Turkey’s June trade figures showed the external deficit widening 26.2% year on year to USD 10.4bn, as both sides of the ledger rebounded after May’s holiday effects. Exports climbed 21.7% to USD 24.9bn, while imports rose 23.0% to USD 35.3bn, leaving imports growing faster than exports and the trade balance weaker. The year-on-year comparison, however, offers limited read-through on the latest incremental trend.
On a seasonally adjusted basis, exports and imports both recovered after dipping in May, as conditions slightly stabilised in the Middle East, but the momentum still appeared skewed towards imports. The import mix reinforced that pattern: intermediate goods imports increased 30.0% and capital goods imports rose 19.6%, whereas consumer goods imports fell 1.2%. Longer term, the trade deficit has been broadly steady at around 6% of GDP in recent months, pointing to ongoing balance of payments strain despite years of monetary tightening aimed at narrowing macroeconomic gaps such as the current-account deficit.
Persistent Deficit and Lira Vulnerability
We see Turkey’s widening trade deficit, which recently hit $10.4 billion, as a clear warning sign that the Turkish Lira remains highly vulnerable. Despite aggressive interest rate hikes by the central bank—keeping policy rates around 50% throughout the past year—the underlying balance of payments has not improved. This persistent deficit, sticking stubbornly at around 6% of GDP, suggests that monetary tightening alone is failing to stabilize the currency’s long-term outlook.
Positioning for Further Lira Weakness
In the coming weeks, we recommend that derivative traders position for further weakening of the Lira by purchasing USD/TRY call options. Historically, when intermediate goods imports surge while consumer confidence drops, it signals that local industries are aggressively hedging against future inflation and currency drops. With USD/TRY trading at historically high levels this summer, option implied volatilities remain underpriced relative to the looming balance of payment risks.
We also suggest utilizing short-dated FX forwards to exploit the massive interest rate differentials while protecting against sudden devaluations. Given that Turkey’s foreign exchange reserves remain under pressure and import demands continue to outpace export growth, the risk of a sharp currency correction is rising. Hedging long-exposure assets in Turkey now will protect portfolios from the inevitable pressure on the Lira as we head into the autumn.
