Ozgur Altug Comments: Russia Crisis Undoes Oil Benefit as Trade at Risk: Turkey C redit

December 19,2014, Bloomberg News

Russia’s crisis is turning Turkey from a key beneficiary of plunging oil prices into one of this month’s biggest victims.
Falling prices have increased Turkey’s yields more than any other emerging-market debt in December and the lira has gone from one of the best performing currencies to this month’s worst after Russia’s ruble and the Colombian peso, according to data compiled by Bloomberg. The lira and bonds rallied in tandem with Russian markets in the last two days.
While cheaper oil has helped trim Turkey’s current- account deficit and inflation, crude below $63 a barrel coupled with sanctions on Russia may cost the country $10 billion in lost trade revenue, or 1.3 percent of gross domestic wwwuct, according to Istanbul-based BGC Partners. OPEC nations and the Organization of Black Sea Economic Cooperation, which includes Russia, purchase a third of Turkey’s exports.
“The level of petroleum and contagion effect of Russia have started to dominate,” Ozgur Altug, an economist at BGC and author of a report titled “Russian Horror Story,” said by e- mail yesterday. “If we expand the analysis to all commodity- exporting countries and assume that they will have similar problems in the coming period, the economic impact of such a disaster scenario to Turkey could go up to $20 billion.”

Fewer Tourists

Russia is the fourth biggest buyer of Turkish goods, importing about $7 billion-worth in 2013, statistics office data show. More than 4 million Russians traveled to Turkey – 3 million of them flying directly to Antalya on the Turkish Mediterranean, according to official tourist data for last year.
Only Germans paid more visits.
Members of the Organization of Petroleum Exporting Countries and the Black Sea trading bloc bought $51 billion of Turkey’s total $152 billion of exports in 2013.
These numbers may fall as the ruble’s 46 percent depreciation against the dollar and 42 percent slump versus the lira this year make Turkish goods and vacation resorts more expensive to Russians.
In 1998, when the ruble plummeted 75 percent to the dollar and the nation defaulted on its sovereign debt, Turkish exports to Russia fell 35 percent, Altug said. A comparable crisis now could cost Turkey $3.5 billion in lost Russian tourist revenue,
$3.7 billion from fewer cross-border or shuttle trades, and $2.5 billion in direct exports, he said.

Pair Trade

The lira rallied 0.7 percent against the dollar yesterday as of 6:00 p.m. in Istanbul, as the ruble and oil gained, and the Federal Reserve spurred markets by saying it would be “patient” on raising interest rates next year. The yield on Turkey’s 10-year bonds fell 40 basis points to 8.12 percent, the most in more than a year. Yields are still 38 basis points higher this month, the biggest increase among 25 emerging markets tracked by Bloomberg, and the lira is 4.5 percent weaker.
“For Turkey, lower oil prices still benefit external balances and inflation,” Erkin Isik, a strategist at Turk Ekonomi Bankasi AS in Istanbul, said by e-mail yesterday. “When the dust settles, I think the Russia-Turkey pair trade will still be valid as long as oil prices remain subdued.”
Plunging commodity costs are likely to reduce inflation from 9.2 percent in November, central bank Governor Erdem Basci told the parliament yesterday. They could also help narrow the current-account deficit to 3.9 percent of GDP next year from almost 10 percent in 2011, JPMorgan Chase & Co. said in a Dec.
12 report. Turkey imports about 90 percent of its oil.

Trade Dynamics

Finance Minister Mehmet Simsek said in a Dec. 2 interview in London that lower energy prices removed any reason for investors to consider the economy “fragile,” a label assigned to five countries including Turkey by Morgan Stanley last year.
“I see more risks than benefits associated with the low oil prices,” Burcu Unuvar, a lecturer at Yasar University in Izmir and a former economist at Is Investment in Istanbul, said by e-mail yesterday. “Our trade partners will be hurt by low oil prices. This will in turn hurt the trade dynamics of Turkey.”