Turkey’s current account (CA) deficit widened 145% y/y to USD 2.89bn in October, in line with the market consensus forecast of USD 2.9bn. The CA shortfall was USD 3.4bn a month ago.

In January-October, the country’s CA deficit rose to USD 51.9bn from USD 39.6bn in the same period of 2012.

Foreign trade balance posted a deficit of USD 5.61bn in October, a 46% y/y increase, data of the Central Bank showed on Wednesday. This was lower than the USD 6bn of foreign trade deficit the Central Bank reported for September. Exports declined 8% y/y in October but imports rose 4% y/y.

On the financing side: Net FDI inflows rose 11% y/y to USD 505mn, covering 17% of October’s CA deficit. Turkey attracted USD 541mn of net FDI in September. Portfolio inflows, which stood at USD 2.2bn in September, fell 37% y/y to USD 3.76bn in October. Inflows into Turkish equities stood at USD 641mn, comparing unfavorably with the inflows of USD 733mn in September. Investors bought USD 1bn worth of government securities in October. Turkey finances its wide CA deficit mainly through capital inflows and U.S Federal Reserve’s expected tapering of asset purchases makes it vulnerable to any reversal of capital inflows.

Outflows through net errors & emission was USD 1.45bn in October versus USD 2bn inflow recorded in September. Net error & emission inflows amounted to USD 3.84bn in the first ten months of the year versus USD 3.75bn in the same period of 2012.

The Turkish government expects the current account deficit to be USD 58.8bn (7.1% of GDP) and it forecasts a CA shortfall of USD 55.5bn (6.4% of GDP) next year.

Earlier this week, finance minister Mehmet Simsek said that the government would pursue a sustainable growth strategy in the medium term to keep the country’s current account deficit under control. Government policies would aim at encouraging domestic savings, the finance minister added.

Concerned about widening current account deficit, the government recently announced several measures to limit loan growth and to control credit card usage. Finance minister Mehmet Simsek acknowledge that these measures would affect consumption and consequently GDP growth but he said their impact would be seen only in the short term. Turkey needs modest growth rates because of its large current account deficit and Turkey should attain modest growth rates until the country’s current account deficit is lowered, Simsek said.

Last month, the IMF’s executive board said in an assessment concluding its annual consultation with Turkey that the domestic demand-led growth was leading to a renewed deterioration in inflation and the current account deficit. The IMF projects a GDP growth of 3.8% this year and 3.5% next year, while it expects the current account deficit to narrow to 7.2% of GDP next year from 7.4% expected this year.

Last month again, rating agency Moody's said that it expected the current account deficit -projected at 7.5% in 2013- and the associated external financing needs -seen at around 25% of GDP in 2013- to remain elevated over the medium term.

In October, another rating agency Fitch warned that the combination of a wide current account deficit, high inflation and weak international liquidity pose difficult policy challenges for the authorities.