Kurd’s Oil Skirting Baghdad Offers Deficit Buster

Turkey’s agreement to import lower-cost oil and gas from Iraq’s Kurdish region could help Prime Minister Recep Tayyip Erdogan cut the nation’s current-account deficit by more than a third.

Erdogan and Iraqi Kurdish Prime Minister Nechirvan Barzani signed an accord last month to pipe oil and gas from the region to Turkey, two people with knowledge of the matter said. The deal may help lower Turkey’s borrowing costs through easing the deficit by as much as $17 billion by 2018, according to Ozgur Altug, chief economist at BGC Partners Istanbul unit.

Turkey’s imports of oil and gas, which amounted to $60 billion in 2012, were the main cause of its $47.5 billion current-account deficit last year, the world’s third-largest. The deal would give it access to lower-cost energy in exchange for infrastructure investment and grant Iraqi Kurds direct access to Western energy markets. Iraq’s government hasn’t approved the agreement and says any accord without its consent is illegal.

“That deal is likely to trigger additional rating upgrades and therefore cause more fund inflows to Turkey as it will narrow bond spreads,” Altug said in e-mailed comments on April 22. Turkey’s current-account deficit will improve by more than one percentage point as a proportion of GDP after 2015 because of the agreement, falling below 5 percent from 2016, he said. That compares with 6 percent last year.

Ratings Outlook

Turkey’s two-year note yields have fallen 400 basis points over the past year, the most among 19 major emerging markets tracked by Bloomberg. The yield was 5.45 percent today, the lowest since at least 2005. That’s still the fourth-highest among that group of countries.

Fitch Ratings raised Turkey to investment grade in November, the country’s first such ranking in 18 years. The deficit is Turkey’s “key weakness” and a balance of payments crisis could trigger ratings action against it, Fitch senior director Paul Rawkins said at a conference in London on March 7.

Iraq’s Kurdish region plans to sell oil and gas directly through an extension to an existing pipeline, which carries oil from fields in Kirkuk to the Turkish Mediterranean port of Ceyhan. That arrangement also bypassed the Iraqi authorities, who have warned the Kurds not to sign separate energy accords. Turkey may also take over the Kurdish government’s stake in concessions operated by Exxon Mobil Corp. on the enclave’s border with the rest of Iraq, according to one of the people, who asked not to be identified because the plans are private.

Gas Exploration

A potential gas deal with Iraqi Kurds may be more significant than any oil agreement as Iraqi gas is estimated to be about 40 percent less expensive than gas from Turkey’s main supplier Russia, according to Turker Hamzaoglu, an economist at Bank of America Merrill Lynch in London.

“The most exciting part of this partnership concerns the concessions for oil and gas exploration for Turks, but there are no details on that yet,” Hamzaoglu said in an e-mailed report dated yesterday. The infrastructure for the oil and gas transportation to Turkey could be built by 2015-2016 “provided politics do not get in the way,” he said.

The Kurdistan Regional Government in northern Iraq signed its own production agreements with companies including Genel Enerji AS, an Ankara-based company started by former BP Plc Chief Executive Officer Tony Hayward, and DNO International ASA of Norway. Genel has been sending oil to Turkey on trucks, Hayward said Jan. 18.

Oil Imports

Turkey imported 3.8 million metric tons of crude oil from central Iraq in 2012, up from 3.1 million tons the previous year, according to Tupras Turkiye Petrol Rafinerileri AS, the country’s sole refiner, which is owned by Koc Holding AS. Altug predicts oil imports from Iraq will reach 11.8 million tons in 2018 as Tupras forecasts Turkey’s demand for petroleum products will climb to 35.7 million tons in 2020 from 32 million last year.

Last week Turkish central bank Governor Erdem Basci cut the country’s three main interest rates by 50 basis points each, reducing the one-week repo rate to 5 percent, the first reduction since December. The bank’s monetary tightening last year, meant to tame a widening current-account deficit, depressed domestic demand and reduced the nation’s growth rate to 2.2 percent, the slowest pace since a recession in 2009.

Five-year credit-default swaps to protect against a Turkish debt default fell one basis point to 122 today. That compares with 139 basis points for Russia and 167 for South Africa, both of which have higher credit ratings than Turkey, and was down seven basis points from 127 on Turkish swaps at the end of last year.

Maliki Government

Turkey’s effort to find cheaper oil is complicated by tensions with Iraqi Prime Minister Nouri al-Maliki’s government, which denied landing permission to Turkish Energy Minister Taner Yildiz plane in northern Iraq on Dec. 4. Ties with Maliki were strained after Turkey backed his opponent, the Al-Iraqiya bloc led by former Prime Minister Ayad Allawi, in 2010 elections.

Turkey has also sheltered Vice President Tariq al-Hashimi, convicted by Iraq of operating death squads. Erdogan defended Hashimi last September, rejecting calls that he be extradited and saying Turkey would host him “as long as he wants to stay.”

“Northern Iraq has become, economically, a natural extension of Turkey,” Deputy Prime Minister Ali Babacan said in a speech in Washington, according to an April 21 report by the state-run Anatolia news agency. “But while Arbil is coming closer to Ankara, we should make sure that it’s not getting away from Baghdad and we should be careful about that sensitive balance.”

Iraqi Sovereignty

Iraq’s deputy prime minister, Hussain al-Shahristani, said April 16 that his government has told Turkey that it doesn’t allow oil agreements without central government approval, and that Turkey must respect Iraqi sovereignty.

The agreement is “illegal and is a violation of the wealth of the Iraqi people,” Furat al-Sharaa, a member of the Iraqi parliament’s oil and gas committee and a lawmaker in Maliki’s coalition, said by phone from Baghdad April 18. Turkey is “taking advantage of the unstable political situation in Iraq to broker agreements with the Kurdistan Regional Government and this is discourteous.”

Yildiz, contacted through his press office, declined to comment on the deal, as did an Iraqi Kurdish official. The Oil Ministry in Baghdad didn’t immediately respond to a request for comment.

PKK Talks

Turkey has had a current-account surplus when excluding its energy imports, Babacan said in Ankara April 12. The government is predicting a $60.7 billion current-account gap this year and energy imports of $59.6 billion, according to its medium-term economic program.

Turkey’s deal with Iraqi Kurds comes as the government in Ankara is trying to reach a peace deal with the outlawed Kurdistan Workers’ Party, or PKK, which started an armed struggle for a separate land in southeastern Turkey in 1984 that has left more than 40,000 people dead.

The peace process is a “visible and credit-positive step,” Moody’s analyst Sarah Carlson said in a report April 11. “The prospect of peace promises to boost investor confidence and improve southeastern Turkey’s attractiveness as a destination for foreign direct investment.”

The lira fell less than 0.1 percent to 1.8051 per dollar at 5:05 p.m. in Istanbul today, extending declines this year to 1.2 percent. The lira was the worst-performing major currency in 2011, when the deficit was the second largest in the world, behind the U.S.

The extra yield investors demand to hold Turkey’s dollar bonds rather than U.S. Treasuries fell one basis point to 199, JPMorgan Chase & Co.’s EMBI Global Diversified index showed. That compared with an average of 283 basis points for emerging markets.

Turkey’s total savings may start at $1 billion this year “and will go up to $17 billion in 2018 as the energy deals come on stream,” Altug said. “Savings could rise beyond that.”

Before it's here, it's on the Bloomberg Terminal.