%.
The issue of surging gold imports was even addressed by the country's President Recep Tayyip Erdogan two weeks ago, who said that Turkey is planning to keep increasing its gold production so it can rely less on imports.
It is not just the retail consumers who stepped up gold purchases last year. Turkey's central bank was the biggest official buyer of gold in 2022.
Turkey's official gold reserves rose by 148 tonnes to 542 tonnes, marking the highest level on record in 2022, according to the World Gold Council data.
In the fall, Turkey's inflation accelerated to 85% before slowing to 64% in December. Turkey's central bank was also one of the few that cut rates in 2022, taking the key interest rate from 14% to 9%.
Another interesting part of the report was that the net errors and omissions category, which Bloomberg described as the capital inflows of unknown origin, was at $24.2 billion for last year. The category hit a record high in mid-2022 and was critical in helping to finance the deficit. The data collected goes back to 2006.
The funding offered some protection to the country's central bank that splurged $108 billion on backdoor currency market interventions in 2022 to stabilize the lira, Bloomberg Economics wrote.
ING's Mercan also added that Turkey saw "the continuation of strength in net errors and omissions, which is not a stable source of funding. These numbers show a challenging picture for external financing last year given the reliance on unidentified flows and the Central Bank of Turkey borrowing roughly US$7.3bn (including swap deals)."