Meanwhile, the nation’s current account deficit widened to $7.1 billion in January from $2.7 billion a year earlier as imports surged 39 percent, the central bank said in a statement on Monday. The rolling 12-month deficit rose to $51.6 billion, or about 5.6 percent of economic output, the highest in major emerging markets.
Turkey is financing its growing current account gap via short-term portfolio inflows as foreign investment in the country declines. A sudden outflow of the short-term money, which may be sparked by more political tensions or interest hikes by the U.S. Federal Reserve later this year, could lead to a sudden reversal in economic growth and impact the lira, economists say.
The foreign direct investment that Turkey has used to finance the deficit is in decline. Erdogan’s relations with the European Union and United States have deteriorated after he widened a crackdown on dissent following a military coup in July 2016, curtailing the inflow of money that Turkey has used to fund its economic expansion.
Investors were reminded of further evidence of the crackdown on Tuesday as a Turkish prosecutor requested that U.S. pastor Andrew Brunson serve life in jail on terrorism charges and for his alleged role in the coup. Brunson’s internment for the past 18 months has increased political tensions with the United States, prompting some senators to call for economic sanctions against Turkey.
Moody’s downgraded the nation’s debt to two steps below investment grade last week, warning that Erdogan’s increasing powers mean economic policy is becoming less predictable and compromising the central bank’s monetary policy. The bank refrained from increasing interest rates earlier this month as Erdogan’s government called for lower rates to boost growth.
Turkish five-year credit default swaps also widened two basis points to 171 bps.