Addendum to Hurriyet column, A Phantom MENAce to Turkey

While my readers from Turkey cannot access the blog, I am continuing with the regular posts, in the hope that they will see it through Twitter or Facebook. And as promised, here's the addendum to this week's Hurriyet Daily News & Economic Review column.

First, while the impact of the MENA turmoil on the overall economy may be limited, the firms operating in Libya suffered a lot of property damage. Besides, some regions are bound to be hurt more by others. For example, there is a lot of anecdotal evidence, as well as some hard data, that Southeastern Turkey was not very badly affected from the 2009 crisis because of exports to MENA.

But at the macro level, one easy way to see the impact of the turmoil would be to look at the deterioration in the terms of trade. Unfortunately, terms of trade come with a lag of about 40 days or so for Turkey, but the folks at Nomura track these figures real-time for a number of countries. In a recent research note, they discuss the effect of the turmoil on the terms of trade, as well as provide the Bloomberg codes for their indices and a link to their methodology.

One important point I could not touch upon due to space limitations in the column was the impact of the turmoil on the banking sector: Turkish construction companies usually need letters of guarantees around 15 percent of the total project value. So applying the magic $15 billion number, we see that exposure of Turkish banks from this channel is slightly over $2 billion. This would be substantial increase to banks' gross NPLs, which are just short of TL20 billion, but as a percentage of total loans, it would be a mere 0.5-0.6 percent increase... BTW, a post to the Paratrend google group quoted the Eurobank Tekfen CEO saying that the banking sector risk to North Africa was around $2 billion. I would assume he would know his own business better than me, so it seems my guesstimate was a bit off, but even better...

Another impact would be on monetary policy. You could argue that if oil prices cause strong second-round effects on inflation through cost increases, the Central Bank might have to start raising rates earlier than it plans to. But on the other hand, to the extent that the turmoil leads to outflows and weak global demand, it could also lead the Bank to hold for longer. So the effect of the turmoil on monetary policy is "it depends", which is, by the way, the right answer to all the questions in the first round of the IMF's job interviews- to get an offer, the right answer is "it depends on the elasticities" in the second round:)...

Finally, since I am no political scientist, I will refrain from any comments on the changes in the region on Turkey in the long-run, even though I have been called an HBB (know-it-all) before. Here, you could make all sorts of arguments, that so-called experts are making on live TV debates for the past few weeks, such as how Turkey could be a model for the region, how booming middle classes in these countries could be a boon to Turkish exporters, and son on and so forth- Gosh, another of these extra-long sentences that my editor friend hates, she is going to strangle me:)...

As for oil prices, I am duly providing a couple of free-access FT articles: Here and here...