Not one shot fired yet, but Turkish finances already hurt; fears over high oil import bill

ANKARA – An imminent war in neighboring Iraq is already taking its toll on the Turkish economy, as rising oil prices threaten the country’s drive to cut inflation. Turkey has long opposed war, fearing its economic impact, and on Thursday Parliament voted to delay until today a debate on whether to allow the deployment of thousands of US troops here for a possible attack on Iraq. Washington is offering a multibillion-dollar package to shield its ally’s weak economy from the winds of war, but some analysts say the impact on the economy could be more profound than generally accepted. A recent rise in inflation suggests the damage is already wrought. War in Iraq could hit the Turkish economy in several ways, increasing its oil import bill and public finance needs, while depressing growth and undermining its balance of payments by cutting tourism receipts. «Turkey being import-dependent in energy reflects in input costs, both directly and through derivative products,» said Ahmet Akarli of Finans Invest. «We will have to accept surprise inflation prompted by external factors.» Turkey imports more than 90 percent of its oil and is vulnerable to price rises at a time when it needs to stimulate industry as well as slash chronically high inflation. The indexation of domestic oil prices to global prices and tight fiscal policies implemented under a $16 billion IMF loan deal leaves no room for the government to absorb higher oil prices in the domestic market. The government aims to slash consumer price inflation (CPI) to 20 percent and wholesale price inflation (WPI) to 16.2 percent by the end of this year from 26.4 percent and 32.6 percent in January respectively. Inflation, which reached into three figures in the 1990s, is a major deterrent to urgently needed foreign investment. Oil price worries However, crude oil and public sector price rises are expected to have stoked inflation in February, with WPI expected to reach a monthly 3.7 percent, according to a Reuters survey. «A 10 percent rise in oil prices increases WPI by 1 percent,» said Haluk Burumcekci, chief economist at Disbank. «Rising trends in imports and raw material inventories indicate risks about future inflation.» Oil prices shot up to a 12-year high on Thursday when US light sweet crude oil futures rose as high as $38.74 per barrel. It was the highest oil price since Iraq’s invasion of Kuwait in 1990 when crude peaked at over $41. Oil prices rose 12.6 percent in December and 10.2 percent in January according to an IMF commodity index which comprises equally weighted average prices of UK Brent, Dubai and West Texas Intermediate. In the same period, state manufacturing sector prices, which reflect rises in input costs in state-run industries, rose 2.8 percent in December and 8.5 percent in January, reflecting higher global oil prices. Merrill Lynch said in a recent oil market report that the low level of global oil stocks might prevent prices from falling even after the war in Iraq. The key difference between today and the 1991 Gulf War is that inventories are now 123 million barrels below normal compared with 125 million barrels above normal prior to Iraq’s invasion of Kuwait, the report said. Therefore, Merrill Lynch raises its 2003 oil price forecast to $28.5 per barrel on a West Texas Intermediate and to $26.5 per barrel on a Brent basis, from $24 per barrel and $22.5 per barrel. Turkey’s estimated oil import need for 2003 is estimated by analysts at 25 million tons. Under this scenario, Turkey’s crude oil import bill would vary between $4.8 billion and $5.2 billion, putting more burden on the budget which is required to produce a primary surplus to help manage the country’s debt load. Turkey’s oil import bill was around $4 billion in 2002. The tensions over Iraq are also delaying investment and consumption decisions needed to boost the economy as the government has set its year-end growth target at 5 percent. «In the war environment and with high real interest rates, there are no signs of rising domestic demand and investment,» an economist said. The worries over 2003 growth are evident in a central bank survey where year-end growth forecasts slipped to 4.2 percent from 4.3 percent.

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