Energy key to poor outlook for
Turkey By Robert M Cutler
MONTREAL - Turkey takes understandable
pride in its strong economic growth, which
explains in part the government's angry reaction
to the downward revision by Standard & Poor's
(S&P) this month of its ratings outlook for
the country.
Prime Minister Recep Tayyip
Erdogan responded: "This is totally an ideological
approach. No one can believe this. You cannot fool
Tayyip Erdogan. Why? Because I have a developing
country." Erdogan said Turkey might announce that
"it does not recognize S&P as a credit rating
institution".
S&P cited concerns about
external demand and terms of trade in revising its
prospects for Turkey's long-term foreign and local
currency sovereign credit. Rubbing salt in
Turkey's wound, S&P
on the same day upgraded
the ratings of neighboring Greece after Athens
completed a major debt writedown with private
creditors.
Turkey's economy "is fairly
closed, with exports accounting for a small share
of GDP (about 24% in 2011)", S&P said,
referring to gross domestic product. It noted the
current account deficit is large and highly
dependent on short-term financing from outside
Turkey. As a result, the country is particularly
vulnerable to sudden financial account outflows
and refinancing risks, S&P warned.
The
Turkish economy expanded 8.5% last year, and
according to the World Bank, its recent growth
rate is second only to China's. Since 1980, the
country, like China, been transformed, with GDP
surging to US$700 billion from $70 billion and
exports growing to $300 billion from $3 billion.
It is now the world's 16th largest economy.
Most recently, foreign direct investment
rose 25% in the first two months of the year, to
$1.7 billion in the period, while the Purchasing
Managers' Index in April stood at 52.3, up from
49.6 a month earlier. A figure over 50 indicates
economic expansion, and under 50 contraction.
Industrial production expanded 4.4% year-on-year
last month. In March, the foreign trade deficit
fell 25.3% year-on-year.
Even so, negative
signs are all too evident. Inflation climbed to
11.1% in April, the highest in three-and-a-half
years, while the foreign trade deficit for the
first three months of the year is down only 17.5%
from the first quarter of 2011.
A planned
Turkish health tax on cigarettes, which would
increase tobacco prices 24%, will further drive up
inflation, increasing the inflation rate by 1.2
percentage points this year, Bloomberg reported,
citing a report by BGC Partners' chief economist,
Ozgur Altug.
Turkey is also suffering from
Europe's economic woes, where austerity policies
are hurting demand. The European Union's share of
Turkish exports fell to 42.3% in the first quarter
from 48.3% a year earlier, while EU exports as a
proportion of Turkish imports declined slightly,
to 26.9% from 37.8%.
The country's current
account deficit, though down from $6 billion a
year earlier, was still a high $4.2 billion in
February, and while energy's share of the deficit
and of the trade deficit have declined in recent
months, oil and gas are still 20% of all imports
and 50% of the current-account deficit.
Gas accounts for 50% of Turkey's
electricity generation and 31% of the primary
energy supply (oil accounts for 28%). There is an
intimate relationship between Turkish growth and
the sustainability of energy supply. In
particular, Turkey is a relatively
energy-intensive economy, which takes a
disproportionate hit when global energy prices
rise.
Every $1,000 of Turkish GDP requires
0.26 ton of oil equivalent, whereas the average
for the 34 developed countries that are members of
the Organization for Economic Cooperation and
Development is 0.18. Energy demand and electricity
demand may continue to grow as much as 7% per year
as they have done recently.
The World Bank
estimates that a possible 27% in energy savings is
possible through retrofitting residential
buildings and industrial plants. This could save
the equivalent of over 100 million barrels of oil
per year, or 20% of the country's average annual
imports.
The economy will also gain if the
proposed Trans-Anatolian Gas Pipeline (TAGP, also
called TANAP after its initials in Turkish) is
implemented, carrying natural gas from
Azerbaijan's offshore Shah Deniz deposit.
Azerbaijan is set to become the largest foreign
investor in Turkey as principal owner of the TAGP,
along with which it is also building petrochemical
complexes and associated infrastructure.
Despite the negative side of the economy,
aggrieved Erdogan is not alone in thinking S&P
wrong in its outlook.
"Turkey has not
defaulted [on its debt], was not subject to
financial restructuring and is a powerful country
with strong repayment ability," said RBS global
head of emerging market research and strategy
Timothy Ash, the comparison with debt-hit Greece
implicit.
"Certainly it deserves a better
grade ... Turkey continued fulfilling its
responsibilities [vis-a-vis its creditors] even
after the 2001 crisis. International markets
consider Turkey already at investment country
status. So one of these must be wrong, either the
markets or the credit rating agencies."
Last June, Saruhan Ozel, chief economist
of Turkey's Denizbank, noted that lenders received
higher returns in lending to countries with lower
credit ratings. (The lower rating indicates
increased risk.)
"For a lot of corporate
investors, countries like Turkey that are repaying
all their debts on time without any problems but
whose credit ratings are insistently kept below
investment grade are valuable. By lending to them,
they are making very good money," Ozel wrote in
the Zaman newspaper.
Dr Robert M
Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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