Fuelling the ongoing concern of investors and the Turkish authorities over the high exposure to potential shocks in the European banking sector produced by the country's current account deficit, the Central Bank of Turkey (CBT) revealed on March 18 that short term external debt rose to $149.6bn in January.

With the central bank now closing in on resurrecting its full-on fight against rising consumer credit, it said in a statement on its website that short-term external debt stock rose 6.5% to $107.6bn in January, compared with the end of 2012. Meanwhile Turkish banks' short-term external forex loans increased 6.1% to $31bn.

Analysts were quick to pick up on the building evidence that the "soft landing" achieved by Ankara in 2012 is being undermined by renewed accelearation of domestic demand early in the year. Tim Ash of Standard Bank says the figures "underline Turkey's continuing vulnerability through the external financing and exchange rate channel." Short-term debt falling due within 12 months grew by around $20bn in the first month of 2013, he notes.

The figures suggest that while the central bank has resumed its fight against rising external debt via its complex monetary policy, the acceleration looks to be over-powering current efforts. "Much is made of the increase in CBT reserves over the past year, which is partially a reflection of the CBT hiking and mixing forex reserve requirements," Ash adds, before pointing out that while official forex reserves around $40bn higher year on year in January (at around $125bn) the growth in debt is leaving it behind. "Coverage of short term debt, plus the likely current account deficit due this year (~$60bn) with official forex reserves remains low, at just 60% or so," he warns.

"With growth resuming, the CAD rising, and continuing vulnerabilities through the short-term debt channel would suggest still a negative bias in the forex space," Ash continues, "especially if Turkey begins to suffer from lower portfolio inflows, as the market begins to price in higher policy rates. Note that net portfolio flows are still running at over $40bn on a 12 month basis, according to January's balance of payments data, which seems unsustainable. Indeed they may need even higher portfolio inflows to finance a larger CAD this year."

Source: bne