ISTANBUL: The chaos in Iraq could cost Turkey some $2-2.5 billion in lost trade this year, slowing efforts to boost exports and rebalance the economy, but the long-term impact will be negligible unless the situation deteriorates sharply, economists said.

Exports to Iraq, Turkey’s second largest foreign market, fell 19.3 per cent to $745 million in June, data from the Turkish Statistics Institute showed on Friday, a sharp decline but broadly in line with expectations.

A lightning advance by the insurgent group Islamic State, which swept through north and west Iraq last month, raised fears of a collapse in demand for Turkish goods and a sharp rise in Turkey’s energy import bill, with Iraq its biggest crude oil supplier.

The unrest briefly boosted global oil prices to a nine-month high above $115 a barrel.

But exports from Iraq’s southern oil terminals in July rose to a near-record rate, remaining unaffected by fighting in other parts of the country. Oil is now trading back below $108 a barrel, easing Turkey’s fears.

The June trade data meanwhile suggested that the total export loss this year would be a small fraction of Turkey’s overall export target, economists said.

“If the conflict doesn’t turn into a full-blown war, the overall effect will be limited to $2bn, easily manageable compared to Turkey’s $166bn export target this year,” said Is Investment economist Muammer Komurcuoglu.

Economy Minister Nihat Zeybekci has said his officials had calculated the expected trade loss due to Iraq at $2.5bn, saying that was a manageable level.

Turkey is aiming for exports of $166.5bn this year, up 10pc from last year’s $151.8bn, when it recorded a trade deficit of nearly $100bn.

Recovery in Europe is already helping to compensate for Iraq. Exports to European Union countries, which make up 46pc of total Turkish exports, rose 14.7pc in June.

Mehmet Buyukeksi, head of the TIM exporters’ association, said earlier this month that the situation in Iraq was worrisome but would be offset by a revival in European demand.

The trade deficit reached $39.58m in the first half, a fall of 21.9pc compared to the same period last year.

Turkey’s current account deficit, its main economic weakness mainly driven by trade imbalances, is also seen narrowing. The government is targeting a $55bn shortfall this year from $65bn last, with some economists even more optimistic.

“The expected $2bn fall in Iraqi exports in the remainder of the year is neither negligible nor very significant for Turkey’s macroeconomic balances,” Garanti Investment Chief Economist Gizem Oztok Altinsac said.

“We are not considering revising our $45bn current account deficit forecast.”

Published in Dawn, July 26th, 2014