IFR Turkey 2012

Turkey Report 2012
5 min read

As Turkey gets to grips with hefty economic policy challenges – and shrugs off the complications of living in a volatile region – it exudes a self-belief hard to find elsewhere.

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As Turkey gets to grips with hefty economic policy challenges – and shrugs off the complications of living in a volatile region – it exudes a self-belief hard to find elsewhere.

There are many reasons for that optimism. Growth could be 2.5% this year and up to 4.5% in 2013, and capital markets are shaking off the dust of 2011.

Positive sentiment among foreign investors towards Turkey has been reflected in rising inflows of international funds into ISE-listed stocks, and ECM bankers say building blocks are now in place to put the equity market on a firm long-term footing.

A privatisation programme – a potential source of activity in the new issue market – appears to be back on track and the government has reiterated its commitment to accelerating the sale of residual government holdings of companies such as Turkish Airlines, Turk Telecom, and a number of banks. Potential IPOs could add as much as US$5.2bn of new equity supply by the middle of 2013, and the utility sector may also emerge as a source of new issuance.

Turkey was also able to relieve perceptions of funding pressure in January – amid nervousness surrounding upcoming maturities – with a 10-year offering via Barclays Capital, the sovereign’s largest deal in two years and the first US dollar deal in 2012 from a Central and Eastern Europe borrower. It is also thought to be mulling an Islamic bonds debut this year, tapping into a global sukuk market estimated to be worth more than US$100bn.

Last year was not without its difficulties, though, with some observers characterising it as a pretty miserable year and focusing stubbornly on the ballooning current account deficit, inflation fears and the dangers posed by currency depreciation.

Fiscal and monetary stimulus fired overheating and increased the volume of investor concerns as the year progressed. Rising investment flows unmatched by exports led to a soaring current account deficit, equivalent to about 10% of GDP. A tighter external financing environment and concern about the balance of payments pushed down the lira, contributing to sticky inflation above 10% and well north of targets. Instead of hiking rates to slow inflation, the Turkish central bank stood fast behind its unorthodox monetary policy, opting to leave borrowing costs low so as not to hamper growth. Many demanded a stronger and more orthodox response.

Macro imbalances remain and nervousness in the markets, ratings agencies and the IMF had not entirely evaporated by the start of the year. Bankers point to formidable challenges: rising oil prices could further widen the deficit; Turkey is still far from being a saving nation and the informal economy ensures that considerable amounts bypass banks, suppressing retail demand for equities; the lira remains fragile, pushing up dollar refinancing costs for listed companies; corporate reporting standards and governance still leave much to be desired

However, signs of a slowdown in inflation in February and a decline in credit growth may have vindicated the central bank’s policy of managing inflation through currency market interventions and bank reserve requirements.

As finance minister Mehmet Simsek says, it was an unorthodox policy, but it one that was effective and will continue to serve them well.

Alongside Ankara’s determination to address macro challenges, another crucial, but oft understated, reason for the underlying optimism is the “p” word: politics, both domestic and regional.

Domestically, investor sentiment is taking its cue from unprecedented political, and hence financial, stability consolidated by the enthusiastic re-election in June of the Justice and Development (AK) party after eight years in power.

Regionally, the country’s position and dependence on imported energy makes it vulnerable to global volatility: political upheaval in the Middle East, natural disasters in Asia and the ongoing global financial crisis explain why it missed its 2011 sovereign funding target of US$5.5bn. But – buoyed by that ever-present and intoxicating optimism – Turkish business figures and outside observers dismiss the crisis in neighbouring Greece and the eurozone, the potential for a row with the EU over Cyprus, and tensions in Syria, Iraq and Iran.

Turkey, they say, is on a roll.