Rising oil prices threaten to taint year-end targets
An ongoing spike in global oil prices is harming Turkey’s growth and account balances given the scope of the country’s dependency on foreign crude sources. (Photo: Today's Zaman)
Turkey may see year-end economic targets set by a government medium-term economic program (OVP) deteriorate as an ongoing spike in oil prices takes a toll on the energy-dependant country's balance of payments, observers argue.
Fears of a new oil shock [the latest being last summer's Libya turmoil] that could endanger the economic recovery, making things even worse on the struggling global stage, spread across all markets as oil prices climbed to a nine-month high of $125 a barrel on Friday. Oil prices fell below $109 a barrel Monday in Asia after a 14 percent gain this month, while Brent crude was traded at $125.67 per barrel in London. Observers had earlier warned rising oil prices could also harm growth and account balances in such countries as Turkey, which is dependent on foreign crude oil sources. Since it must import almost all of its oil needs, Turkey's current account balance is highly sensitive to changes in energy prices. The country's dependency on foreign energy continues to increase in parallel with its relatively faster economic growth, and it is a long term prospect for Turkey to alleviate this dependency with some swift measures. An increase in crude from $108 per barrel to $124 costs Turkey an extra $6.4 billion.
We are sorry to see external problems hurt Turkey’s relatively more profitable oil procurement deals with its trade partners,” Energy Minister Taner Yıldız said last week.
The ruling Justice and Development Party’s (AK Party) OVP envisages 4 percent growth in the economy this year over the preceding year while the program estimates year-end inflation at 5 percent. Speculation indicates oil prices in international markets could increase by as much as 20 to 25 percent in the first quarter, if the current tension between Iran and the US continues, hence nearing 2008 levels. One critical concern for Turkey is that rising oil prices will also drive up natural gas prices, which are determined by the former. This could directly increase electricity production costs, putting a burden on the country’s industrial manufacturing. Natural gas has the largest share of Turkey’s electricity generation costs among other major resources at 47 percent, Energy Ministry data shows.
Evaluating the possible negative impacts of higher oil costs on Turkish markets, İbrahim Öztürk points to a structural problem: an ever-widening current account deficit (CAD). “Normally in Turkey crude prices of higher than $70 per barrel and more than 7 percent growth in gross domestic product (GDP) is enough to keep CAD high. … With the current increase in crude prices, CAD will remain to pose a significant risk even if this year’s growth is less than 5 percent,” he explains. Another problem, according to Öztürk, is a lack of energy productivity, particularly for the main sectors, which are highly dependant on energy imports for manufacturing. “Turkey hovers at the bottom in the list of countries that consume the highest amount of oil in Europe. The country spends five times more on energy for its industrial production when compared to the European average.” Öztürk thinks this indicates Turkey must first address measures to upgrade to an energy-efficient industrial manufacturing model.
As regards inflation expectations, Öztürk says the central bank will have to revise its year-end inflation targets. The Central Bank of Turkey, which estimates year-end inflation at 5 percent, says,“Between the downward impact of expected lower growth this year and the pressure of higher energy costs, inflation will hover around 7 and 8 percent by the year-end.”
Consumers Union President Nazım Kaya told Today’s Zaman that the government should reduce private consumption taxes (ÖTV) on oil by 20 percent before markets can gain immunity to external shocks. Around 70 percent of the money consumers pay at the oil pump goes to ÖTV.
Arguing that some suppliers could try to take advantage of surging oil prices and increase prices, Kaya says even if demand declines prices could continue to rise. “We are concerned that this will lead to serious increases in commodity prices. The government should realize that the high cost of energy is the main trigger behind high inflation rates.”
Seyfettin Gürsel agrees that the government will have to revise the year-end targets stipulated in the OVP. Although it is too early to comment on whether the ongoing price hikes will continue in the coming months, he argues it is now almost certain that the hikes hurt the balance of payments. “This is an unprecedented development, and the government calculated the global crude prices at around $100 per barrel through the year-end. But the latest price hikes in oil means a serious cost burden, and they will have no option but to revise the targets.” His statement indicates the government should also reset oil price expectations at higher figures now.
“The central bank’s year-end inflation target is 6.5 percent, and it could go up at least one percentage point. … This could push gross domestic product (GDP) growth one point lower [than 4 percent]. The thing is it is not due to a problem in supply-demand chain; it is led by foreign policy conflicts,” he explained.Increasing international pressure on Iran would lead the Islamic Republic to block oil traffic from the Strait of Hormuz. This fear has recently been coupled with loss of production from South Sudan, Yemen and Syria. Recalling that the International Energy Agency (IEA) last year opted to release emergency stocks following a decline in supply from Libya -- then strangled by domestic clashes -- Reuters’ John Kemp says [in a report published Monday] global policymakers will have to do the same this year. He says the problem is that “they are reluctant to admit there is a serious shortage of crude and order a stock release because it would mean admitting they badly miscalculated the impact of sanctions.” Last summer’s release of crude stockpiles led to an 8 percent decline in prices.