The economic impact of the Iran deal on Turkey

The economic impact of the Iran deal on Turkey

We Turks are a weird bunch. The awarding of the 2020 Olympics to Tokyo instead of Istanbul caused many Turks, including “çapulcular” (marauders) like your friendly neighborhood economist, to rejoice more than the Japanese.

Similarly, last week’s Iran nuclear deal put many of my fellow countrymen (and women) in a celebratory mood similar to that of the Iranians. Given Turkey’s proximity to Iran, both geographically and culturally, government officials and businessmen alike are expecting the relaxation of economic and financial sanctions to be extremely positive for the economy. Is this optimism warranted?

While almost all the articles and columns in the Turkish press have been emphasizing the gains to companies, most of the immediate benefits will be seen in macroeconomic indicators. For one thing, as Iranian oil and natural gas exports eventually return to their pre-sanction levels, energy prices are likely to fall.

As every Turkish economist knows, a 10 percent fall in average oil prices would lower the country’s current account deficit by around 0.5 percentage points of GDP in a year or so. As the Fed’s imminent rate hike is likely to decrease capital flows to emerging markets, and therefore make the financing of the deficit more difficult, this would be a welcome development.

Similarly, such a fall would also shave 0.4-0.5 percentage points off headline inflation. The impact on growth, though likely to be positive as well, is considerably more difficult to calculate, but my back-of-the-envelope calculations suggest that growth could get a boost of around 0.5 percentage points.

All these macro effects are great, but what about the micro ones? The deal will eventually allow companies, Turkish and non-Turkish alike, to do business in and export to Iran. And since the Iranian economy is expected to lift off, there could be tremendous opportunities for firms that could move quickly.

With multinationals visiting Iran in droves since nuclear talks restarted in 2013, most Turkish companies are already late to the game. Besides, because of the political tensions between the two countries, Iran would stop short of laying down the red carpet for Turkey. But even if politics does not get in the way, the overall impact of the deal should be limited in the short-run, mainly because Iran is a very small export market for Turkey.

Except for a brief period in 2012, when the sanctions caused Turkey to settle its natural gas imports bill with the country in gold, exports to Iran have been rising very slowly - and are now around 0.5 percent of GDP. Even if they were to double over the next couple of years, the net impact on the trade balance would only be a couple of percentage points of GDP.

But exports could surge if Turkish firms manage to seize opportunities: For example, exports to Iraq as a share of GDP more than quintupled during the last decade, from 0.27 percent in 2003 to 1.45 percent in 2014. There is no reason Turkish companies are not equally successful in Iran. But I would expect not only political, but also commercial relations between the two countries to improve first.

If it weren’t for the unexpected meet-up between Pip and Estella, Charles Dickens could have as well named his penultimate novel “Great Expectations, Greater Disappointments.” It might be a good idea to set the bar low for the impact of the Iran deal on the Turkish economy.