Greece’s future is its past

Why trade holds the key to debt renegotiation  |  A deal was done at the last minute: Greece’s €172bn debt bailout was extended for a further four months after a turbulent week of bluff and counterbluff. Even now, there are no formal agreements on the required reform process ahead and without these agreements the deal will not be ratified. It appears that the Greek government is keen to demonstrate its willingness to reform by focusing on tax evasion and civil service reform, but it is unlikely that this will be sufficient for either Germany or the ECB.

By letting its focus continue to be on austerity, debt renegotiation, and structural reform, Syriza and now the Greek government, seem intent on playing by the same rules as the Troika, the ECB and Germany. For an economy that has shrunk by 25% since the beginning of the financial crisis, this is extraordinary. Instead it should be looking at debt re-payment over the longer term. If an economy is growing, then its debt is affordable; if the debt is extended for four months, then growth should be made central to subsequent discussions.

At present the outlook does not look good for several reasons: first, Greece is a service economy yet, despite the improving external position represented by the declining euro, its service sector trade is set to decline sharply over the next three years and pick up only gradually into 2019 (Figure 1). Given Greece’s already weak domestic demand, the decline in service exports, which includes tourism, is worrying.




Figure 1  |  Outlook for Greek service sector trade to 2020
Source  |  DeltaMetrics 2015


Second, Greece’s goods trade to GDP ratio is 0.4. In other words, there is a fairly strong pull of trade on Greece’s GDP. Oil is a critical part of this: the correlation between Greece’s trade and the oil price is 0.80 – largely because of the importance of oil in Greece’s total trade structure. For example, Greece’s exports of refined oil are twice as high as the second-largest export sector: medicines.




Figure 2  |  Greece’s debt and the challenge of trade
Source  |  DeltaMetrics 2015


The importance of oil to Greece’s trade explains its resistance to the EU’s extension of sanctions against Russia in January and is the third reason why Greece’s situation more broadly looks vulnerable. Turkey is Greece’s largest trading partner and its import/export portfolio is dominated by oil, gas, cars and infrastructural products. Russia is a growing trade partner for Greece but Russia predominantly exports oil and commodities while Greece exports clothes and fresh or stoned fruit to Russia. Greece’s growth in exports since the financial crisis has been because of its role as an oil and infrastructure distributor with a heavy reliance on Turkey, its largest trading partner and, increasingly, Russia (Figure 3).




Figure 3  |  Greek imports from Turkey and Greece (% annual change) 2010-2016
Source  |  DeltaMetrics 2015


Imports from both countries have been volatile, but two things are clear: First, Greece has been attempting to switch its imports of oil from Turkey to Russia, evidenced by the steep increase in imports in 2010 from a small base. Second, and arguably more interestingly, imports from Turkey and Russia have been inverse to one another: when Russian imports have increased, Turkish imports have declined and vice versa. Even in the forecast period, from 2015 to 2016, Greece’s imports from Russia are falling at a slower rate than those from Turkey.

If Greece is to have a path to debt repayment then it must do two things: First it must seek to restore its greatness as a trading nation, both in services and goods, through reforms that focus on skills development, innovation, inward investment and port redevelopment. Supply side reforms alongside structural reform may make debt serviceable more quickly than just one in isolation since both are necessary and neither is alone sufficient.

But second, and in spite of history, Turkey may yet hold the key to Greece’s growth through trade and this is a bullet that should be bitten quickly. Europe’s geopolitical relationship with Russia is difficult at present to say the least and while this continues, it is unlikely that Greece will be able to restore its role as an energy and infrastructure distributor in the near future. Greece’s trade relationship with Turkey reflects mutual trade interests.

Market nervousness about the possibility of a “Grexit” heightened by the rhetoric of the past week may yet prove to be unfounded, however. The Greek public voted for Europe but against austerity. This is as much about politics as it is about economics. Greece, in trade and geopolitical terms, sits on an emerging fault-line between Russia and Europe. As sanctions build against Russia, Greece’s position is arguably more secure within Europe than it is, say, aligned with two of its major and more volatile trading partners, Turkey and Russia. And let’s not forget, the history defined by the Stability and Growth Pact and monetary union means Germany’s banks are exposed to the risks of Greece’s sovereign default and of a Grexit more than any other nations. “Necessity is the mother of invention”: let us hope that the Realpolitik of a Grexit is the driver for the resolution of the crisis.


Greece’s future is its past  |  Author  |  Rebecca Harding  |  CEO

Webcast 022 | Cold Turkey

Delta Economics’s Q1 forecast of 5% trade growth in MENA has been hit by a deteriorating geopolitical situation. Uncertainty will hurt markets and places Turkey’s growth in a fragile position.



Webcast 022 Author  |  Rebecca Harding  |  CEO

Oil spill-overs

Why Iran’s role in the Iraq crisis is critical for everyone  |  Oil prices have climbed this month amid uncertainty about Iraq’s security as ISIS took control of Iraq’s second city, Mosul, and threatened to establish a Caliphate across Northern Iraq and Greater Syria. The region is oil-rich and the dangers of spillover into other countries in the region potentially puts further upward pressure on oil prices just as the crisis in Ukraine was beginning to be priced into markets generally and oil markets in particular.

Against this backdrop, the consequences of Iran’s decision to mobilise troops to fight against ISIS, thereby supporting the Iraqi government and, by implication the US. This clearly presents diplomatic and security challenges to the US: it does not support Iran’s backing of Syria’s Bashar al-Assad and the idea of the US and Iran being on the same side may be unpalatable to the White House.

Nevertheless, the Iranian move is shrewd. It supports Iraq’s Shiite government as a regional strategic partner and, wanting sanctions to be lifted as it does, is moving to protect its economic and trade interests as much as its political ones. The Delta Economics Q2 2014 forecast for trade growth in the MENA region generally is just over 0.6% lower than our forecast in Q1 at 4.5% growth during the course of the year. But Iran’s total trade will grow by nearly 5.5% and its exports of mineral fuels by over 17%. it clearly has a lot to gain from closer relations with both Iraq and with the rest of the world.



Figure 1  |  Oil Spillovers: Why Iran is increasingly important to the Middle East’s oil supply
Source  |  DeltaMetrics 2014


Asia is important as an export destination for Iranian mineral fuels, explained at least in part by the fact that sanctions have prevented substantial trade with Europe or North America historically. As a result, the country to watch is Turkey – simply because oil exports into Germany are routed through Turkey from Iran. Iran is Turkey’s largest crude oil importer.

From an Iranian perspective, however there is potentially a stabilising effect on oil markets that its decision to intervene in the crisis could have. If Iraq’s oil increasingly comes on tap, then any drop in oil supply from Iraq can be offset against increased supply from Iran. Figures 2 and 3 show how mineral fuel exports from both countries are predicted to perform to the end of 2014.

Figure 2 suggests that mineral fuel exports picked up sharply in the early part of 2014 but may suffer slightly from the fall-out of the current crisis in June and July, after then they will remain relatively static to the end of the year.



Figure 2  |  USDm value of Iraq’s mineral fuel exports, June 2001-Dec 2014
Source  |  DeltaMetrics 2014


Figure 3 shows that Iran’s mineral fuel exports will actually follow a similar pattern to Iraqi exports and fall slightly towards the end of Q2 and into Q3 picking up only slightly in Q4. Mineral fuel exports to Turkey have been declining fairly systematically since the beginning of 2013 which potentially reflects the fact that Turkey has supported Syrian opposition rather than Al-Assad in Syria.



Figure 3  |  USDm value of Iran’s mineral fuel exports, June 2001-Dec 2014
Source  |  DeltaMetrics 2014


Interestingly, however, this does not appear to have affected Germany’s imports from Iran which have increased since mid-way through 2012, despite the fact that sanctions still exist, reflecting, perhaps, Germany’s (and Europe’s) sustained concern about its energy security.

Crises in the Middle East always make markets nervous. Unsurprisingly the correlation with oil prices of MENA trade is very high at 0.98 since a higher value of oil trade historically also reflects higher oil prices. However, the correlation of MENA’s trade with key markets is very high: with the S&P 0.70, with Dax, 0.81, with the India BSE 0.91 and with the KOSPI, 0.92. If oil trade in the Middle East is weak, it makes both oil and equity markets nervous.

Remarkably, there is also a very strong correlation between Middle East mineral fuel exports with the Gold Spot last price monthly, as Figure 4 shows.


Figure 4  |  USDm value of Middle East mineral fuel exports versus NYSE Arca Gold Spot last price monthly, June 2001- May 2014
Source  |  DeltaMetrics 2014, Bloomberg


This correlation is very marked up to the middle of 2012 but has looked increasingly negative since then. Gold is often used as a hedge against price changes but while prices rose over this period in emerging markets, they declined in Europe breaking the relationship. In spite of that, the correlation over the whole period is over 0.90: if Middle Eastern oil trade goes up, then it means that oil wealth is increasing and that demand for gold, as a result, will be higher. If oil exports increase towards the end of the year, we can expect higher gold prices then but in the immediate future, further price declines.

The Middle East is increasingly a source of oil for Europe as it attempts to reduce its dependency on Russian oil. Yet as the region is fraught with geopolitical risks, there are dangers to the speed at which trade growth will increase, especially if the Iraq crisis spills over across the region. The major beneficiary nation, however, will be Iran whose mineral fuel trade is forecast to grow the fastest of any country in the region. This is the results of loosening sanctions and the desire, especially in Europe to have a broader energy supply base.

But it is also arguably the result of Iran’s policy to create a Shiite power-base within the region. While in the short term this may stabilize markets: pushing oil prices down as more oil becomes available during the course of the year. It might be that the effect is to increase the likelihood of a bull run next month because markets again price all the effects of the crisis in. However, the division of the region on religious grounds is also visible through its trade making it vulnerable and volatile. This may well have longer term spill-over effects.


Chain reactions?

Why Turkey cannot escape geo-politics | When Turkey’s citizens went to the polls in local elections on Sunday 30th March, it is probable that President Erdogan’s Twitter ban featured more strongly in their minds than t-shirt exports to Europe, but maybe it shouldn’t have done. The economic growth and stability that was a key feature of the first few years of his Presidency have been dwarfed recently by substantially slower GDP growth, just 2% in 2013, a rising budget deficit, accusations of corruption and cronyism and rumbling under-currents of protests. An influx of 700,000 refugees from Syria is further putting strains on Turkey’s economic resources and the recent shooting-down of a Syrian jet on the Turkish border points to the vulnerability of Turkey to the spill-over from instability in the Middle East.

What a difference a couple of years make. Delta Economics is forecasting that Turkey’s export growth in 2014 will be 4.6% but this is under half the rate of growth of nearly 10% seen in 2012 and with imports growing 4.5% compared to just under 4% in 2012, there is no likelihood of the trade deficit closing any time soon either. The challenge for Erdogan, quite apart from restoring his reputation with his voters on the political front, is that he must also restore the reputation of Turkey amongst the investment community.

The first challenge will be to address the value of the Turkish Lira which has been falling against the US Dollar since the beginning of 2011, with a brief respite between the end of 2011 and the end of 2012.  However, this has had little effect on exports, which grew by 5.3% in 2013 (Figure 1).


Figure 1 | Turkey’s Imports, Exports and Total Trade (USDm) vs Turkish Lira per USD, Last Price Monthly June 2006-Feb 2014

Figure 1 Source | DeltaMetrics 2014, Bloomberg

The recent intervention by the Turkish Central Bank to rescue the Turkish Lira by raising interest rates to 12% shored up the value of the currency in February but Foreign Direct Investment (FDI) is a more effective route for stabilising the real economy. FDI in 2014 is expected to reach its 2013 levels, but the more expensive currency will also exacerbate the trend of rising imports.  And at a sectoral level, only clothing has reached its pre-crisis export level (as shown in Figure 2). What the link between sectors and trade routes suggests is that the appreciation of the Turkish Lira up to the financial crisis was negatively related to trade and was fuelled to a large extent by hot money. Since then, it is the depreciation of the currency that has propped up trade; any attempt to shore up the currency could have a detrimental impact long-term on trade without sustained real investment. This is because short-term capital flows are not contributing to the value of the currency as much as they did pre-crisis; instead, Turkish trade relies on exports and inward investment.


Figure 2 | Turkey’s key sector export trade growth, USDm, vs Turkish Lira per USD, Last Price Monthly, June 2001-Feb 2014

Figure 2 Source | DeltaMetrics 2014, Bloomberg

The second challenge will be to re-invigorate the move into higher-end manufacturing that was initiated through closer trade and supply chain ties with Europe. Delta Economics estimates that automotives generally will contribute the equivalent of USD 17.6bn to Turkish exports in 2014. While we are expecting exports of cars and goods vehicles to fall back slightly in 2014, exports of components are forecast to grow by some 4.9% reflecting the role that Turkey has forged for itself over the past decade in global supply chains.

However, as Figure 3a shows, Turkey’s trade in higher end manufacturing (proxied through clothing and automotives and even to some extent through iron and steel) is vulnerable to regional risk. Nine of Turkey’s top ten export partners are either in Europe where demand is flat and deflationary pressures increasingly evident, or the Middle East, where geo-political pressures are placing downward pressure on trade in the smaller nations by trade value.


Figure 3a | Regional risk to Turkey’s trade


Figure 3b | Regional risk to Turkey’s trade

Figure 3b highlights the third challenge: the higher-end manufacturing which grew so rapidly up to the end of 2012 is highly dependent on Europe while commodity and infrastructure trade relies more on the some of the least stable countries within the Middle East region. Delta Economics is forecasting that automotive trade with its five main export partners, including Russia, will decline during the course of the next year.

Figure 4 shows automotive exports to Germany and Russia. There does not appear to be any effect of currency depreciation on trade; the correlation is just 0.26 for Germany and 0.21 for Russia. More than this, we are expecting a significant slow-down in export growth of cars to both countries during 2014 suggesting that previous growth has been on the back of inward investment which has now stabilised.


Figure 4 | Turkish exports of automotives to Germany and Russia (USDm) vs Turkish Lira per USD, Last Price Monthly, June 2001-Feb 2014

Figure 4 Source | DeltaMetrics 2014, Bloomberg

Decelerating export growth to Europe could be compensated by diverting attention to Turkey’s largest export partners in the Middle East, but this highlights the fourth challenge faced by Turkey’s leaders: that its exports to MENA are in iron and steel which themselves are a function of infrastructure development in that region. In the wake of the downturn and the Arab Spring, infrastructure spending has suffered and Figure 5 shows how regional volatility affects the growth path of exports for Turkey.

The substantial drop in exports between 2009 and 2010 reflects the collapse of the infrastructure boom in the MENA region at that time, particularly in the UAE. The sustained uncertainty in Egypt and Libya has meant that exports have not recovered to their pre-crisis levels and we are forecasting a net decline in trade to these countries during 2014.  And although trade has recovered to pre-crisis levels with Iran the growth is fragile and arguably will be highly dependent on the outcome of the on-going talks with the US and Europe to remove economic sanctions. We are forecasting growth in iron and steel exports to Libya, Iran and Egypt after Q3 2014, but the geo-politics of the region present a substantial downside risk to the forecast.


Figure 5 | Turkey’s exports of iron and steel to selected MENA countries (USDm) vs Turkish Lira per USD Last Price Monthly, June 2001-Feb 2014

Figure 5 Source | DeltaMetrics 2014, Bloomberg

The final challenge is particularly prescient given the current situation in Russia. Turkey’s growth has to a large extent been fuelled by its role as an energy transit hub and, in turn, this has meant that it has become highly reliant on imports from Russia, for its own increasing demand and to supply its own export growth, particularly to the Middle East. We estimate it will import nearly US$ 7bn of refined oil in 2014 from Russia, which is roughly three times higher than its second largest importer, India. Nearly half of its top 30 export partners are in the Middle East with ten of its top 30 export destinations facing major geopolitical or economic challenges over the next year. These countries account for nearly 30% of Turkey’s oil exports and while we are forecasting substantial growth for nearly all these destinations, the potential for downside risk to this forecast is equally substantial.


Figure 6 | Geo-politics and Turkey’s oil trade

Turkey cannot separate its politics, global geo-politics and its economic performance. It must attract real investment into its economy to reduce its dependency on hot-money flows. But to do this, it must convince investors that it is both politically stable itself and that it can over-come its reliance on Russian oil and trade with highly volatile countries while re-invigorating its innovation and manufacturing base in textiles, automotives and iron and steel. Geographically located as it is on a geo-political and sectarian fault line between Europe, central Asia and the Middle East, it is a microcosm of the challenges that the world faces during 2014 all of which are linked together through trade. Turkey’s voters in the future should think beyond their politics to realise that their economics may well be determined by a chain of geo-political events over which they have very little control.