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The latest outbreak of hostilities in the Gulf brings particular risks for Türkiye when viewed from a foreign institutional investor perspective.
First, there is obviously the risk of hostilities spreading. Perhaps Türkiye’s NATO status and the risk of the Article V clause, which triggers mutual defense, have thus far discouraged such actions from Iran. Likely also driving Iran’s reluctance is Türkiye’s more balanced approach to the conflict and efforts to broker peace. Türkiye is also a large market for Iranian energy and a trade partner.
Second, Türkiye fears instability in Iran, risks of a civil war, and then possibly huge migration flows, just when Türkiye is beginning to see some relief with the return of Syrian refugees to their homes. This could strain Turkish domestic politics and social and economic stability in the run-up to elections likely in late 2027.
Third, developments in Syria have clearly helped push forward the Kurdish peace process in Türkiye. But if instability in Iran fuels Kurdish secessionist forces, it could complicate Kurdish peace efforts across the region—especially for Ankara.
Türkiye has obviously viewed a Kurdish peace as potentially bringing huge economic benefits in terms of reconstruction, improving relations with key neighbors, and boosting broader economic development and investment.
So any deterioration in the security situation in Iran would put this at risk.
Fourth, Türkiye has a huge annual energy import bill of over $50 billion. Not only could the conflict disrupt energy supplies from Iran, but higher global energy prices would worsen economic imbalances and vulnerabilities and add upward pressure on inflation.
The current account deficit in Türkiye, while much lower than historical highs, is widening in any event and was likely to be over $30 billion this year, anyway.
The rough rule of thumb has been that each $10 a barrel increase in the oil price adds around $3 billion to the current account deficit.
If oil pushes up toward the $100 a barrel mark and stays there, that could easily add $10 billion plus to the current account deficit.
Similarly, each $10 oil price increase adds around 1.2% to inflation. This will just make the Central Bank of the Republic of Türkiye's (CBRT) existing task in fighting inflation much more difficult—perhaps exposing the Monetary Policy Committee's (MPC) decision to cut early and above expectations as being somewhat premature, given the geopolitical setting and risks, which are ever-present.
The CBRT’s task will be made more difficult by the likely increased risk perceptions around Türkiye, which could see some of the hot money inflows seen coming to the country since the turnaround in policy under Simsek reverse.
The lira is likely to come under more sustained selling pressure, reserve loss will increase, and the CBRT might well have to hold policy rates now higher for longer or even hike policy rates, which will obviously impact the growth outlook. For President Recep Tayyip Erdogan's administration likely eyeing early elections, that’s disappointing to say the least.
As said, Türkiye has a knack for beating expectations in terms of resilience and durability.
And while the current account deficit and inflation story are vulnerabilities, I would say that buffers are much larger than they were before Simsek and team took office.
Foreign exchange reserves are close to record highs, the FX-protected Turkish lira deposit scheme (KKM) has been unwound, and the current account deficit, while rising, is still half the prior record highs.
Real policy rates are also still elevated—albeit perhaps not high enough given the persistently high level of inflation and the geopolitical risks now dawning.
Importantly, I think Simsek and his team in Türkiye have a respected group of technocrats running policy at the moment. And you could argue that the increased geopolitical risks now make it much less likely that Erdogan would risk any changes in that team.
Arguably, in moments like this, prudence and sound macroeconomic management matter even more, so I tend to think that Simsek’s standing has been strengthened by the new Gulf war.
And on the geopolitical front, it is not all negative for Türkiye.
Türkiye has some clear strengths in defense technology—particularly drones and likely drone defense.
With the latest conflict in the Gulf exposing a further shift in warfare to one based on drones and technology, this might see further military sales and diplomatic alignment between Türkiye and the Gulf states amid talk of the diversification of defense partnerships.
This already comes after talk of deeper defense ties between Türkiye, Saudi Arabia and Pakistan.
Events in Iran will also likely further push for greater defense and strategic cooperation between Türkiye and Europe, as they again reveal common interests between the two.
Türkiye and Europe share similar goals with respect to policy toward Iran, as they do toward Ukraine and the Black Sea.
Ankara offers Europe both a foil against greater potential instability in Iran and defense technology answers to many of the challenges facing Europe.
Likely, all this will further deepen defense ties between Türkiye and Europe, as seen in Ankara’s recent participation in a huge NATO exercise and continuing Turkish naval deployment in the Baltic Sea.
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