Rising oil prices may take a toll on Turkey’s economy

Birol told Today’s Zaman the recent spike in oil prices will negatively affect Turkey’s balance of payments. In what he summed up as 3+1 negative effects on the economy, Birol said rising oil prices will increase inflation, ultimately having a negative effect on growth as well. And finally, since the uprisings still have not been settled fully, Turkey’s trade to protest-ridden countries will take a hit, he added.

On top of these three effects, rising oil prices will also drive up natural gas prices, which are determined by the former, Mr. Birol says. In Turkey, natural gas is widely used for electricity production, and it is a major production input for many sectors.

Birol predicted that these (3+1) effects all together might slow down the Turkish economy in the near future, possibly leading to more interest rate cuts by the Central Bank of Turkey to deal with the negative effects of rising energy costs.

The recent oil price hike due to the latest Libyan revolt raises concerns for all oil-import dependant countries, and as a country that must import its oil, Turkey is no exception.

Recently, Turkish government officials had expressed concerns about rising oil prices, while hoping Turkey would overcome this turbulence yet again thanks to its fundamentally strong economy. However, as the unsettled situation in Libya lingers, worries over its long-lasting effects on world economies grows.

Rising oil prices hurts a country’s account balances, inflation and growth. Turkey’s current account deficit has been an issue for some time, and the latest developments in oil prices will not help. In fact, crude oil prices have had a significant effect on the current account deficit, since a barrel of crude oil has nearly more than doubled in price since the beginning of 2009, thereby increasing the cost of imports. The import of intermediate goods for production and Turkey’s inability to have a domestic manufacturing industry that can source most, if not all, inputs domestically is further fueling this chronic problem.

According to the central bank’s 2010 report, the current account deficit last year had a staggering increase of 247.1 percent compared to 2009, reaching $48.5 billion, up from $13.9 billion for the year prior. The government’s energy importation accounts for a major part of the current account deficit in Turkey. Since it must import almost all of its oil needs, Turkey’s current account balance is highly sensitive to the change in energy prices.

Crude oil, which was $89 at the end of January, is now just below $100 as of the opening of the markets on Monday. In addition to the direct effect of oil prices on the manufacturing sector in Turkey, rising oil prices also increase the cost of natural gas since the latter is priced according to the former. This would have a delayed effect on future productions costs.

To help make Turkish exports more competitively priced, the central bank cut the benchmark interest rate in December and January, weakening the lira. Central bank Governor Durmuş Yılmaz said late last month the impact on the current account, the widest measure of trade in goods and services will start to be felt in the second quarter of the year.