Cablegate: Turkey's Policies Moderate Impact of High Oil

This record is a partial extract of the original cable. The full text of the original cable is not available.

081443Z Nov 05





E.O. 12958: N/A
SUBJECT: Turkey's Policies Moderate Impact of High Oil


This cable has been coordinated with Congen Istanbul.

1.(SBU) Summary: With Turkey importing over 90% of the oil
it consumes, higher energy prices have aggravated Turkey's
large and growing current account deficit. A recent
Standard and Poor's analysis named Turkey as one of the most
vulnerable Emerging Market countries to higher energy
prices. However, Turkey's high taxation of petroleum
products, full pass-through of market prices and trade and
investment ties with energy-exporting countries all mitigate
the impact. End summary.

--------------------------------------------- ------
High Oil Prices Exacerbate Current Account Concerns
--------------------------------------------- ------

2. (SBU) As Turkey's other vulnerabilities--particularly its
debt situation--have moderated, economists' concerns have
increasingly focused on the large and growing current
account deficit. Whereas the deficit was 5.1% of GDP in
2004, it is expected to rise to over 6% of GDP in 2005,
despite real GDP growth of about 5%.

3. (SBU) The principal cause of the ballooning current
account deficit is widely considered to be the flood of
portfolio investment inflows, which drive up the exchange
rate. The appreciation of the lira causes imports to grow
faster than exports. The advent of sharply higher energy
prices in 2005 has substantially added to Turkey's import
bill, aggravating the current account deficit problem.
Comparing January through August 2005 to the same period in
2004, out of a roughly $12 billion increase in imports,
nearly $4 billion stemmed from higher energy imports (crude
oil, petroleum products and natural gas). The dollar value
of energy imports grew by nearly 50% from the same period in
2004. This result is hardly surprising: Turkey imports
about 91 percent of its oil and a higher percentage of its
natural gas. Looking at crude oil imports in isolation, the
increase in the dollar amount was entirely due to higher
prices: imported crude volumes actually declined slightly.

--------------------------------------------- -
Standard and Poor's Report Highlights Turkey's Vulnerability
--------------------------------------------- --

4. (SBU) Turkey's relative vulnerability to high oil prices
was highlighted in a Standard and Poor's Report October 11
on the impact of higher oil prices on Emerging Market
countries. Among these countries, the ratings or outlooks
for only Turkey and Pakistan were considered threatened by
current energy prices, with the source of vulnerability
these countries' "external positions" (read current account
deficit). The singling out of Turkey created a bit of a
stir in Turkish financial markets.

Fiscal Impact Neutral to Positive

5. (SBU) However, a closer look at the report and other
sources shows that the risks have been substantially
moderated by other factors. First, from a fiscal
standpoint, increased energy prices will not lead to an
Indonesia-type situation, since there are no subsidies on
petroleum products, natural gas or electricity. Nor are
petroleum product prices administered. One of the IFI-
sponsored reforms in Turkey is a complete pass-through of
petroleum product market prices to the retail point of sale.
Retail sales are also heavily taxed: one report on global
taxation of petroleum products placed Turkey as having the
eleventh highest tax burden on gasoline and diesel sales in
Europe. When compared to Asian countries, Turkey had the
second highest level of fuel taxation in all of Asia, after
Hong Kong. The S & P report acknowledges that Turkey's
fiscal situation is unlikely to be hurt by higher oil
prices: although Turkey reduced the rate of its ad valorem
Special Consumption Tax (SCT) on petroleum products in 2005,
revenues from petroleum taxes increased because of the
increase in the underlying prices,.

--------------------------------------------- ---------
Pass-through of Market Prices Allows a Demand Response
--------------------------------------------- ---------
7. (SBU) The full pass-through of market prices combined
with the high level of taxation, has another benefit besides
its positive fiscal effects: it allows market forces to work
and produce a demand response. Though energy demand tends
to be inelastic around the world, the full pass-through is
likely to produce greater efforts at conservation and
investment in alternative energy sources over time. The
full pass-through is a relatively recent reform: it dates
from the beginning of 2005.
Inflationary Impact
8. (SBU) Higher oil prices have made the Central Bank's
disinflation campaign that much harder. They were a factor
in the Central Bank's slower pace of rate cuts in recent
months, following its steady rate-cutting in the first half
of 2005. The inflationary effects of higher oil prices seem
manageable, however. For example, Morgan Stanley's Turkey
analyst estimates their cost at 1-2 percentage points in the
inflation rate this year, concluding higher energy prices
will cause a slowdown in the pace of disinflation, not a
burst of inflation.

Recycled Petrodollars Coming to Turkey?

9. (SBU) There are two other potentially mitigating factors
arising from Turkey's proximity to-and relations with-the
energy-exporting countries of the Middle East and former
Soviet Union. First, Turkey typically is able to access
energy prices slightly lower than those quoted on global
commodity exchanges: in 2004, Turkey's average crude oil
import price was $34.50 versus $38 for Brent Crude. Turkey
is also able to access relatively inexpensive natural gas
from Russia.

10. (SBU) The other mitigating factor, though harder to
qualify, may end up being more important: there are signs
Turkey is benefiting from increased trade and investment
ties with cash-rich oil-exporting countries. Turkey's
economic ties with Russia are increasingly important, and
not just as a result of Russian gas sales. Turkish
construction companies are active in Russia, Russia is the
second most important country of origin for Turkey's
critical tourism industry, the "suitcase trade" with
Russians has long been a staple for Istanbul retailers, and
Russian companies are increasingly looking for purchases in
Turkey. Russian telecoms company Alfa has bought a large
stake in Turkey's leading mobile telephony group, Turkcell.

11. (SBU) Turkey's attractiveness as a destination for
Middle Eastern investors also seems likely to attract
substantial investment. The highest-profile recent example
of this was the Saudi Oger-led consortium, with its $6.5
billion bid emerging as the winning bidder of the Turk
Telekom privatization tender in July. It is notable that
the second place bidder was also from the Middle East: UAE-
based Etisalat. In October, the Crown Prince of Dubai came
to Istanbul and announced it would be investing in a huge
business tower project with a $500 million dollar price tag
(septel from Congen Istanbul). Portfolio flows from the
Middle East are thought to be substantial, if hard to
quantify. Many of these investors invest via European
subsidiaries and funds such that the flows do not show up as
Middle Eastern in origin in the balance of payments data.
To the extent these investors are putting more money into
Emerging Market funds, they are undoubtedly including
nearby, fast-growing and now EU accession candidate Turkey.


12. (SBU) Turkey has mitigated the adverse impact of higher
energy prices through a combination of passing through world
energy prices and high taxes on petroleum products.
Significantly, S&P's sovereign analyst for Turkey-as opposed
to the global oil analysts who wrote the report-downplayed
the Turkey-specific implications of his colleagues' report
in an e-mail to econoff, saying there were many other
factors in Turkey's overall vulnerability. His e-mail may
be more significant than the oil analysts' warnings: market
watchers have generally taken a more favorable view of
Turkish risk since the October 3 start of EU accession
negotiations. Fitch Ratings sovereign analysts recently
visited on a periodic review, and have virtually ruled out a
downgrade. They expect to either hold Turkey's rating at
its current BB- with a stable outlook, or upgrade it


© Scoop Media

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