Turkey's high oil price worries other emerging markets
The Turkish government has invested billions of dollars in recent weeks to protect the lira from soaring oil prices. Despite this, the Turkish currency experienced the fifth largest depreciation in different emerging markets.
Its flexible policy has pushed up the price of spending on this resource. Turkey has a lot at stake as it imports almost all the oil and natural gas it consumes. Several energy-importing economies such as India or South Africa are going to face numerous drawbacks due to Russia's invasion of Ukraine.
To counter the pressures, the government launched a new type of savings account designed to preserve the lira against any foreign exchange losses. It has also cut rates by 500 basis points since last September. This is an attempt to deter local demand for other currencies without hurting growth.
Brendan McKenna, a financial expert at Wells Fargo in New York, argues that "many emerging market economies, such as Turkey, are struggling to recover from the pandemic and an oil price shock exacerbates this". In addition, he says that the currencies of these countries could come under severe pressure.
The MSCI Emerging Markets Currency Index recorded the second largest decline this year. This is because US rate hikes threaten to eat into capital held by developing territories. Traders expect the Fed to make numerous quarter-point rate hikes this year.
India, the Philippines and Thailand are the worst hit, with rising oil costs fuelling inflation, weakening currencies and slowing growth. Central banks say they will remain accommodative for as long as necessary to support development, but it would mean higher prices for consumers.
Teneo co-chairman Wolfango Piccoli estimates that every $10 increase in the price of a barrel of oil costs Turkey about $4 billion. The country's net energy imports are the highest in the developing world after Ukraine, according to financial services firm Citigroup Inc.
Ankara's next test will come in the next few days as economic experts expect prices to rise by 52.5 per cent annually. This would see the interest rate fall to minus 38.50%, the lowest in the world.
Rising prices due to the Russian attack on Ukraine add to concerns about possible supply shortages. This concern was exacerbated by a fire at a Turkish oil pipeline. A fallen power pole caused the explosion of the facility, located in the province of Kahramanmaras.
The incident affected the transport of crude oil from Iraq to the port of Ceyhan for export. The drop in oil flow on this pipeline is the latest in a series of supply disruptions that have pushed world crude oil prices to an all-time high.
The Turkish economy depends mostly on imports to produce foodstuffs and textile goods, among others, so the rise of the dollar against the lira has had a direct impact on the price of different products and services. For this reason, at the beginning of the year, the government announced a 125% increase in electricity and gas bills.
"Since the beginning of the year, we have seen several significant increases in the prices of electricity, natural gas, tobacco and alcoholic beverages, and this will add extra pressure on inflation," JPMorgan said in January. The measures put in place by Erdogan, Turkey's president, threaten the Eurasian country's equilibrium.