Turkey will be hit hard by spike in energy costs, analysts warn

• Gulf conflict is disrupting supplies
• Expected to drive up Turkey’s CPI
• ‘Complete dependence’ on imports

Turkey is likely to be one of the countries hardest hit by spiralling energy costs caused by the conflict in the Gulf, as higher fuel prices feed into its rising inflation, analysts and economists have said. 

The Turkish economy is the most exposed to an energy cost crisis among central and eastern European states, according to Dutch bank ING. 

ING analysts said on Tuesday that a 10 percent oil price increase would translate into a 1.1 percentage-point rise in Turkey’s consumer price inflation because of its “complete dependence on oil imports”. 

The Turkish central bank’s monetary policy committee is likely to pause interest rate cuts at its March 12 meeting, ING said. It also cautioned that global uncertainty may depress investor appetite for emerging markets.

Even before the Gulf crisis, Turkey’s inflation had resumed an upward trajectory. The consumer price index rose to an annualised 31.5 percent in February, up from 30.6 percent the previous month.

One of the sharpest increases was in transport costs, according to the latest inflation report from statistics agency Turkstat, issued on Tuesday.

Economist Mustafa Sönmez told AGBI a series of price shocks was likely to hit Turkish consumers, who are already grappling with high interest rates and persistent inflation.

“Turkey is a net energy importer hence it is going to be badly impacted,” Sönmez said. 

“Energy costs going up will start a chain reaction, not just in logistics but all the way through energy to production, impacting all goods and services,” he said. 

Ankara has sought to diversify its energy sources, extending gas contracts with Azerbaijan, Algeria and Russia – also its main supplier of oil. But supplies of Iranian gas piped into the national grid and Qatari LNG have now been disrupted. 

Turkey is also increasing gas production from its fields offshore in the Black Sea, though neither domestic production nor the potential for Russia to increase flows are likely to be enough to ward off price shocks. 

Local media outlets have reported that petrol prices will increase by more than 9 percent at midnight on Tuesday, prompting queues at many fuel stations. 

The government is reportedly considering adjusting a consumption tax on fuel to protect consumers from volatility.

The central bank also moved to shore up the currency by offering forward selling lira-settled foreign exchange contracts. The system allows the central bank to provide a hedging mechanism to the market without directly reducing its foreign currency reserves.

The Istanbul stock exchange’s blue-chip BIST 100 index shed 2.7 percent on Monday. But this was softer than the drop in early trading, which was close to 6 percent. 

The rebound suggests traders have settled into a wait-and-see mode.