Troubled Turkey braces for gas hit
A rocketing gas price is bad news for Turkey, a big energy importer, which already has concerns around higher US rates and a strengthening dollar
Turkey, a major net importer of gas and energy, is facing severe economic challenges from the surge in gas prices, adding to the challenges it is already facing on inflation.
The central bank has been steadfastly holding to a policy of loose monetary policy, driven by president Recep Erdogan’s insistence, announcing a 100bp rate cut in September in spite of inflation of 19.6%.
Policymakers’ inability to get inflation under control is weakening confidence in the lira, which broke through TL9 to the dollar — a key
psychological barrier — earlier this week.
“The central bank has said it considers the recent increase in inflation has been driven by the transitory cost factors such as rising commodity prices,” said Ugras Ulku, head of emerging market Europe research at the Institute of International Finance. “But rising commodity prices could prove to be less transitory than the central bank reckons, adding to cost factors and making an already challenging inflationary picture worse.”
The surge in the gas price is hurting net importers. Antonio Cavarero, head of investment at Generali said: “Higher US rates, a possibly strengthening dollar and high energy prices are particularly hurting EMs that are net commodity consumers.”
There is scant possibility of let up. Caroline Bain, commodities economist at Capital Economics, warned that although the present surge in gas prices will recede as political tensions are resolved, the gas price will likely remain elevated.
“I can’t say we’re over the worst,” she said. “We had a long winter, then a summer with the highest temperatures ever. These extreme weather events result in increased demand for gas for heating and cooling. Scientists are warning that, with climate change, these weather events are likely to be more and more frequent.” these weather events are likely to be more and more frequent.”
In Europe, gas prices are currently €85 per megawatt. Bain forecasts €55 by the end of the year and €20 by the end of next year, compared to €2 at the start of the pandemic.
Sovereigns are typically insulated from these events to some degree by the fact that they procure gas through long term contracts. However, Turkey has several contracts for gas supply expiring this year, which it will have to renegotiate.
Turkey will likely shield its citizens from the effects of the gas price surge. The regulator sets consumer fuel prices, and has the capacity to reduce the tax component of the price, subsidising citizens’ fuel costs by forgoing tax revenue.
While this is expensive, Ulku was not concerned. “Turkey actually has a fairly small fiscal deficit,” he said. “It was 2.9% of GDP in 2019 and went up to only 3.4% in 2020. We’re forecasting it to be similar in 2021. That means Turkey has some fiscal space, which the government could use to lower taxes on imported energy. Lowering the tax wedge on energy prices could widen the fiscal deficit to near 4% of GDP without adding much to investors’ concerns, in my opinion.”
Despite its inability to bring down inflation, Turkey has no problem accessing foreign funding — yet. “Turkey, the government its private sector, and its banks, have no difficulty in borrowing from foreign investors,” said Ulku. “However, with every new concern about stability, the risk premium increases and drives up the cost of borrowing, which combined with the weakening currency, makes it expensive for Turkish borrowers to service those debt liabilities over the medium term.”