Oil shock adds to Erdogan’s election woes ahead of 2023 vote
(Bloomberg) – Soaring crude oil prices amplify the impact of a weak lira on the Turkish economy as President Recep Tayyip Erdogan prepares for an uphill election battle amid high inflation and stagnant wages .
Consumer inflation, at over 54%, is already the highest among the Group of 20 economies and is set to worsen as oil prices have more than tripled in lira over the past 12 months.
The deteriorating outlook complicates Erdogan’s electoral considerations with less than 14 months until the general election and his popularity hovering around 40%, the lowest since the start of his rule two decades ago. Turkey’s leader has forced the central bank to cut interest rates to create more jobs, but soaring energy costs are pushing Turkey deeper into a wage-price spiral.
Below are four charts that show the impact of oil prices on the Middle East’s largest economy:
Oil prices have risen from just over 500 liras ($34) a barrel to nearly 1,800 liras over the past year, while world prices have doubled in dollar terms, the currency crashing Turkey increasing the burden on consumers. Turkey – which imports around 900,000 barrels of oil a day – has hiked fuel prices six times in the past week alone, threatening further deterioration in consumer confidence after it fell to an all-time low recorded in December. Turkey’s political opposition says the frequent hikes reflect more than just soaring global commodity prices and are a direct result of government mismanagement.
Turkish consumer inflation is already at its highest level in two decades, but producer prices are signaling that the worst is yet to come. Factory-gate inflation accelerated to 105% last month, driven by soaring energy costs. Historical evidence shows that the recent rise in Brent and gas will drive it even higher and fuel consumer prices.
Given the central bank’s average oil price forecast of $80.4 a barrel, current prices and expectations for the rest of 2022 may add up to 4.8 percentage points to end-of-year inflation. year, according to Selva Bahar Baziki, Turkish and Swedish economist for Bloomberg Economics.
Rising energy imports led to a widening of the foreign trade deficit in the first two months of the year. It came after Erdogan-led Turkish officials said they expected the country to post a current account surplus on the back of a weaker lira, a goal that now seems out of reach.
A growing external imbalance usually leads to a further depreciation of the lira, which then fuels consumer and producer inflation.
Fluctuations in crude prices and their impact on the current account generally leave the pound vulnerable. Recent government efforts to stabilize the currency have led to some improvement in the pound’s relationship with foreign trade, with its 40-day correlation showing a less severe reaction than the historical average.
A lower correlation may be due to a temporary “distortion” caused by recent measures whose impact may be short-lived, according to Nick Stadtmiller, director of emerging markets at Medley Global Advisors.
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