Turkey’s progress in cutting the biggest current-account deficit among emerging markets in Europe, the Middle East and Africa is under threat as fighting disrupts exports to neighboring Iraq.
Shipments to Iraq, Turkey’s biggest market after Germany, slid 21 percent in June from a year earlier, the Turkish Exporters Assembly said July 1. A prolonged crisis caused by the advance of Islamic State militants may weigh on the trade gap as exports drop and oil prices rise, the Turkish central bank said last week.
The bond market is already wobbling. Yields on two-year notes climbed 19 basis points this month, after a half-point improvement in the deficit to 7.48 percent of economic output in the first three months helped fuel the best rally in emerging markets in the second quarter. While a doubling of interest rates in January reined in spending on imports, the central bank has cut borrowing costs for the past two months.
“The Iraqi crisis is credit negative for Turkey,” Alpona Banerji, a senior analyst at Moody’s Investors Service in London, said in comments relayed by a spokeswoman over the phone on July 3. “A prolonged conflict would have a material effect on both Turkish exports and growth.”
Iron and steel led $12 billion of Turkish exports to Iraq last year, according to the Statistics Institute. About 300 Turkish companies and 10,000 workers have been reconstructing the war-torn nation’s roads, bridges, dams and hospitals, the Anadolu Agency reported on July 1. Most have left since the oil-rich northern city of Mosul was captured last month by the al-Qaeda splinter faction formerly known as the Islamic State in Iraq and the Levant, or ISIL, according to state-owned Anadolu.