FxWirePro: Turkish ministry hints at reduced export prospects despite Russian likely uplift of sanctions

The latest Economy Ministry survey shows that export prospects are plummeting after having rebounded over the recent quarters:

The export forecasting index for Q3’ 2016 was lower than the corresponding index for Q2.

The expectations about imports inched lower too, but by lesser. In our view, the survey could be slightly outdated as it may not have captured all respondents' reactions to the easing of tensions with Russia.

Russia had imposed sanctions on Turkey months ago as they had shot down Russian warplane over Syria crisis.

As a result, the Russian sanctions have hampered the Turkish economy. They especially affected the banking and tourism sectors.

Thus, Bloomberg reported that there was a significant increase in bad loans recorded in the Turkish banking industry; the nonperforming loan ratio rose to 3.18 pct.

But for now, Turkey has apologised and sources say that Mr. Vladimir Putin (the Russian president) would instruct his government to begin talks with Turkish counterparts “in order to restore the mutually beneficial bilateral co-operation in trade, economic and other spheres

Otherwise, it is a good indication of where things were headed. The removal of Russian sanctions will mainly help agricultural exports, whereas export of manufactured goods to the EU is likely to remain lacklustre.

Turkey's trade deficit dropped 25.5 pct to $5.05 billion in May of 2016, compared to a $6.8 billion gap a year earlier. Exports increased 9.6 pct to $12.4 billion, due to higher sales of vehicles (+41.2 pct) and precious stones and metals (+176.9 pct).

In contrast, imports declined 3.8 pct, mainly driven by lower purchases of mineral fuels, minerals oils (-37.1 pct) and iron and steel (-36.3 pct).

In the first five months of 2016, the trade deficit shrank 21 pct to $21.4 billion from $27 billion in the same period of 2015, as exports declined 4.4 pct while imports fell at a faster 9.5 pct. 

We do not believe TRY would trade back below 2.75 levels on a lower side. The inflation differentials alone would take fair value to well towards 2.90 and above. Moreover, the persistent support from the EU on the refugee crisis may wane given Erdogan’s support for groups fighting Kurds across the border. We, therefore, project USD/TRY to settle at about 3.10 by end Q4’ 2016.