News / Middle East

Iraq Crisis Weighs on Turkey's Economy

Turkish truck drivers captured earlier by militants in northern Iraq at an airport in Irbil, Iraq, July 3, 2014.
Turkish truck drivers captured earlier by militants in northern Iraq at an airport in Irbil, Iraq, July 3, 2014.
Dorian Jones

With the escalating crisis in Iraq, concerns are growing in Turkey over the economic fall out.  Iraq is Turkey's second largest trading partner, with Turkish companies exporting roughly $14 billion a year.  

With the radical Islamist group ISIL scoring major military gains in Iraq, concerns are growing about the economic impact for Turkey.  

Sinan Ulgen is a visiting scholar for Carnegie Institute in Brussels.

"Turkey’s export to the countries in the region have been affected on two grounds.  One because of the instability of course, but the other one is because of the land routes to other markets in the Middle East have been blocked by the instability in Iraq and Syria," said Ulgen.

But analysts say the impact on Turkish exports to Iraq could have been worse, because around 75 percent of those exports are to the relative stable Iraqi Kurdish region, which has largely escaped the impact of ISIL.

Turkish transit trade to the lucrative Gulf markets is another story, says political consultant Atilla Yesilada of Global Source Partners.

He says the Iraq crisis coincides with rising diplomatic tensions between Cairo and Ankara.

"The Egyptian authorities have started causing troubles for our trucks and ferries.  [About] 30,000 lorries, trucks, had been traveling to Iraq before the crisis and now that the number has dropped to say 5,000," said Yesilada.

Turkish economic woes could yet worsen, with ISIL continuing to threaten regional stability.

One area of concern, analyst Yesilada warns, is rising oil prices that will bring new costs, if not in the near future in the medium term for energy importer Turkey.  
 
"It could expand over time.  The most obvious example is the price of oil.  Every $10 jump in Brent oil adds $4 billion to our energy deficit, and 50 basis points to the CPI inflation," he said.

Analyst Ulgen says that situation is likely to depend on whether the threat of ISIL can be contained.  He says if the situation deteriorates, so will the economic pain for Turkey.

"The most important, whether, if, the situation continues to worsen, then Turkey’s [international] risk perception can be affected, which will raise the cost of capital for Turkey and Turkish companies, that will be even more crucial for the Turkish economy," he said.

Observers point out, stellar growth underpinned the first decade of the AK Party’s rule.  But growth in the past few years has markedly slowed.  

With Prime Minister Recep Tayyip Erdogan running for the presidency in August elections and a general election in June 2015, observers say keeping the economy running could prove to be Erdogan’s greatest test.  

 

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