Turkey could plunge into another recession due to spike in oil prices following Aramco attacks

Turkey could face another recession due to the spike in oil prices following attacks on Saudi Aramco’s facilities at the weekend and the recent improvement in inflation could slow down, Reuters reported on Tuesday citing analysts.

Specialists say this as Turkey is a major emerging market and is almost completely dependent on imports to meet its energy needs.

If oil prices stay elevated in the long term, Turkey’s economy could suffer, Piotr Matys, emerging markets forex strategist at Rabobank, said.

“If oil remains at current levels in the coming weeks then that is going to have a negative implication for Turkey’s inflation, slow down the process of disinflation and in turn will require the central bank to slow down the pace of easing,” the strategist said.

On the other side, tax subsidies on gasoline prices by the ruling Justice and Development Party (AKP) would tamper the effects of higher oil prices on inflation, according to Is Investment, the investment banking arm of Isbank Group.

“Its impact on the current account will be limited if the rise in oil price stays around current levels. In addition, USD10 increase in oil price adds 0.3ppt to inflation. However, government tax subsidies on final gasoline prices will not change, thus the impact of the rise in oil on inflation will be much limited,” the group said in a note on Tuesday.

There are two options for the AKP government to decide on, whether to abandon some tax income by not passing price hikes fully onto consumers or to risk higher inflation, according to Hilmi Yavas, an economist at Yatirim Finansman.

The Turkish currency has lost almost 50 percent of its value against the greenback since last August due to tensions between Turkey and the United States (US) over the S-400 Russian missile and protests in Hong Kong. The Sino-US trade war has also negatively impacted the lira.

The call by Turkish President Recep Tayyip Erdogan’s AKP to dispute the Istanbul mayoral election in March this year has also worsened the economic situation in the country, costing the taxpayers 40 million ₺ ($ 7.143 million).

Turkey’s economy fell into its first recession in a decade at the end of last year and the Turkish lira lost more than 40 percent of its value.

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