Before going into details about the headline, I should state that the decision taken on Nov. 27 by the Vienna-based Organization of the Petroleum Exporting Countries, or OPEC, proved beneficial for Turkey on many fronts in regard to its macroeconomic balances.
Following OPEC’s decision not to “cut output,” oil prices plummeted to below US$70 and even fell to US$65. For Turkey’s current transactions balance, or current account deficit, which is the simple explanation term we use in the media, this means a positive impact of at least US$ 4.5-5 billion.
In addition to this, the drop in the price of oil and in global gold prices on the back of that, which resulted in other commodities i.e. agricultural produce and raw material like metals following the trend set by these two critical commodities, means Turkey’s inflation rate will also be positively affected.
The Turkish Central Bank has been sensitive toward two topics for the last three to four years. The first is the price stability risk i.e. inflation; and the second is financial stability risk i.e. current account deficit.
The drop in global oil prices and the subsequent drop in the prices of other commodities led to optimism among market professionals and global investors that these developments will have a positive impact on the risks posed by the current account deficit and inflation. This resulted in increased interest in Turkish stocks and Treasury bills, lifting the Borsa Istanbul 100 Index to the 86,000-87,000 mark and a drop in the benchmark repurchase interest rate on Treasury bills to 7.5-7.6 percent. This is the lowest that this interest rate has been since July 2013.
WE SHOULD MAKE GOOD USE OF THE ‘TACTICAL WAR’ ON OIL
An important step has been taken to settle the US$-Turkish Lira exchange rate in the 2.18-2.22 bandwidth. If the price of oil and other commodities continues to drop and inflationary pressure is reduced on a global scale, leading central banks might extend expansionary monetary policies to the end of 2015, depending on the ease provided by the “disinflation” process. This will help economies that need foreign sourcing, like Turkey, to source these funds on extremely good terms.
As Turkey, we have found a vital opportunity to speed up reforms and make good use of this tough competition, or in one sense a “war,” being carried out on a global level. We have to turn this situation to our advantage in order to implement a large part of the macroeconomic reform process, which will be carried out under 25 headings and 1,200 sub headings, and is expected to be implemented in the period spanning 2015-2017.
Our hand will be strengthened if a major part of our fresh reform initiatives have been implemented in 2015 when oil prices will start to normalize and the time nears for the U.S. Federal Reserve to increase interest rates.
OPEC WON’T GIVE GROUND EVEN IF IT RESULTS IN ‘LOSS’
The media and international economic circles are calling this drop in the global oil price to levels even below US$ 70 when it has been around the US$ 116 range since June as a “warning to Russia.” Such a comment might contain some truth within its own context. However, oil market experts and producer countries stress that there is over supply in the market even if it is to a limited extent. I had mentioned previously that even if the price of oil drops to US$ 65, it will not have an excessive impact on the Russian economy in the short term.
If the question is why won’t OPEC “reduce” output despite such a steep drop in the price of oil, the basic reason behind that is to not “give ground.” This equates to removing your stock from the shelves in a store because prices have dropped. Competitors will fill up that shelf and you will never get access to that shelf again. This is why firms will sacrifice profit and even incur losses to keep hold of that shelf space in certain important chain stores.
Member countries of OPEC are aware that if they withdraw from the oil markets because prices are dropping, the United States will fill that space and they will never be able to regain that place in the global oil market. This is why they decided not to cut output in this “tactical war.”
RUSSIANS ALSO NOT BACKTRACKING
As Turkey prepares to host Russian President Vladimir Putin on Dec. 1, rumors have started abounding that Russia will ask Turkey to bestow strategic investor status on ROSATOM. According to this, the amount that Russia’s ROSATOM is taxed will drop to 2 percent.
Turkey, on the other hand, expects a reduction in the price of natural gas as a goodwill gesture when President Recep Tayyip Erdoğan and Putin meet to sign off on agreements and for Russia to present new strategic partnerships.
While Russia tries on the one hand to increase strategic partnerships with its neighbors, it is on the other hand, trying to manage perceptions about its economy and balance the Ruble, which continues to depreciate in value as a result of perceptions regarding the state of its economy and is also linked to the drop in oil prices.
Russian officials are stating that the drop in oil prices is temporary and will return to the US$ 85-90 range in the medium term. Let us wait and see whether these expectations materialize and how strategic steps between Turkey and Russia will be enriched.