Sanctions on KRG may have limited impact on Turkish trade, experts say

Published 27.09.2017 19:55
Updated 27.09.2017 19:58
Sanctions on KRG may have limited impact on Turkish trade, experts say

Ankara is considering a range of options in response to the Iraqi Kurdistan Regional Government (KRG) after it held an independence referendum on Monday that was fiercely opposed by Turkey, Iraq and Iran.

In recent days, Ankara has upped its stance on the KRG referendum, considering possible political and economic sanctions on the region that could include the closure of the Habur border gate.

Turkey is also seeking alternative trade routes to prevent harming bilateral trade, which is currently worth around $8 billion, roughly $2.5 billion of which comes from trade with the KRG.

Evaluating the potential consequences of these sanctions, experts claim that the impact would be limited to Turkey's trade volume, while the trickle-down effect could loom over the Turkish lira due to possible military intervention.

William Jackson, a senior emerging markets economist at Capital Economics, headquartered in London, said that the possible economic sanctions imposed on the KRG would have a limited impact on the Turkish economy.

Speaking to Anadolu Agency (AA) about the economic impact of the KRG's unconstitutional referendum, Jackson stated that the effects on the Turkish economy would be limited.

"The impact this will have on the Turkish economy overall will be small. Turkey imports the majority of its oil and natural gas from Russia and Iran, not from [Northern] Iraq," he said.

The senior economist said very small movement has been observed in the Turkish lira, informing that the weakening of the lira occurred at a much lower level compared to the stock market.

"Since last month, the weakening of the Turkish lira has been below 2 percent. We should consider the fact that Turkish financial markets can recover quickly from political shocks," he added.

Pointing out that the effects of economic developments on the economy have been extremely limited over the past few years, Jackson noted that local financial markets recovered their losses within a few weeks following the 2013 Gezi Park events and the general elections held in June 2015. He also said that the stock market and the currency compensated for their losses in August after the coup attempt of July 15, 2016.

Timothy Ash, BlueBay Asset Management's emerging markets senior sovereign strategist, said there is a consensus that the KRG will not quickly bring the referendum result to a formal declaration of independence.

Ash indicated that possible sanctions imposed by Turkey on the KRG could have mutual economic effects.

"Sales in local currencies and portfolio purchases in foreign exchange are fairly balanced. The Central Bank [of the Republic of Turkey CBRT] is willing to keep the average financing interest at 12 percent," Ash said. "However, inflation is rising and the current account deficit is increasing. The financing quality of the current account deficit is also weak."

London Capital Group (LCG) market strategist İpek Özkardeşkaya stated that the referendum has a direct and negative impact geopolitically, highlighting that it is a development that has shaken the order in the region and reasserting that Turkey is completely against it.

"In addition to economic sanctions, the risk of a possible military operation can lead to a contraction of the Turkish lira, creating downward turmoil," Özkardeşkaya said.

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