Treasury and Finance Minister Mehmet Şimşek said on Friday the economic impact of the Middle East conflict would be negative but manageable, stressing that Türkiye's disinflation-focused program had already proven its resilience against external shocks.

Şimşek described the conflict as a "major shock" and warned that wars tend to have longer-lasting and deeper economic consequences than other types of crises.

He was speaking at the International Economy Summit in the Sapanca district of the northwestern Sakarya province.

"Wars create much more permanent and larger consequences than other shocks," Şimşek said. "We believe Türkiye is resilient. We proved this last year, and we will prove it again this year."

The U.S.-Israeli war on Iran, which started in late February before the sides agreed on a fragile two-week cease-fire this week, has damaged Gulf energy production, stranded tanker traffic and boosted oil prices by about 50% in the world's worst energy shock.

That came as a major test for countries that import most of their energy needs, including Türkiye.

Şimşek said the conflict had a particularly strong impact on global energy markets because of the strategic importance of the Strait of Hormuz, a key route for oil, natural gas and fertilizer.

Opening the waterway at the southern tip of the Gulf to free hundreds of stranded tankers and other vessels was a condition of the cease-fire announced on Tuesday.

But the flow remains heavily restricted, keeping futures prices near $100 a barrel.

"We are aware of the magnitude of this shock," Şimşek said, adding that even if the cease-fire holds, both the global economy and Türkiye will still suffer some degree of damage.

Turkish authorities have taken steps to cushion the fallout of the war on domestic markets. Şimşek on Thursday said they were prepared for more steps if the cease-fire does not ​hold.

The Turkish central ⁠bank has already halted its easing cycle at 37%, lifted its overnight rate by ​about 300 basis points to near 40%, and sold and swapped tens of billions of ​dollars in foreign exchange and gold reserves to support the Turkish lira.

Şimşek said the conflict caused some deterioration in the ​inflation outlook, which authorities had hoped would dip below 20% by year-end. Annual inflation eased to ⁠30.9% in March.

Strong fiscal buffers

Şimşek on Friday said the government's medium-term economic program introduced in mid-2023 had strengthened Türkiye's macroeconomic foundations, increased resilience and enabled the country to better absorb external shocks.

"The program has proven itself," he said. "Despite the trade wars, the '12-Day War,' drought and agricultural frost last year, we got through all of these shocks without major losses in the program," he noted.

He said Türkiye was seen as one of the countries best positioned to withstand geopolitical shocks because of its relatively strong fiscal buffers, lower macroeconomic imbalances and limited direct energy dependence on the Gulf region.

According to Şimşek, Türkiye has almost no dependence on oil supplies that pass through the Strait of Hormuz, while natural gas imports from Iran continue to flow through pipelines and have not been disrupted.

"This is important because if the cease-fire does not hold and the war drags on, many countries could face energy supply security problems," he said.

Şimşek said one of Türkiye's strongest buffers was its fiscal position.

Despite the cost of the devastating 2023 earthquakes and other spending pressures, he said the budget deficit was reduced to below 3% of gross domestic product and that both public debt and the deficit remain low compared with other emerging markets.

He noted that average budget deficits in emerging economies stood at 6.3% of GDP last year, more than double Türkiye's level.

Şimşek acknowledged that the current account deficit would worsen because of higher oil prices, weaker tourism revenues and trade disruptions.

"A current account deficit increase of around 1 percentage point is possible, while growth could slow by around half a percentage point," he said. "All of these effects are manageable and will not derail the program."

He also said Türkiye remained comfortable in terms of reserve adequacy despite some capital outflows during the early phase of the conflict.

"With the cease-fire, those flows are returning," Şimşek said. "Demand for foreign currency from our citizens remained very limited thanks to confidence in the program. We are in a very comfortable position in terms of reserve adequacy."

Şimşek reiterated that the government would continue prioritizing disinflation and said authorities would do whatever was necessary to maintain price stability and preserve macroeconomic discipline.