Turkey’s current account deficit declined by 18% y/y to $3.06bn in March after expanding by 29% y/y in February, the central bank announced on May 11.

Markets expected a deficit of $3.16bn, according to a Reuters poll. The better than expected March result was mainly driven by rising exports.

Turkey’s current account deficit – traditionally the economy’s weak spot stemming from a heavy reliance on imports, especially energy – stood at $32.6bn in 2016, compared to the previous year’s $32.1bn. The government’s forecast for 2017 is $32bn, or 4.2% of GDP. The IMF expects the current account deficit to widen to 4.7% of GDP in 2017 from 3.8% in 2016.

Exports in March rose by 14% y/y to $15.4bn while imports were up 6% y/y to $18.2bn, leading to a foreign trade deficit of $2.84bn in the third month of 2017, a 22% y/y decline from a year ago.

Tourism revenues, which traditionally help the country plug its large current account deficit, were up 4% y/y to $749mn, financing 25% of the current account shortfall in March.

Also on the financing side, net foreign direct investment (FDI) inflows rose 37% y/y to $1.57bn, while net portfolio inflows declined by 20% y/y to $2.23bn in March. There was an outflow of $49mn from Turkish equities in the month, while the domestic government debt securities market saw an inflow of $1.02bn. The central bank also reported an outflow of $1.15bn through net errors and omissions.

Following the release of the latest data, the Turkish lira was trading at 3.5691 per dollar, down 0.50% d/d, as of 10:10 on May 11. The main stock exchange index, the BIST-100, was up 0.24% to a new historical high of 96,424.

Turkey's persistent current account deficit and its high external financing needs constrain ratings because they make economic growth vulnerable to external refinancing risks, S&P Global Ratings warned last week when it affirmed Turkey’s unsolicited 'BB/B' foreign currency long- and short-term sovereign credit ratings.

Turkey is heavily dependent on external loans to finance its large current account deficit. Debt-financed consumption proved the main driver of the country’s remarkable economic growth in the past decade. But as economic growth is heading for a slowdown and exports remain weak, Turkey’s corporate sector, especially when it comes to tourism firms, may find it difficult to meet liabilities. 

In the first quarter of 2017, a total of 3.8mn foreign tourists visited the country, a 6.43% y/y fall, according to tourism ministry data. Tourism revenues, as a result, plunged 17.1% y/y to stand at $3.37bn in Q1, according to the statistics office TUIK. Turkey is targeting $23.5bn in tourism revenues for 2017.

Turkey's Balance of Payments
($ mn)	2015	2016	y/y	Q1-17	y/y
CURRENT ACCOUNT	-32,118	-32,626	2%	-8,296	5%
Goods, Services and Primary Income	-33,548	-34,415	3%	-8,758	4%
Goods and Services	-23,906	-25,424	6%	-6,603	1%
Foreign trade balance	-48,114	-40,843	-15%	-8,363	1%
Exports	151,970	150,178	-1%	40,052	10%
Imports	200,084	191,021	-5%	48,415	8%
CAPITAL ACCOUNT	-21	23	-	-16	-%
FINANCIAL ACCOUNT	-21,941	-21,335	-3%	-10,480	89%
Net FDI	-12,455	-9,148	-27%	-1,967	-1%
Net acquisition of financial assets	5,095	3,155	-38%	836	9%
Net incurrence of liabilities	17,550	12,303	-30%	2,803	2%
Net Portfolio Investment	15,719	-6,292	-	-4,420	58%
Net acquisition of financial assets	6,129	1,511	-75%	-180	-139%
Net incurrence of liabilities	-9,590	7,803	-	4,240	30%
NET ERRORS AND OMISSIONS	10,198	11,268	10%	-2,168	-
Source: tcmb