Turkey’s current account deficit expanded by 68% y/y to $5.24bn in May after growing by a revised 17% y/y in April, the central bank announced on July 13.

Market analysts were expecting a lower deficit of $3.1bn in the month, according to a Reuters poll. The poll also forecast an annual deficit of $37bn for the whole year.

Following the release of the latest data, the Turkish lira was trading at 3.5759 per dollar, up 0.23% d/d, as of 10:50 on July 13. The main stock exchange index, the BIST-100, was up 0.17% to 103,983.

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.

The OECD projects Turkey’s current account deficit to increase to 4.8% of GDP in 2017 from 3.8% in 2016.

Exports in May rose by 14% y/y to $14.5bn while imports were up 22% y/y to $20.2bn, leading to a foreign trade deficit of $5.65bn in the month, a 47% y/y rise.

Tourism revenues, which traditionally help the country plug its large current account deficit, were up 11% y/y to $1.74bn in May, financing 33% of the current account shortfall in the month.

Also on the financing side, net foreign direct investment (FDI) inflows rose by 53% y/y to $1.17bn, while net portfolio inflows jumped by 363% y/y to $5.69bn in May. There was an inflow of $272mn into Turkish equities in the month, while the domestic government debt securities market saw an inflow of $921mn. The government also borrowed $1.75bn through a 30-year US dollar-denominated bond issue on May 5.

The central bank reported an inflow of $1.66bn through net errors and omissions in May.

In January-May, Turkey’s current account deficit rose by 20% y/y to $16.85bn.

Turkey's persistent current account deficit and its high external financing necessarily constrain ratings because they make economic growth vulnerable to external refinancing risks, S&P Global Ratings warned in May 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 has proved the main driver of the country’s remarkable economic growth looking back over the past decade. But as the economic outlook is still suppressed by geopolitical risks, Turkey’s corporate sector, especially when it comes to tourism enterprises, may find it difficult to meet liabilities. 

Investors, meanwhile, expect the government to focus more on long-delayed reforms to address the country’s chronic current account deficit problem.

Turkey’s foreign arrivals data showed growth on an annual basis for the second consecutive month in May, with the return of Russian tourists to the country in the wake of the Ankara-Moscow rapprochement very much driving the expansion.

Across January-May, a total of 8.76mn foreign tourists visited the country, a 6% increase on a year ago, thanks to the April and May growth. Turkey is targeting $23.5bn in tourism revenues for 2017.

The country's foreign trade deficit, the main driver behind Turkey’s chronic current account deficit problem, contracted by 9% y/y to $6.02bn in June, according to the preliminary data from the ministry of customs and trade.