Goodbye Biden, hello (again) volatility
This week’s report is uncharacteristically short and focuses mainly on the economic data, as our politics author-cum-cosmic strategist is experiencing internet problems where he is.
As regards the much-anticipated Biden-Erdogan meeting, this author’s understanding is that all contentious issues were thrown in the freezer, in exchange for President Erdogan committing to send troops to Afghanistan. The USD/TL, which notably strengthened in the run-up to the meeting, weakened sharply afterwards. While the global environment was largely to blame, the CBRT’s easing bias in the face of a difficult inflation outlook, as we wrote about during the week, is leaving the lira vulnerable to further weakness.
The May budget came in strong, as signaled by the cash data earlier, thanks to continued buoyancy in tax revenue as well as some spending restraint. The overall deficit shrank to around 1.6% of GDP in May, we reckon, from 2.2% at the end of the first quarter, and almost 4% late last year.
At $1.7 billion, the current account deficit was markedly lower than expected in April. More importantly though, the financing side remained awfully weak, with the deficit financed mainly from CBRT reserves. It is worth noting that in the year through April, a cumulative current account deficit of almost $10 billion has been financed primarily from unidentified inflows, a.k.a. errors and omissions (some 70%) and CBRT reserves (about 30%).
Turning to the high-frequency data, the CBRT’s net foreign reserves rose notably last week, according to daily CBRT balance sheet data, which largely owed to a new swap deal with China and hence, is largely window-dressing, in our view. Nonresident flows were weak with very modest inflows through portfolio flows and swaps, while corporates appear to have increased their F/X deposits by almost a $1 billion.
Lastly, on Covid, the case numbers have declined slightly further last week, as vaccinations picked up dramatically.
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