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Sunday, 22 October 2017

IFR Turkey Special Report 2013

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  • IFR Turkey 2013 Cover

Shelter from the storm: Turkey can be forgiven for feeling smug. With Cyprus cranking the eurozone crisis back into high gear and the EU’s peripheral members again looking fragile, at first sight the country stands out from its rowdy neighbours as a paragon of growth and financial stability.

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Finance minister Mehmet Simsek made the point recently, hailing the achievement of 2.2% growth against the backdrop of the continuing crisis in Turkey’s main trading partner, the eurozone, escalating geopolitical tensions in its neighbourhood, and high oil prices.

In the coffee houses of Istanbul, the fact that growth slowed dramatically in 2012 – to the lowest since 2009 and just 1.4% per cent in the fourth quarter – only serves as a paradoxical reminder of just how robust the country’s development has been: its slowdown from an 8% norm has largely been engineered by financial authorities fearing overheating.

There are still some causes for concern as foreign direct investment continues to fall short of expectations (US$8.3bn in 2012 versus the US$20bn target) and the current account deficit continues to creep up. Ankara has not always helped, as with February’s decision by ministers to veto a US$5.7bn concession to operate highways and bridges – potentially the second most valuable privatisation in Turkish history.

In a world short of positive indicators these are only minor warning signs versus the list of reasons to be optimistic.

Last year Turkey regained investment-grade status for the first time in 18 years when Fitch upgraded it to BBB–. S&P is still a step behind after the recent upgrade to BB+ and Moody’s is yet to move. More important than credit ratings, which lag well behind the IG signal from CDS, Turkey is also enjoying its lowest inflation in 44 years, employment has been rising rapidly, and real interest rates are near zero.

The strength of the lira against the dollar has also attracted demand with spreads on the country’s debt being squeezed by 200bp–250bp in 2012, outperforming emerging market peers in the banking sector. Overseas investors also snapped up Eurolira debt issues by Turkish banks.

Equity issuance has had another slow start to 2013, but more than doubled in 2012. Savings and pension fund reform should support continued gains by ensuring a stable bid in the future from domestic institutional investors, reducing the high proportion of deals that end in failure.

Those changes should take effect just in time for the potential IPO by Ziraatbank, a rare Turkish elephant that could raise as much as US$3bn in 2014.

While economists are mixed about the mid-term outlook, investors are stuffing Turkey’s pockets with lira, dollars and now yen. The success of Turkey’s Samurai of ¥90bn and sukuk forays has helped it to diversify its borrowings and reduce dependence on dollar-denominated deals.

In the case of Turkey, optimism almost always seems to prevail and investors keen to focus on the nation’s potential shrug off lingering uncertainty over the lira’s potential to depreciate in the medium term and concerns about the deficit.

Clearly the sweet aroma of its coffee continues to make Turkey alluring – and the woes that have befallen its neighbours only serve to enhance this.

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