Monday, February 28, 2011

Weekly Hurriyet Column: A Phantom MENAce to Turkey

Below is  my Hurriyet Daily News & Economic Review column for this week, which you can also read at the Daily News website. As for the title, I managed to squeeze in both a wordplay and a movie reference. BTW, my friends at Global Source / Turkey Data Monitor came up with the same wordplay in their monthly, just a few hours after my column. As they say, smart people may not think alike, but they at least think of similar titles:)...

I will have an addendum as usual, where I will expand on some points I raise the column. But that will have to wait for a day or so... Anyway, on to the column:

With winds of change blowing in the Middle East and North Africa, or MENA, the Turkish media has focused on the impact of the turmoil on the domestic economy.

With all attention on Libya, the magic number is $15 billion. That’s the total value of the projects undertaken by Turkish companies in Libya during the last four years. Although the outstanding bills from these projects are not available, revenues from construction services abroad amounted to $1 billion last year.

Accounting for 15 percent of the revenues, Libya is in second place after Russia. All in all, MENA accounts for over a third of Turkey’s construction income, but the substantial discrepancy between the size of the projects and revenues has led me to believe that most of the revenues of the Turkish construction companies’ overseas businesses are retained abroad. Therefore, while some companies could face difficulties, the overall impact on the economy would be limited.

The same could be said of exports. Although just over one-fourth, or $30 billion, of Turkey’s exports were directed at MENA last year, the countries currently in turmoil received less than 5 percent of the total. Similarly, foreign direct investment from the region is negligible. Of the $7.2 billion that has come from MENA since 2002, nearly one half is from one item, the sale of Türk Telekom.
The phantom menace to Turkey lies in higher oil prices. I should tell you outright that I will not attempt to predict this year’s average oil prices. The forecasts out there go all the way from $100 to $220, and for every compelling analysis on why the oil shock is transitory, there is another one that argues it is permanent. One more guesstimate from a non-expert will not add much in this highly uncertain climate. Instead, I’ll go over the effect of oil price increases on the Turkish economy.

First and foremost is the impact on the current account deficit. The rule of thumb every Turkey economist knows is that a $10 increase in the oil price raises the country’s current account deficit by $4 billion. Working with percentages for a change, I found that the current account deficit would increase by 0.4 percent of GDP in response to a 10 percent rise in oil prices.

As for inflation, I am somewhat more pessimistic than the Central Bank: Although Gov. Durmuş Yılmaz recently noted that a $10 increase in oil prices would add 0.4 percent to inflation, I got the same number through a 10 percent rise.On the positive side, I found that the budget balance would improve by 0.4 percent of GDP as result of a 10 percent increase, mainly through import duties. When I integrated all these results into a growth equation, I surprisingly found a negligible effect.

But my models, and others for that matter, are limited in two important ways: First, they ignore the impact on the rest of the world. For example, if higher oil prices increase global inflation or decrease global demand, Turkish inflation and growth are sure to be negatively affected as well.

Second, and more importantly, while these models can handle a reasonable rise in oil prices, they would break down completely in the case of a huge oil shock, as all of the statistical relationships would fail. Then, Turkey would import much fewer barrels of oil and contract substantially, as would the rest of the world. This is the stagflationary scenario feared by Pimco’s Mohamed El-Erian, among others.

Otherwise, my basic predictions, all of which involve the number four, should be a good proxy for the impact of the MENA turmoil on the Turkish economy this year. In honor of the number of goals yielded by my beloved team in each of the last three games, I have decided to call this the “Beşiktaş rule.”

Emre Deliveli is a freelance consultant and columnist for Hürriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at

No comments: