The roaring commodity “super-cycle” and new threats to the Turkish lira

An expected post-pandemic global economic recovery is well underway, led by growth in China, enormous stimulus, higher inflation, monetary accommodation by central banks, rising environmental infrastructure investments, and a weakening U.S dollar.

These factors are paving the way for a roaring “commodity super-cycle”. Commodities will be the most interesting asset class to follow in 2021. JPMorgan is labeling this emerging era as a “long-term boom”, similar to the one that took place during 1997-2009, when China led global growth and the U.S. dollar weakened.

The previous 12-year up-cycle ended with the global financial crisis. Slower growth in China, a rally in the U.S. dollar and an oversupply of shale-based minerals took their toll on oil prices between 2009 and 2021, another 12-year term.

This year seems to be a turning point again. Metal prices, starting with iron ore, copper and platinum have already reached multiyear peaks. Food price inflation surged to six-year highs, led by corn, rice and wheat due to drought and demand from Asia. The Brent oil price is trading firmly above $60 a barrel. All this comes at a time when the U.S. dollar keeps on weakening.

Such a turn in the global economic tide spells trouble for Turkey.

Turkey imports nearly all the oil and natural gas it consumes. Last year’s crude oil imports totalled 29.4 million tonnes, dropping from 31.1 million tonnes in 2019. The energy import bill fell to $28.9 billion from $41.7 billion.  

In 2019, the global average price of Brent was $64.4 a barrel. The economic impact of the global pandemic pulled down the price of crude to $40 a barrel last year. In January, Brent increased by 7.6 percent. In February, price gains totalled a remarkable 15.2 percent, rising to $63.3 a barrel.

The average price of Brent may remain relatively flat at $65 a barrel in 2021, based on expectations that OPEC will ease production quotas and that shale oil production will once more pick up later in the year. So, the average price of Brent in 2021 will be $25 a barrel higher than in 2020, adding roughly $10 billion to Turkey’s import bill.

Tourism income, which shrunk by 70 percent to $12 billion last year due to COVID-19 travel restrictions, will pick up this year; yet the recovery may be limited to 30-35 percent. Even such a limited increase could prove optimistic.

The Turkish lira has been appreciating since November, when President Recep Tayyip Erdoğan replaced the governor of the central bank and appointed a new treasury and finance minister. Year-to-date recovery for the lira is around 7 percent, taking the rally since November to about 20 percent, thanks to a shift to a more orthodox monetary policy. The benchmark interest rate now stands at 17 percent versus 10.25 percent in early November. But a stronger lira always means stronger demand for imports.

Despite the rate hikes, Turkey’s economy is expected to grow by between 4.5 percent and 5 percent in 2021, double the expansion recorded last year. Assuming exports increase by around 10 percent from 2020, imports post 12 percent growth, and the energy bill rises by $10 billion, Turkey’s trade deficit will widen to a sizable $70 billion in 2021 from last year’s $50 billion. Hence the current account deficit will grow to about $45 billion; or to more than 6 percent of GDP.  

Turkey’s 12-month forward-looking external debt payments total around $170 billion. So, along with the projected current account deficit, its external financing needs will amount to some $215 billion in 2021.

The size of this shortfall will be large enough to once more pressure the value of the Turkish lira.

The Turkish authorities will have to make a choice. If they want to be able to finance such a huge foreign exchange requirement, they will either need to slow economic growth, perhaps through more rate hikes that will also help reduce inflation, or they will have to mend ties with Western financers. Perhaps the AKP-MHP government will be obliged to do both.