Lira’s inflation could ride out oil hike
ISTANBUL – Recent good inflation figures have raised hopes Turkey may yet approach or even undercut a year-end CPI target of 35 percent, providing the effects of Middle Eastern crisis are contained, especially higher oil prices. Turkey imports more than 90 percent of its oil and is vulnerable to oil price rises at a time when it urgently needs to stimulate industry and end its worst recession since 1945. Iraq announced on Monday it was halting oil exports for a month in protest at Israeli action in Palestinian territories, driving oil prices higher. Many analysts, however, feel enough factors are working now in Turkey’s favor to cushion the immediate impact of rises. «There might be trouble if the oil price stays at high levels for a long time. But we think it is not very likely now,» said Tolga Ediz, an analyst at Lehman Brothers. Iraq’s move helped push benchmark Brent crude oil prices up by $1.04 to $27.03 a barrel on Monday, close to a six-month high, before they came down to around $26.55 early on Tuesday. Since hitting a 39-month high of 73.2 percent in January, Turkey’s year-on-year consumer price (CPI) inflation has come down steadily over the months of February and March. «There are good chances that Turkey may find itself with a much lower inflation rate than everybody is predicting,» Leonardo Leiderman, head of Emerging Markets Economics at Deutsche Bank, told Reuters in a recent interview. Consumer prices rose 1.2 percent last month, well below a market expectation of around 2 percent, pulling the year-on-year rise down to 65.1 percent from 73.1 in February. «If the positive trend continues, I will not be surprised to see Turkey with an inflation rate lower than 35 percent at the end of the year,» Leiderman said. Emin Ozturk, an economist at Bender Securities, said: «CPI inflation may see a low of 29 percent at the end of this year on assumptions which are not very over-optimistic.» He assumes monthly average inflation, excluding food, will run at 2 percent in April-September and 2.5 percent later. If so, the CPI’s food component, which fell 0.5 percent in March, will be around zero percent a month in April-September. Economists attribute the fall in inflation mainly to a recovery by the Turkish lira in recent months and a recession that shrunk the economy by over 9 percent last year. The latter is in itself a severe problem for Turkey, and there are no signs yet of a return to growth. Quelling inflation is a major part of a multibillion dollar IMF rescue program and is essential to any hopes of stimulating foreign investment in Turkey. But hitting inflation targets while the economy stagnates or contracts would be an empty victory. «Inflation comes down as the lira anchors firmly and domestic demand remains suppressed in tight fiscal jackets,» said the brokerage house FinansInvest, which revised its end-year CPI forecast down to 43 percent from 50 percent. The good harvest forecast may support the downward trend. There are some other factors to boost optimism, analysts say. «In the months to come, especially year-on-year, numbers are destined to fall significantly due to past-year effects, stronger lira and weak demand,» Societe Generale’s Istanbul branch said in a report. Amid a severe crisis, CPI rose 10.3 percent in April 2001, 5.1 percent in May and 3.1 percent in June last year. «We now expect the year-end CPI to fall to 36 percent against our previous estimation of 55 percent,» SocGen said. The central bank, which cut its key overnight rates by a further three percentage points on Monday, expects the downward trend in inflation to continue in coming months. It said in a statement on Monday that rising oil prices posed a risk. Some analysts, however, are not too worried over the present sharp rise in prices. «The strong lira should mitigate some of the impact of the rise in the dollar price of oil and it remains to be seen whether the rise in oil prices will prove to be a spike rather than a plateau,» said Tolgaz Ediz of Lehman Brothers. Leiderman of Deutsche also sees no threat from the rise in world oil prices for Turkey’s inflation struggle, saying it would only be concerned if the oil price went as high as $40 a barrel. «As Deutsche Bank, we expect this increase in prices to be temporary. We expect there will some supply response by the OPEC and non-OPEC members in the second half of the year,» he said in a weekend interview. A rise of one dollar in world oil prices does not by any means mean a one-dollar rise in local pump prices since taxes and other charges account for 70 percent of the retail price. These charges are mostly fixed rather than variable. Therefore, the adverse impact will be limited, Ozturk said. State-run refiner Tupras said the suspension would not hurt Turkey because it had not taken oil via the Iraqi oil pipeline which ends at southern Turkey since November 2000.
