S&P economists interpret the impact of the Russia-Ukraine crisis on the Turkish economy

►MAXIM RYBNIKOV, THE EMEA REGION COUNTRY RATING DIRECTOR

The current escalation taking place between Russia and Ukraine presents upside risks. Pre-pandemic, in 2019, 16% of total visitors to Turkey came from Russia, which represented the single biggest tourism source country for Turkey. If Russia were to halt tourism flows to Turkey, it would be dire for the country. Turkey rejected the decision by Russia to recognize the independence of two regions in Eastern Ukraine, but for now we don’t foresee Russia responding with tourism restrictions. We’ve seen previously that Turkey and Russia can cooperate in some spheres but oppose each other in others.Another risk could stem from economic degradation of both Russia and Ukraine, potentially eroding the purchasing power of tourists, but for now, this is more difficult to quantify. Turkey is a net energy importer and increases in commodity prices in the second half of 2021 already exacerbated high domestic inflation pressures. Hypothetical further rises in energy prices will make it difficult to control Turkey’s inflation levels. We estimate Turkey’s inflation to average 49.5% in 2022, the highest level of all states rated by S&P Global.

►TATYANA LYSENKO, LEAD ECONOMIST FOR EMERGING MARKETS

Inflation is approaching 50%, which is almost double the previous peak in October 2018. We believe this is largely because of domestic policy, but indeed high international energy prices exacerbate these trends. We expect annual inflation to rise given domestic policy developments such as a large hike in the minimum wage, and rising inflation expectations amid deeply negative real interest rates. Given recent developments in commodity markets, inflation could rise even higher. Energy price inflation alone contributed nearly five points to the annual increase in consumer prices in Turkey. January saw a spike in regulated electricity and gas prices. Rising energy prices are pushing up inflation globally and Turkey will continue to face pressures from imported inflation, which will be reflected in domestic consumer prices. Turkey also imports intermediate goods for domestic production and exports. Rising prices for intermediate imports, including energy, coupled with TRY depreciation, have pushed producer prices up by over 90% in January. As there tends to be a lag between an increase in producer prices and an increase in consumer prices, upward pressure on consumer prices will likely persist in the coming months. Turkey’s overall macroeconomic trajectory remains uncertain amid a lack of clarity on the direction of its economic policy. This includes monetary policy. It is striking that forecasts vary widely regarding Turkey’s policy rates for this year and next – it ranges from below 14% to 25-30%. A median forecast, however, is for the key rate to remain unchanged at 14% until the end of 2022. Sharply different scenarios are possible for interest rates, for TRY, and ultimately for economic growth.