FDI inflows, Current Account contraction boost up TRY forecasts

The remarkable trends that could bolster Turkish currency:

1) The Turkish current account gap has been narrowing as anticipated, led by contracting import demand, oil price slumps and commodity prices; we forecast 4.5% of GDP deficit for 2015 as a whole. The Turkish trade gap decreased 39.8 percent to USD 4.88 billion in August of 2015, compared to a USD 8.11 billion shortfall a year earlier and in line with market expectations. Now, a number of factors supported in combination during August: e.g. real export growth was 8% YoY even while imports contracted; preliminary data suggest.

2) FDI inflow has been punchy this year, driven by foreign investment in the power generation sector, including nuclear power. This type of project based capital inflow comes as a welcome offset to generally absent investment mood in the private sector. August saw c.$2bn net FDI inflow, compared to $1.1bn net outflow a year ago.

Turkey recorded impressive current-account numbers yesterday, although the general trend had been anticipated by the markets and hence, the lira did not benefit much. We forecast USD-TRY in the 2.65 region by year-end: the lira had a positive day, of course, as did most EM, but the generic rally masked the lira's underperformance of key peers such as the rand - TRY-ZAR closed the day lower despite the supportive current-account data.