Turkey’s trade balance, one of the few points for solace in this year’s worst performing bond market, might not be improving as much as the data appears to show.

Despite having no significant gold deposits, exports of the precious metal made up 70 percent of the narrowing in the current account gap, according to government data published Friday. A gold importer for 28 of last 30 years, Turkey became an exporter in 2012 when it started paying for Iranian gas in precious metals as a way of circumventing international sanctions that may soon be lifted.

In the face of slowing economic growth and accelerating inflation, Turkish President Recep Tayyip Erdogan pointed to the shrinking current account deficit among economic achievements ahead of parliamentary elections in June. Government 10-year bonds in liras, whose yields increased the most among 24 emerging-market nations tracked by Bloomberg in 2015, have steadied in the past three weeks.

“What is worrying is that the reduction in the shortfall stems from gold exports,” Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy, said by phone on Friday. “It’s a very murky, very mysterious, very opaque situation. Iran is clearly the obvious suspect.”

Turkey’s net gold exports during the first two months of 2015 increased to $2.58 billion from $398 million a year earlier, according to central bank data. That compares with total trade gap of $5.7 billion during the Jan.-Feb. period.
Iranian Gold Trader
The central bank reported Friday a current-account gap of $3.2 billion during the first two months of 2015, down 4.2 percent from the same period in 2014. The shortfall should narrow to 4 percent of gross-domestic product this year from around 5.5 percent of GDP in 2014 and was no longer a source of risk to the economy, Economy Minister Nihat Zeybekci said on Friday.

His office didn’t respond to an e-mail seeking comment on the destination and sustainability of Turkey’s gold exports which are now one of the main drivers of the improvement in the current-account balance.

A sudden jump in Turkey’s net gold exports in 2012 became the subject of a police investigation that involved an Iranian gold trader called Riza Sarraf. He was accused of bribing former members of the government to facilitate the trade that he later said was worth about $12 billion, according to Turkey’s AHaber TV.
Falling Oil
The accusations against Sarraf were branded by the government as a foreign plot to topple Erdogan, then the prime minister, and all charges against him were later dropped.

The drop in the current-account gap has also been helped by oil prices, which fell more than 50 percent since the last year’s peak of $115 per barrel. Turkey’s falling energy import bill will support the narrowing of the gap barring an economic downturn in the country’s main export markets in Europe, Muhammet Mercan, chief economist of ING Bank AS in Turkey, said in e-mailed comments on Friday.

Expectations of an improving current-account balance were seen as a boon to Turkish debt until recently. Yet political attacks led by Erdogan against the central bank contributed to a sell-off in two-year notes, the year’s worst performers among emerging market peers. The yield on Turkey’s two-year lira notes rose 5 basis points to 8.85 percent Friday, extending its gains this year to 83 basis points.

There isn’t much room for short-term bond yields to fall as the U.S. Federal reserve prepares to raise interest rates, according to Ipek Ozkardeskaya, a market analyst at London Capital Group in London. Any positive impact from the improvement in the current account might not last given the reliance on gold, she said.

“The amount of gold exports cited in current-account balance are not based on reality,” Ozkardeskaya said. “I expect the gold exports and their excessive impact on the current account to fizzle out.”

By Bloomberg