Turkey faces inflation risk

ANKARA – Rising global oil prices could damage import-dependent Turkey’s fast-growing economy and widen an already large current account deficit, putting inflation and growth targets for 2006 at risk. Prices of benchmark Brent crude jumped 40 percent last year. The average price for US light crude oil futures also hit $56.70 a barrel in 2005, the highest yearly average since trading began on the New York Mercantile Exchange in 1983. Analysts say prices could rise further this year because of escalating tension between oil giant Iran and the West over Tehran’s nuclear program and internal conflicts in producer Nigeria, which could disrupt Turkey’s fragile economic balances. Turkey has successfully brought its economy back to growth with help from the International Monetary Fund after a severe financial crisis in 2001. Inflation is sharply down, foreign investment is returning and consumer confidence is stronger. But the IMF, Ankara’s top lender, has said a gaping current account deficit raises the country’s vulnerability to external shocks and global liquidity conditions. «If oil prices rise further, then a serious problem may emerge on the current account deficit and there are not many measures that can be taken against this,» said an economic official, speaking on condition of anonymity. Turkey neighbors oil-rich Muslim countries such as Iran and Iraq, but itself is heavily dependent on imported energy to feed expanding manufacturing industries such as automotives, electronics, white goods and textiles. The government expects a 2006 current account deficit of 5.8 percent of gross national product. It revised its projection for 2005 to 6.2 percent from an original 4.5 percent. «We expect Turkey’s total oil bill to rise by 35 percent to $28.5 billion in 2006, and this will raise the ratio of the current account deficit to GNP by 1.8 percentage points,» said Raymond James chief economist Ozgur Altug. Official data show that Turkey paid $8.6 billion for crude oil in 2005, up 41.9 percent from the previous year. Turkey’s total imports last year were worth $116 billion. «The current account deficit increased by $6.5 billion in 2005 and this change parallels a $6.8 billion increase in oil, oil products and natural gas imports,» said Fortis economist Erkin Isik. The rise in the value of oil products occurred against a 2.2 percent decline in the amount of imported crude oil, Isik said. This shows the widening of the current account deficit is due mainly to the surge in oil prices, he added. A significant price rise will raise energy and transportation costs and endanger Turkey’s 5 percent inflation and economic growth targets, the official said. «If oil prices rise more than envisaged, this will create cost inflation,» the official added. The central bank has also voiced concern over high oil prices, which it says could imperil the 2006 inflation target. It has said that Turkish inflation is more likely to exceed than to fall below its 2006 target. Turkey cut inflation to below 8 percent in 2005 after decades of double- and triple-digit price level rises. Ankara has set its macroeconomic goals for 2006 under a three-year economic program backed by a $10 billion IMF standby accord on the assumption that crude prices will rise by 10-15 percent. High energy prices might also threaten the country’s 5 percent growth target by hitting consumers’ purchasing power. «Oil prices and a subsequent rise in taxes will lead to transfer of resources to energy and as a result will create contraction in the economy,» the official said. Despite tight IMF-backed fiscal discipline which aims to ensure price stability, Turkey’s economy grew by nearly 10 percent in 2004 and is widely expected to beat a 5 percent target for 2005.

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