Oil and economic crisis
Turkey has been experiencing a serious and protracted economic crisis. The New Economy Program (NEP), a roadmap developed by the Ministry of Finance and recently shared with the public, was prepared in an attempt to mend the effects of the crisis and solve the economy’s woes.
The program, which covers the years 2019 to 2021, aims to restore the imbalances in the economy within three years. According to the program, inflation will be reduced to single digits by 2021. The unemployment rate, currently at 10.8 percent, is projected to grow between 2018 and 2020 before settling in 2021. GDP growth, which was 7.4 percent in 2017, will fall below 4 percent by 2021, and will then increase to 5 percent in 2021 with the support of policy measures.
Then there is the current account deficit, the weak spot of the Turkish economy.
Energy at the heart of CAD targets
According to the NEP, the current account deficit, which was estimated at $50 billion in 2017, will be reduced to approximately half that amount by 2021. Thus, the ratio of current account deficit to GDP (5.6 percent in 2017) will decrease to 2.6 percent in 2021. This target is extremely important for the success of the government’s program. Should the current account target be missed, the overall success of the program will also be affected significantly.
Energy imports, which are the most important component of Turkey’s current deficit, will undoubtedly be the determining factor. Energy import targets are mentioned specifically in the Ministry of Finance program, with overall imports targetted to remain stable – within the $43 billion to $46 billion range – from 2018 to 2021.
Imports unl kely to rema n stable
In reality, energy imports are unlikely to remain stable. While GDP growth is projected to vary, energy consumption and therefore energy imports may be expected to be slightly lower as we experience lower growth rates than in previous years. The government aims to set clear targets on energy imports in order to reduce the current account deficit and close the gap with domestic and renewable resources. However, the fact that domestic and renewable energy targets may be hampered – in particular by the reluctance of investors to support domestic coal production – is one of the most important risks the program may face.
O l pr ces trend ng upwards
A greater risk for Turkey comes from energy prices. In addition to setting energy import targets, the NEP includes oil price forecasts which fall closely in line with the predictions of the Energy Information Administration (EIA) of the US Department of Energy. According to those forecasts, the average barrel price of Brent oil is projected to be $72.8 in 2018, $73.2 in 2019, $69.7 in 2020, and $67 dollars in 2021.
However, these estimates have already begun to be revised and the oil price currently stands at between $80-85 at the time of writing. The International Energy Agency has pointed out an upwards trend in global oil prices and clearly expects an increase in the medium term. Global oil demand is increasing and OPEC has proved reluctant to increase production. Meanwhile production is also down in Venezuela. Although there have been reports that Saudi Arabia and Russia have agreed to increase production through the September to December period, there has been little reflection
of this in the oil price.
The threat of U.S. sanct ons
A further concern arises from the sanctions that will be imposed by the US on Iranian oil exports beginning from November. This factor is almost certain to pull up oil prices even more. Prices have fluctuated wildly over the past ten years, reaching highs of $145 and lows of $26 a barrel; it would be no great surprise to see oil prices climb above $100 a barrel.
Should the $100 a barrel figure be exceeded, there is consensus that the global economy, and especially the rising economies, will be significantly affected.
Turkey is at the forefront of those countries at risk. When rising oil prices also trigger natural gas and imported coal prices, it is inevitable that Turkey’s economy – which is highly dependent on energy imports – will feel the strain.
A $100 a barrel oil price is would be the critical level for Turkey. Indeed, a close examination at the NEP shows that with oil prices above $ 100, it would be extremely difficult to achieve any improvement in the current account balance on which the government’s program is partly based.