Moody cautions Turkey on risks caused by crisis in Iraq
Iraqi crisis may cause a downward risk on the current account deficit, growth and inflation, Moody's warned.
The crisis in Iraq, generated by the Islamic state of Iraq and Levant (ISIL), will constitute a downward risk to Turkey in its current account deficit, growth and inflation, Moody’s said in a press release Monday.
Moody's said that if the crisis continues, 15 percent of Turkey's exports, which roughly equates to 3 percent of its overall GDP, will be affected negatively.
Iraq is the second biggest export market of Turkey, accounting for $12 billion and 8 percent of Turkey's overall exports. When exports conducted through Iraq's land are taken into consideration, the overall effect of the crisis on exports will rise to 15 percent.
Moody's statement noted the increase in oil prices will be an additional negative factor, citing a possible strain on the current account balance.
"A more permanent oil price shock will strain the rebalancing trend in Turkey’s current account balance that began earlier this year. The Central Bank of Turkey estimates that with every $10 increase in oil prices, the current account deficit raises by $4-$5 billion (or 0.5 percent of GDP)," Moody’s said.
The statement also pointed out that the increase in oil prices will impact inflation which was 9.7 percent in May 2014, well above the Central Bank’s 5 percent target.
“The central bank’s recent rate cuts are predicated on the expectation that inflation will decline from this month onwards, based on the reduced effect of depreciation on core inflation. However, there is still significant risk associated with higher energy inflation from higher global prices and regulated price adjustments,” Moody’s said.
Despite considering all the possible negative effects of the crisis in Iraq, Moody’s noted the growing export performance of Turkey on the back of European economic recovery and forecasted the year-end current account deficit to narrow to $46 billion, 5.8 percent of GDP.
