Dr. Nejat Tamzok
Turkey has been going through a serious economic crisis for a long time. The New Economy Program (NEP), which was prepared in order to be able to come out of this situation, where almost all economic indicators are negative, was recently shared with the public by the Ministry of Treasury and Finance.
With this program covering the years 2019-2021, it is aimed to restore the degraded balances in the economy by the end of the next three years.
According to the program, we will see the single digits in inflation again in 2021. The unemployment rate, which was 10.7 percent in 2017, can only be achieved in 2021, following higher rates in the years 2018-2020.
In the program, it is predicted that the Gross Domestic Product (GDP) growth, which was 7.4 percent in 2017, will be below 4 percent by 2021, and it can only be increased to 5 percent in 2021 with the help of measures to be taken.
In terms of the subject of our article, the part of the program that mainly concerns us is the current account deficit.
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According to the New Economy Program, the current account deficit, which was approximately 50 billion dollars in 2017, will be reduced to approximately half of this amount by 2021. Thus, the ratio of current account deficit to GDP which was 5.6 in 2017 will decrease to2.6 percent in 2021. The current account deficit is the weak spot of Turkey’s economy. Therefore, the set target is extremely important for the success of the program. When this target is missed, the overall success level of the program will also be affected significantly.
At this point, energy imports, which is the most important component of current deficit in Turkey will undoubtedly be the determinant. As a matter of fact, the program preparers must have been aware of this as they also mentioned the energy import targets in the program specifically. According to this, during the years 2018-2021, energy imports are targeted to remain stable between 43-46 billion dollars range.
Although energy imports are unlikely to remain stable while GDP growth varies in the same period, energy consumption and therefore energy imports may be expected to be slightly lower as we will experience lower growth rates than in the previous years. Setting clear targets in the program such as the energy import will be limited to reduce the current deficit and the gap will be closed with the domestic and renewable resources also supports this expectation. However, the fact that domestic and renewable energy targets may be hampered – in particular considering the reluctance of the investors on the domestic coal side- is one of the most important risks the program may face.
But the major serious risk for Turkey is related to the energy prices.
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In addition to the energy import targets for the period 2018-2021, the new Economy Program includes oil price forecasts for the same period and it is understood that the figures very close to the forecasts of Energy Information Administration of the US Department of Energy in September 2018 are used (Short-term Energy Outlook / US Energy Information Administration). According to this, the average barrel price of Brent oil is forecasted to be 72.8 dollars in 2018, 73.2 dollars in 2019, 69.7 dollars in 2020 and 67 dollars in 2021.
However, the estimates of the price of Brent oil’s barrel, which was in the range of 80-85 dollars when this article was written, have already begun to be revised. For example, in the statements made by the International Energy Agency, the upward trend in oil prices has been pointed out and it is clearly stated that an increase is expected in medium term. On one hand, the increase in global oil demand, on the other hand, the reluctance of OPEC to increase production and the production cuts in Venezuela – accordingly the risks arising in supply and demand balance – are among the reasons for this increase. Although it is reported that Saudi Arabia and Russia agreed to increase their productions in September-December period, the reflection of this development on oil prices has been limited.
The main concern arises from the sanctions that will be imposed by the US on Iranian oil exports beginning from November. This factor is almost certain to pull up the prices even more. Considering that prices have changed over a wide range between 26 dollars and 145 dollars in the last 10 years, it will not be a surprise to see prices above 100 dollars. If this figure is exceeded, there is generally accepted that the global economy, especially the risisng economies may be affected significantly.
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Turkey is at the forefront of countries to be affected. When rising oil prices also trigger natural gas and imported coal prices, it is inevitable that Turkey’s economy which is highly dependent on energy importation will further strain.
100 dollars per barrel is extremely critical level also for Turkey. Indeed, a closer examination at the New Economy Program shows that with oil prices above $ 100, it will be extremely difficult to achieve any improvement in the current account balance and hence program targets.
Ankara/October 2018