The proverbial ink is barely dry on the digital draft of an interim deal to reopen the Strait of Hormuz. The news is welcome for an economy like Turkey’s that imports most of its energy needs. Still, the fifteen-week war has also provided another clear illustration of how such structural disadvantages outweigh advantages that could be derived from geography and nimble geopolitics.
Without much oil or gas available domestically, Turkey’s current account is highly sensitive to energy prices given the country’s still-high energy import dependency. While Ankara could muffle the pass-through to domestic inflation by scaling back energy taxation and subsidizing consumer prices, not much could be done about the effects on the balance of payments. Combined with domestic political uncertainties, the negative shock to the current account once again forced the Turkish Central Bank to defend the Lira exchange rate in March and late May. At just under thirty billion dollars, reserves net of loans and swaps haven’t yet entered negative territory, but this is only because the value of Turkey’s gold holdings has increased with global prices. The same phenomenon has also contributed to a rise in Turkish households’ and firms’ perceptions of their own wealth, as many invested in gold to protect themselves against depreciation. This is another complicating factor as Ankara tries to stamp out inflation.
