Turkey's current account deficit dropped $1.5 billion to $3.4 billion in April, compared to the same month the previous year, the Central Bank of the Republic of Turkey (CBRT) reported yesterday. The 12-month rolling deficit decreased to $44.2 billion from $45.7 billion. Additionally, direct investment decreased by $461 million to a net inflow of $234 million compared to the same month the previous year.

The CBRT said the improvement in the current account deficit from April 2014 was limited by direct investment outflows involving distributed profits, which increased by $595 million to $892 million.

Although the decrease in the current account deficit is positive, analysts said external financing is required as it continues to pose a challenge. "The composition of external financing is a key vulnerability, with foreign direct investment now only covering a tenth of the shortfall," commented William Jackson, chief emerging market economist at Capital Economics in London.

Attila Yeşilada of Global Source Partners in Istanbul agreed that foreign debt financing was a key challenge for Turkish companies. "The smaller deficit is positive news that should support the Turkish lira. But the elephant in the room is the foreign debt repayment requirement, which is now at about $200 billion, a huge sum contributing to the weakness of the Turkish lira. Turkish companies continue to borrow more than their export receivables in foreign currency."

Yeşilada said the pressure to repay foreign currency debt is already hurting cash flows at Turkish companies. "If the [Turkish] lira continues to decline in value against major currencies, the expense of servicing foreign currency debt at Turkish companies will become a major drag on balance sheets, possibly driving some of them to default. This would affect the health of the banking sector."

Destek Securities analyst Adnan Çekçen stressed that auto imports had a significant effect on the current account balance, which was higher than analyst estimates. "We can attribute the larger-than-expected current account deficit to increased auto imports this month," he said.

Last Tuesday, the Automotive Manufacturers Association announced in a report that 80 out of each 100 cars sold on the Turkish market in May were imported from abroad, the highest number in the last 10 years. Çekçen said the markets perceived the announcement negatively – markets that are already jittery due to the uncertain result of the Turkish elections on Sunday. "The higher-than-expected data weighed on Turkish lira assets. But the Turkish lira held at near 2.73 to the dollar. As long as it stays at this level, pressure on Turkish lira assets is expected to continue, as next week will be busy with data from abroad and coalition talks in Turkey," he said.