Turkey Without Russian Tourists Strikes Economy Where It's Weak

Russia to Target IS in Syria but Rift Over Assad Remains
  • Government needs foreign exchange to plug current-account gap
  • Lira, bonds already hurt by rising geopolitical risk this year

Russia’s effective ban on tourist travel to Turkey in retaliation for the downing of one of its jets by Turkish F-16s this week will reverberate far beyond a Kremlin-themed hotel on the Antalya coast. These four charts show the threat to Turkey’s economy.

Getting Away

Turkey is the most popular foreign destination for Russians, with 3.3 million making the trip in the first nine months of this year. They make up more than 10 percent of the tourists in Turkey, the second-highest number after Germany.

Selling tours to Turkey would be a “blatant violation” of Russian laws, according to the Federal Tourism Agency, and while there are no plans to evacuate as many as 11,000 Russian tourists already in the country, about 6,000 who’ve booked tours for coming weeks will need to change their plans.

Deficit Gap

Tourism accounted for $21 billion of income for Turkey in the nine months to September, and plays a key role in keeping the sizable gap in the current-account under control. Prior to this week, the deficit-to-GDP ratio was expected to fall to 5 percent this year from 5.8 percent in 2014 and 8 percent a year earlier, according to forecasts compiled by Bloomberg.

The deficit is important because Turkey’s economy is vulnerable to shifts in investor sentiment toward emerging markets as the U.S. Federal Reserve prepares to increase the cost of lending, according to Ipek Ozkardeskaya, an analyst at London Capital Group. In order to narrow it, Turkey introduced restrictions on consumer credit two years ago to cool domestic demand, and subsequently saw the economy slow, too.

“Turkey’s tourism industry has already been shaken by growing geopolitical tensions,” Ozkardeskaya said by e-mail. “Cancellations from Russians can reverse the recent improvement in the current-account gap.”

‘Suitcase Trade’

The impact goes beyond the official tourism numbers. The amount of Turkey’s foreign-exchange revenue associated with Russian tourists and the unregistered trade they facilitate is higher than $6 billion per year, or just over 0.8 percent of the nation’s gross domestic product.

Add to that Turkish exports through official channels and Russia-related income rises to 1.4 percent of GDP, Erkin Isik, a strategist at Turk Ekonomi Bankasi AS in Istanbul, said by e-mail on Thursday.

Compounding Problems

Turkish assets were already slumping amid the conflict in neighboring Syria and the collapse of a three-year long truce with the Kurdish militant group PKK. The lira is the third-worst performing emerging-market currency this year after the real and the Colombian peso while two-year notes are the second-worst.

The yield on Turkey’s two-year government notes has risen 19 basis points to 10.53 percent since the Russian jet was downed.

“This will further push up bond yields, especially in the event that the Fed also raises rates,” said Ozkardeskaya at London Capital Group. “If the recent narrowing of the current-account shortfall is reversed, there will be growing pressure on the lira.”

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