Turkey has remained a key culprit in the current emerging market mayhem that has become an investment theme and concern over the past couple of months. Along with the Argentina Peso, Indonesian Rupiah and the South African Rand, the Turkish Lira has led an emerging market currency rout, with August average spot values representing a 41% yoy decline versus the US Dollar, as shown in the chart below.
This currency collapse reflects several perversities of Turkish economic mis-management, and has already driven 17.9% yoy retail inflation in August. With this plunge in the Lira, the local currency price of oil has skyrocketed, as illustrated below:
The indexed price of Brent crude in Lira has tripled yoy and is double the previous peak in early-2014, while Brent in USD terms remains stuck well below those peaks.
Until the current oil price shock, Turkey had enjoyed several years of sustained oil demand growth, from both income and price elasticities, as real GDP growth crested at 7.05% yoy in 2017. Middle-distillate demand, driven by economically-sensitive diesel, dominated this growth.
In fact, during 3q17, Turkish mid-distillate demand represented 26% of total European yoy growth in these grades, as local demand growth hit 15% yoy. During the quarter, Turkish total oil demand exceeded 1.1 mbpd. Still, even before the recent crisis, Turkish oil demand was already weakening, with yoy declines in total demand during May and June 2018.
This weakness should continue, from both price and income elasticities, given the sharp spike in Lira-denominated oil prices and the deepening economic crisis. The IEA should be revising their Turkish oil demand forecasts downwards, but as a policy, remain constrained by IMF country outlooks. In its April 2018 World Economic Outlook (WEO), the IMF had forecast Turkish 2019 real GDP growth at 3.97%, while the current consensus is calling for a 0.5% yoy decline and is slipping. This drop in real GDP should be worth about 80 kbpd of total oil demand from the previous IMF income levels, but we will wait for the July demand numbers before refining our forecasts.
