Iran war hits Turkey's fragile economy as investors flee following oil shock
The US-Israeli war on Iran is starting to weigh on Turkey's economy, as inflation continues to exceed expectations and Ankara faces both an outflow of foreign investors and a widening current account deficit.
Inflation was already on an unfavourable path before the conflict escalated. In February, consumer prices rose by 2.96 percent, pushing the 12-month average to 33.39 percent - far above the official year-end target of 16 percent.
An international banker, speaking on condition of anonymity, told Middle East Eye that foreign investors had rapidly pulled out of Turkey, selling an estimated $25bn to $30bn in assets since the start of the war in late February.
According to the banker, investors have preferred to hold cash in US dollars rather than remain exposed to Turkish assets, prompting the central bank to burn through foreign exchange reserves to preserve market stability.
Under governor Fatih Karahan, the bank has moved swiftly to intervene in the markets through several mechanisms.
Reports suggest it has spent around $25bn over the past 10 days, as volatility in energy markets, driven by fears over the closure of the Strait of Hormuz, rattled investors.
The central bank also halted its rate-cutting cycle this week, effectively setting the overnight lending rate at 40 percent in an effort to contain volatility.
Rising oil prices present a particular challenge for Turkey, which remains a net energy importer.
The banker MEE spoke to compared the current moment to the 1970s Arab oil embargo, which triggered a major global inflation shock and hit Turkey hard because of supply shortages and soaring import costs.
Soaring energy costs, spiralling inflation
Turkey’s current account deficit reached $6.8bn in January, a record high, driven largely by the trade deficit stemming from gold and energy imports. This came before the latest jump in oil and gas prices.
Economists warn that if oil prices remain around $100 a barrel, annual inflation could rise by an additional five percentage points, making it even harder for the government’s economic team to meet its year-end target.
Each $10 increase in the oil price widens Turkey’s annual current account deficit by an estimated $5.1bn. The roughly $30-per-barrel rise since the start of the year, if sustained, would add around $15bn to the deficit.
Iris Cibre, an economist, estimates that if natural gas prices average $63 and oil remains around $80 over the next three months, the current account deficit could climb to as high as $35bn.
Turkish Finance Minister Mehmet Simsek responded to the soaring oil prices last week by reviving a fuel tax mechanism, which cushions consumers from price spikes by sacrificing the government's special consumption tax. It is also a method to fight domestic inflation.
Experts also say the regional war, along with three separate Iranian missile attacks towards Turkey’s Adana province, could hit tourism revenues if travellers perceive the threat as creeping closer to popular summer destinations on the country’s coast.
Timothy Ash, a longtime observer of the Turkish economy and an international investor, said the central bank should have raised rates this month given the scale of geopolitical risk.
“The extreme geopolitical risks now emanating from the war in Iran should have encouraged further policy tightening - a rate hike - in my view,” he wrote.
“This crisis still appears to be on an escalation path. The Islamic Republic appears to have found Trump’s Taco - ‘Trump Always Chickens Out’ - choke point, and is likely to prolong the conflict until it receives assurances of no further attacks, sanctions relief and economic assistance.”
This article was sourced from Middle East Eye.
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