Medyada
Oil Rout Is Great for Turkey as Simsek Sees End to Label

Mehmet Simsek, Turkey's finance minister, poses for a photograph following a Bloomberg Television interview in London, U.K., on Tuesday, Dec. 2, 2014. While emerging-market nations from Latin America to Russia suffer from declining commodity prices, Turkey’s finance minister is celebrating a streak of good luck as oil plunges further into a bear market. Photographer: Matthew Lloyd/Bloomberg.

While emerging-market nations from Latin America to Russia suffer from declining commodity prices, Turkey’s finance minister is celebrating a streak of good luck as oil plunges further into a bear market.

“It’s great, not good, absolutely great,” Finance Minister Mehmet Simsek said in an interview in London yesterday. “There are very few countries which benefit significantly, and Turkey is one of them.”

The 36 percent collapse in the price of a barrel of Brent crude this year will probably move Turkey off many watchlists and back onto “investors’ radar,” Simsek said. The slump helps the country, which imports most of its energy, by reducing external deficits, curbing inflation and boosting growth, he said.

“The reason why most analysts, when they talk about fragility, if there’s any reference to Turkey, that’s mostly because we have a large current-account deficit,” Simsek said. “It’s not because of anything else.”

Turkey was dubbed a “Fragile Five” economy by Morgan Stanley last year because it risks a withdrawal of foreign cash needed to fund its current-account deficit. The shortfall could plummet to below 4 percent of gross domestic product next year even under a conservative scenario of oil prices averaging about $80 a barrel, Simsek said. That compares with almost 10 percent of gross domestic product in 2011, when Turkey’s deficit was the second-largest in dollar terms behind the U.S.

Oil’s Retreat

Each $10 decline in the price of oil yields a $4.5 billion to $5 billion drop in that shortfall, Simsek said yesterday. It also means a 40 basis-point cut in headline inflation and could boost growth in GDP by 20 to 30 basis points, he said.

Brent crude traded at $71.48 per barrel at 6 p.m. in London yesterday, compared with an average price of about $109 in 2013. The decline comes amid the highest U.S. output in three decades and signs of slowing demand growth. OPEC, responsible for about 40 percent of the world’s oil supply, resisted calls from members including Venezuela and Iran to reduce production to boost prices at a Nov. 27 meeting in Vienna.

Turkey’s government, however, isn’t planning on transmitting the retreat in commodity prices to consumers as it seeks to defend its budget balance, Simsek said.

Twin Deficits

“We’re not contemplating any reduction in taxes on petroleum products, absolutely not,” he said. “The worst thing to have in the current circumstances, when people expect some kind of normalization of monetary policy in the U.S., the last thing you want is a sizable current-account deficit combined with a budget deficit. That’s why we’ve been fiscally very prudent, and that’s been quite beneficial.”

At 33 percent, Turkey’s debt-to-GDP ratio is about a third of the European Union average. The budget deficit will probably be about 2 percent of GDP next year, according to the average of 26 economists surveyed by Bloomberg.

Turkey is seeking to benefit from European and U.S. sanctions on Russia, with the two countries agreeing on a 6 percent discount in natural-gas prices and a new pipeline during Russian President Vladimir Putin’s visit to Ankara this week. Turkey isn’t participating in the sanctions even as it condemns Russia’s annexation of Ukraine, Simsek said.

“We always cooperate when there is a UN Security Council decision, of course we have to, but we do also,” he said. “We need energy, and Russia is the main supplier and there’s nothing new about it.” Russia accounts for about two-thirds of Turkey’s natural-gas supply, he said.

Growth Risk

The yield on Turkey’s two-year notes rose two basis points yesterday to 7.42 percent, trimming this quarter’s drop to 256 basis points. Propelled by lower oil costs, yields may fall below 5 percent by the end of next September, extending the best return among 57 emerging- and developed-market peers, London-based RBS senior economist Tatiana Orlova said by e-mail on Dec. 2.

This indicates that for Turkey, lower oil will outweigh any concerns over U.S. monetary tightening as investors scour the world for growth, Simsek said.

“The last 18 months or so, the world has been focused a lot on managing liquidity risk in the face of tapering, global monetary normalization, stuff like that,” Simsek said. “But when it comes to managing growth risk, which in my view for the next decade will be the most important issue, the scarce thing will be growth rather than funding for growth. I think in that sense Turkey would be well-positioned to outperform.”

To contact the reporter on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

To contact the editors responsible for this story: Daliah Merzaban at dmerzaban@bloomberg.net; John Fraher at jfraher@bloomberg.net Stephen Kirkland

Picture: Erbil Balta for Monocle

03.12.2014