Diversifying

To view the digital version of this report, please click here.To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.comFinance 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.

To view the digital version of this report, please click here.The Istanbul Stock Exchange is in the midst of great changes. The first step on its journey came with the promotion of the current chairman Ibrahim Turhan to that role at the beginning of 2012. One of his first acts was to communicate his intention to take the 100% state-owned bourse public. The IPO could take the form of a partial privatisation, though there could also be a primary component to raise funds for capital expenditure. Turhan is not the first ISE chairman to have expressed such ambitions; his predecessors having found talk came easier than action. The process of making the exchange IPO ready will be arduous, with the articles governing the operation of the bourse requiring substantial change, and the shareholder structure needing modification.“There has been a strong trend in the world exchange sector towards demutualisation and privatisation in order to deal with the high competition arising from the consolidation within the sector, alternative trading platforms, and over-the-counter markets,” said Turhan. He said the ISE must follow to compete, and it had already demutualised its governance structure, via the Capital Markets Law enacted late last year, as the first step of this process. A planned merger with Istanbul’s gold and derivatives exchanges is the next step. The move will see the entities come under a single management structure in April, with the formal union taking effect from June.“Enabling all asset classes to be traded at a single platform will provide significant economies of scale and the price discovery will be much more robust,” he said. Among its competitors, which increasingly trade cash and derivatives markets simultaneously, the share of derivative transactions in total revenues is growing at the expense of spot trading.Complementary stepThe ISE will also change its name to Borsa Istanbul, but insists this is more than a mere rebranding. “Turkish capital markets are going through a fundamental restructuring,” Turhan said. “Rebranding is just a complementary step aimed to reflect the depth of the change.”The bourse will also increase its share in Takasbank, the local clearing agency, in readiness for its future flotation, ensuring it is integrating both vertically and horizontally. Then there is the product diversification. A multitude of new products and markets will, it hopes, drive new business and growth. Single stock futures were launched in December, with index options planned for the second quarter and FX options later this year. Its equity repo market was also launched in December, giving clients access to repo transactions on shares of companies traded on the İMKB equity market, and those included on the IMKB 30 Index, on exchange. Turhan also promises significant investments in technology, to ensure Borsa Istanbul has a world class offering across trading, including pre-trade risk management, matching, and post-trade activities such as clearing and settlement. An exchange cannot become a hub without looking out as well as in, and the ISE has been busy furthering its international ambitions. In January the exchange signed a Memorandum of Understanding with Japan Exchange Group. In autumn it launched the IBTX (Istanbul Traded Index) and IBTX Banking, in conjunction with the Vienna Stock Exchange, offering Austrian investors better access to Turkish securities.“We are now in efforts to develop joint products and connectivity with various exchanges both from Asia and the Middle East,” said Turhan. The deals, and the others that will surely follow, will “revitalise our trading architecture, enable knowledge transfer and increase international order flow to our exchange”, said Turhan. “Only after completing these steps to boost the value of Borsa Istanbul we can talk about any public offering,” said Turhan, refusing to be pinned down to a date.Watch this space.

To view the digital version of this report, please click here.Turkey is not just a darling for international bond investors – it is a sought-after location for foreign companies looking to gain a foothold in an economy with the growth profile of an emerging market but the stability of a developed one.The country’s strong economic growth, its high-spending, tech-savvy young population and growing middle class combined with the country’s enviable location as a gateway to the Middle East and Africa hold an allure for Western investors seeking respite from moribund home markets.But the challenge for those looking to secure their place in the country lies in finding assets that match their valuation, or picking an industry that is not dominated by the powerful Turkish families that account for huge swathes of the country’s GDP. There’s the Dogan family, which owns nearly half of Turkey’s print and broadcasting media and 10 publicly traded companies, or the Kocs, which hold assets in the automotive, energy, financial services, petrochemical, retail and food sectors.“With that sort of influence, you can easily end up being the sucker at the negotiating table, so you have to take your time,” said one banker. The chief of the Istanbul Stock Exchange, Ibrahim Turhan, wants to change the culture of private ownership and move towards a broader public equity culture, but for the moment, international investors attracted to the buzz of Turkey are proceeding with caution.In September, US growth equity firm General Atlantic ended a five-year hunt for assets in the Turkish market when it paid US$44m for a minority stake in yemeksepeti.com, an online food delivery business.Talking in dollarsGabriel Caillaux, managing director at General Atlantic, said: “The exciting growth trends in Turkey are hard to ignore but it took us a while to get comfortable, not least because the lira had taken some big discounts against the US dollar against a backdrop of rising inflation. This is now being well-managed and nowadays when Turkish businesses are talking to foreign investors, they talk in dollars. It’s important to find a sector that is open to foreign investment and partnership.”There’s another reason for the caution. The plane-loads of bankers that are heading with their pitch-books to Istanbul are wary of a bubble. Caillaux said: “There is a real disconnect between buyers and sellers. Turkey is a hugely exciting place to do business because of its people and economic fundamentals, but that is driving valuations higher for certain assets. There’s real concern about overheating.”Turkey’s positioning on the international stage is something of a contradiction. Its biggest economic challenge lies in its huge balance of payments deficit, which is down to the fact that it has to import its energy to meet its growth needs. The government is looking to develop a home energy market but in the meantime it acknowledges its reliance on outside help.“There is a real disconnect between buyers and sellers. Turkey is a hugely exciting place to do business because of its people and economic fundamentals, but that is driving valuations higher for certain assets. There’s real concern about overheating”Haluk Bilgic, a partner at law firm Ozdirekcan Bilgic Dundar, the correspondent law firm of Gide Loyrette Nouel in Istanbul said: “The government is trying to reduce its dependence on foreign capital but in reality, the financial markets still depend on it. For instance, without the support of foreign capital, big IPOs in the country are unsuccessful.”The country’s apparently contradictory relationship with the EU speaks to its ambition to be close to the currency bloc while at the same time looking eastwards to forge big alliances. The introduction of its new Commercial Code in July 2012 and the Capital Markets Act on January 1 this year, provides further evidence of a country getting its regulatory house in order to smooth the path to accession. Bilgic said: “Turkey’s lon

To view the digital version of this report, please click here.It has never been easy to be a capital markets banker in Turkey, but rarely has it been this hard. In recent years, the market for IPOs has virtually dried up. Deals do punctuate the market, although they are few and far between: the last significant IPO was retailer Bizim’s US$250m-equivalent January 2011 IPO in the midst of a relative flurry of issuance that was brought to a halt by a sale in another retailer.The US$515m ‘re-IPO’ of supermarket owner Migros in April 2011 was a success, but the surprise loss disclosed in quarterly results one month later caused the share price to collapse – taking with it the ECM pipeline.In most cases where hefty issuances do occur, they are secondary share sales by large domestic corporates. Note the US$2.5bn November 2012 follow-on by Turkey’s seventh-largest lender, Halkbank.In one of the emerging world’s great economies – one which boasts fast-rising retail sales, manageable inflation, an expanding economy and a current account deficit that narrows each year – why is it so hard to find viable listing entities attractive to a blend of local and foreign investors? There are many answers to this question, each of which offers pleasingly simple and achievable solutions. Turkey’s capital markets lack depth. Any headline-grabbing stock sale here tends to succeed only when global institutional investors pile in, searching for healthy yields and dividends. When global markets have a poor day, so do local equity sales.“The main challenge is that Turkey’s capital markets are too small and too illiquid for non-Treasury activity,” said Kaan Basaran, head of origination and sales, Turkey, at Nomura. “The institutional investor base in Turkey has yet to develop: it is not deep enough to handle major local equity or debt sales by itself.” Channelling new capitalIn an effort to rectify this situation politicians in Ankara pushed through a series of much-needed financial reforms on the first day of the year, creating a new national pension scheme. Anyone investing up to TL799.50 (US$443) a month into the new fund receives an extra 25% from the government to add to the total. “The main challenge is that Turkey’s capital markets are too small, and too illiquid for non-Treasury activity”This “matching system”, it is hoped, will deepen the country’s markets by channelling new capital into local insurance firms and pension funds. “The pension reforms are a deeply encouraging sign for the whole country, and a natural and important stage in Turkey’s development,” said Julian Macedo, a director in equity capital markets at Barclays.Another factor, unlike in, say, South Korea, the US or Australia, is that stock ownership is just not a big deal in Turkey. There is a reason for this. The second half of the 20th Century was not kind to Turkey, hemmed in between a struggling Africa, a hostile Soviet Union, and a largely chaotic Middle East.Military misrule and rampant corruption held back economic growth and directed public money into the pockets of the well-fed and well-connected. Only after a financial meltdown at the turn of the millennium, and the promotion of a stable political system under the aegis of premier Recep Tayyip Erdogan, did the economy turn the corner. Triple 5 economyNow, says Turalay Kenc, deputy governor at Turkey’s Central Bank, the country can aim for what he terms a “5-5-5” economy: 5% inflation and 5% economic growth, and a current account deficit no greater than 5%. Kenc said those aims were “realistic” in the medium term, and should lead to more citizens “trusting in the long-term viability” of Turkey’s economy. And that, in turn, should broaden the country’s stock of share owners, as a new generation learns to accept, and even embrace, the concept of investment risk.“The institutional investor base in Turkey has yet to develop: it is not deep enough to handle major local equity or debt sales by itself”These, however, still remai

To view the digital version of this report, please click here.Imitation is the sincerest form of flattery they say, and one country will often emulate another’s perceived success in particular areas. Growing industrial powerhouses like China, for instance, aspire to Germany and Japan’s engineering clout. The process even extends to finding replicas – historic buildings included – of English public schools in the UAE and French chateau in rural China.Financial hubs like London and Wall Street have laid the blueprint for Dubai and Shanghai, often down to the finest technical detail.Yet it is not always the obvious targets that countries look to mimic. Take Turkey’s increasingly amorous relationship with Poland.At first glance, it is not clear what the Turks covet. But narrow it down to the economy and the answer is clear: Poland’s deep and active capital markets. In Turkey’s financial capital, Istanbul, barely a meeting passes by without a mention of the Warsaw Stock Exchange.The desire to emulate Poland, bordering on hero worship, is not so surprising. Warsaw is not only the most active bourse in Central and Eastern Europe, but WSE trading volume now exceeds activity on all CEE-region stock markets combined.Visible emerging powerEverywhere one looks in Turkey, one sees the sort of economic confidence visible only in aspiring or re-emerging superpowers: booming retail sales; cities packed with construction cranes; conglomerates exporting like mad to Europe, Asia, and the transition states of Middle East and North Africa. Turkey’s economy has grown in leaps and bounds since a harrowing financial meltdown at the turn of the millennium. GDP rose 8.5% in 2011 and 9.2% the previous year, according to CIA World Factbook data. That dipped to 2.2% last year, but Turkey’s economy is on track to expand by 3.8% this year and 4.5% in 2014.Only on the issue of capital markets does Turkey fall short, and that brings us back to Poland. Far-sighted legislators in Warsaw made a succession of far-reaching decisions in the mid to late 1990s that continue to resound today.First, the WSE’s directors declined repeated offers to lock themselves into a joint venture with a bourse from Western Europe – which would likely have made them a minority player in their homeland – or to sell up entirely. Rather, they opted to blaze their own trail, remaining independent – not an easy option to take in a country impoverished by the retreating Soviet Union – while seeking over the long term to promote them as the CEE’s bourse of choice.Warsaw solutionPoland managed this tricky feat by systematically stripping out assets from the state fundament, transforming them into well-run private enterprises, then listing them on the WSE. Banks, carriers, insurance firms, utilities: all were sold in a series of IPOs to a mix of retail and institutional shareholders.In time, the world started to take notice. Warsaw’s stock exchange, housed in a large, clinical building (situated, ironically, opposite the old Polish United Workers’ Party headquarters) now hosts institutional investors from across the world. Corporations from Hungary, Austria (where the Vienna stock exchange used to be the link between West and East) and Ukraine have made Warsaw their home.This, above all, is what Turkey is seeking to imitate, and for good reason. Any equity or debt market offering, wherever it takes place, is dependent on a wide array of market conditions. But deeper, more liquid markets – and Poland is one – can absorb, say, an IPO or chunky corporate debt sale even when the wider world has an off-day.Turkey operates at the other extreme.“You can’t complete an IPO here without Europe and America having a good day,” said one Istanbul-based investment banker. “I’ve done dozens of big stocks sales, and if one thing goes wrong, like bad US jobs figures or awful eurozone news, the sale goes down the toilet.”This brings us back to Turkey’s most prominent problem: the glaring lack of a deep pool of

To view the digital version of this report, please click here.Turkish borrowers secured US$20.2bn of loans in 2012, dipping slightly from a record-high of US$22bn in 2011. “The market is constantly improving in the way that more liquidity seems to be available. We see more names knocking at the door and more banks are open to listen,” one European banker said.The positive state of the market is reflected by the launch of Ojer Telekomunikasyon’s US$4.75bn deal in early March – marking the country’s largest corporate loan in five years. The competitive pricing – margins of 425bp over Libor for the five-year tranche and 495bp for the eight-year tranche – illustrates the strong faith that top Turkish borrowers have in international lenders’ appetite, bankers said. “It’s a good starting point in today’s market and those who can and have the right limits will probably do it,” a second European banker said. The IMF’s 4% growth forecast for the Eurasian country over the coming year, combined with borrowers’ expansion plans and lenders’ new-year budgets, means international loan volumes are expected to swell. Cash-rich local banks will also drive domestic loan volumes higher.“Turkish banks have been providing more loans for Turkish acquisitions and projects than the European banks. Of the deals that we do more than half or two-thirds of the financings are now from Turkish financial institutions,” Ayse Yuksel, managing partner at Chadbourne & Parke’s Istanbul office, said. “It used to be the other way around.”Project promiseTurkey’s booming infrastructure and privatisation projects are the most promising source for new syndicated loan deal flow in 2013. A US$960m loan for the Eurasia Tunnel Project’s construction of a 5.4km tunnel between the European and Asian shores of Istanbul signed via financial adviser UniCredit in December, while the first stage of a US$6.5bn financing for the Gebze-Ismir highway project signed a US$2.8bn financing with a syndicate of Turkish banks in mid-March.  Looking ahead, there will more sizeable financings for Gebze-Ismir, a multi-billion loan roughly pinned at US$2bn for the total US$9bn financing for a third Istanbul airport and around US$2bn of loans to back US$3bn of hospital projects are expected throughout the year.  Lenders are still waiting on a potential US$4bn project loan to privatise 2,000km of state-owned toll roads via the Turkish Privatisation Administration scheme, after the government said bids were too low and raised plans for an IPO.Project financing poses a number of challenges for lenders, which have to address emerging market risk, demands for tenors exceeding a decade and new legal frameworks.“It is not entirely clear what the shake-out will be from Basel III. Financings have not ground to a halt, but Basel III is an issue and only time will tell what the long-term impact will be”“Emerging market returns are attractive, but the nature of emerging markets means that the path is not always directly forward,” Magnus Rodrigues, partner at Chadbourne & Parke London said.Turkish banks are better placed to navigate such risks as they are more familiar with the sponsors, but they are unwilling to lend beyond five years and demand relatively higher pricing.International banks, however, are able to provide loans for up to 20 years for competitive pricing, though both factors are highly dependent on the sponsor and sector. The Basel III regulation is also making longer tenors increasingly tricky.“It is not entirely clear what the shake-out will be from Basel III. Financings have not ground to a halt, but Basel III is an issue and only time will tell what the long-term impact will be,” Magnus said. “Nevertheless, at least for recent projects Basel III does not seem to have prevented them from being financed.”The rising support of Middle Eastern banks is helping to widen Turkish borrowers’ financing options and pool of liquidity. Samba and the National Bank of Abu Dhabi are two banks, amo

To view the digital version of this report, please click here.Credit investors joined with currency managers in Europe, the US and Asia to snap up Eurolira offerings from Akbank, GarantiBank and Russian-owned Sberbank in recent weeks, with Turkey’s strong financial sector driving enthusiasm for coupons around four percentage points higher than the same bonds issued in dollars.Bookrunners reported that aside from the credit risk, a key driver was exposure to the lira, which rose 5.6% against the dollar in 2012 as the Turkish banking sector grew 12.6%, according to the Banking Regulation and Supervision Agency.“Investors were happy to step outside their comfort zone to pick up additional yield,” said Stefan Weiler, head of debt capital markets for CEE, CIS and Africa at JP Morgan. “With credit risk seen as minimal there was a willingness from bond investors to take exposure to the currency.”First out of the gate in January was Baa2/BBB– rated Akbank, the issuer of the country’s first dollar-denominated Eurobond in 2010, which raised TL1bn (US$532m) with a five-year security yielding 7.5%. A great deal by any reckoning on a cross-currency swap basis, that worked out at 170bp–175bp over three-month dollar Libor.Books were a weighty near TL3bn. It was followed a month later by the country’s second-largest private bank GarantiBank. Its TL750m five-year 144a/Reg S bond appeared a less smooth affair, though primarily thanks to external circumstances. In the end the bank priced the paper, which had a book of TL1.2bn, at 7.5%, the same level as Akbank had done, though at a time when Akbank’s bond had tightened in secondary to around 7.3%. Garanti came to the market as the results of the Italian election were shaking nerves in the market, the US Federal  Reserve appeared to be sending mixed messages and right after Russian Sberbank’s own Eurolira bond. In fact, “the deal achieved exactly what Garanti wanted,” said Neil Shuttleworth, head of EEMEA debt capital markets syndicate, at Deutsche Bank who led the deal. A banker away from the deal said: “Garanti issued in light of its funding requirements. It didn’t want excess liquidity”. A slight concern that was raised after the Garanti bond sale was that it attracted less investor demand than the Akbank bond, with the book closing at around TL1.1bn. However, that may have been a result of timing and with the issuer’s pricing strategy, with European credit markets in retreat after the unexpected result of the Italian election.Price vs size“When Akbank printed the deal in January everybody was in risk-on mode, whereas in February the market tone had changed,” said Nick Darrant, head of CEEMEA syndicate at BNP Paribas, a joint bookrunner on the deal. “Garanti’s prime focus was price, not size and with Akbank trading at around 7.44% in the secondary market they were happy to pay 7.5% inclusive of new issue premium.“Between the Turkish deals came Sberbank, which bought Turkish financial DenizBank from Dexia last year, becoming the first Russian bank owner in Turkey. Sberbank raised TL550m in a deal which priced 20bp outside where Akbank traded in the secondary market and which failed to shine following launch, perhaps due to the complexity of a Russian underlying combined with the Turkish currency, analysts said.Books on the trade were “mildly oversubscribed”, according to the leads, suggesting the size and price was pushed as much as they could be. Sixty-six investors participated.Turkey’s banks are relative newcomers to the Eurobond market, and US$9bn of Eurobonds were sold in 2012, up from US$2.6bn in 2011 and US$1.75bn in 2010, according to Barclays data. Turkish bank Eurobonds outstanding totalled around US$14bn or 1.8% of total banking assets as of December 2012. That is low compared with Russian banks, for which the dollar Eurobonds percentage of total assets outstanding stood at around 4% in 2012.Still, bankers said the pipeline for Eurobond deals remains strong, with some predicting as m

To view the digital version of this report, please click here.Turkey finalised its adoption of Basel II in July last year, becoming the 22nd of 27 member countries to implement the regulations of the Basel Committee on Banking Supervision. There were concerns that the country’s 44 banks – three public, 41 private – would all have to sprint, cap-in-hand, to raise capital. The opposite has in fact been true. When the capital adequacy ratio of the banks was revealed at the end of September, it turned out that the banking system’s average CAR was 16.5%, comfortably above the 12% minimum CAR level set by the regulator. “Basel II had been talked about and delayed from as far back as 2007. Although we had thought the impact of the adoption of Basel II was going to be negative and reduce regulatory CAR for the banking sector, in fact, banks were able to build up capital through strong retention of earnings during the interim period.“In addition, when regulations finally came out, there was some easing of risk weightings assigned to certain asset classes which also softened the impact. In the end, for most banks we saw a capital adequacy ratio erosion of only 0.1% or 0.2%,” said Janine Dow, senior director of financial institutions at Fitch.Building confidenceIt is a view confirmed by Coskun Kucukozmen, lecturer on banking, finance and risk management at Izmir Ekonomi Universitesi, and also a former regulator on the country’s Banking Regulation and Supervision Agency.“I should say at the outset that despite the expected fall in average capital adequacy across the Turkish banking sector resulting from the implementation of Basel II, it is clear that there will be no immediate or additional requirements for capital. This situation builds up the confidence in the sector,” he said. What has helped is the rating of the sovereign. Fitch already rates Turkey as investment grade, while Moody’s has the sovereign at Ba1.“The sovereign ratings are the most relevant and costly for Turkish banks,” said Kucukozmen. It has been backed up by the steady hand of the Central Bank of Turkey. Aware of the country’s relatively strong GDP growth of 2.2% in 2012 with forecasts of 3.8% for this year and 4.5% for 2014, the Central Bank has managed inflation targets and maintained financial stability through capital and loan-loss reserves and currency market interventions, rather than a knee-jerk rise in interest rates. Just the beginningThose in Ankara and Istanbul talk about revitalised and vibrant cities. No wonder then that Najam Khan, head of corporate finance Middle East and Islamic finance for Commerzbank, said: “The Turkish economy is buoyant – the banks are active. This is just the beginning.”A sign, of course, of the standing of the banks is their ability to raise money in the capital markets. While last year saw US$8.7bn offshore issuance from Turkish banks, according to figures from Dealogic, this year has already seen US$2.2bn bank issuance. For the whole year US$12bn is expected with a further volume of up to TL10bn in local currency issued offshore.At the start of the year, Yapi Kredi, the fourth-largest privately owned bank in the country, led the charge for CEEMEA financial issuers. It drew on the US$500m remaining from its US$1.5bn programme that had been approved last year. Guidance for the seven-year 144a/Reg S was tightened twice from around MS plus 290bp and it eventually priced at MS plus 273bp with an order book of US$3.5bn. Pricing was comfortably inside the bank’s secondary curve. “The Turkish economy is buoyant – the banks are active. This is just the beginning”Yapi Kredi was swiftly followed by Halkbank, the country’s seventh-largest bank, which sold a US$750m seven-year at MS plus 255bp, again well inside guidance, and then BankPozitif, 65% owned by Bank Hapoalim, which priced a US$150m five-year at US Treasuries plus 415.4bp.But what looks as though it will become one of the themes of the year for Turkish banks is Eurolira issuance.

To view the digital version of this report, please click here.The past 10 years signalled an economic transformation. “Turkey is collecting the fruits of the work it has been doing for at least a decade, and especially since 2008–09, in terms of reducing inflation, implementing fiscal discipline and pushing through reforms,” said Emre Akcakmak, portfolio manager at East Capital.Luck has played its part too. While Turkey has at times been rocked by the financial crisis, it has also benefited from the unfettered pumping of liquidity into the system that constitutes the regulatory response.A significant proportion of this liquidity has found its way to Turkey. Although yields on three-year bonds have come down from a high of 24% in 2008, they were still paying 5.7% in early March, not a bad return for a country with Turkey’s risk profile.Yet there are some dark clouds on the horizon. One is the stubbornly high current account deficit. This remains manageable while global interest rates remain low, which is likely to be the case while economic conditions in Europe and the US remain weak. However, as the global economy improves and rates rise, Turkey may find it becomes more difficult to finance its deficit. Austrian bank Erste Group forecasts the CAD will reach 6.8% this year.Risk of complacencyAnother problem facing Turkey, as with many emerging markets, is political risk. In the past the country has seen its fair share of coups and it would be unwise to discount the possibility of further political upheaval that might undermine economic activity, said Akcakmak.These days the concern is less about the power of Turkey’s politicised military, and more about an increasingly powerful and centralised government. Trouble could be brewing in the form of proposed constitutional reform, with the AKP, Turkey’s leading political party, looking to switch to the presidential system from its current parliamentary one, as part of a package of changes. There is talk of a possible referendum to circumvent parliamentary opposition, and a general concern that as the country orientates itself more and more towards its Middle Eastern neighbours, it is becoming increasingly authoritarian.Mixed recordThe AKP has at least been consistently pro-business. For many, political risk is a declining concern. “It is not clear how much investors care about politics as long as there is stability,” said Christian Keller, head of emerging markets research at Barclays.The government has notched up notable successes, such as encouraging a much greater degree of savings and pensions that should ultimately improve the CAD. It has also presided over a period of considerable job creation.“Turkey is collecting the fruits of the work it has been doing for at least a decade, and especially since 2008–09, in terms of reducing inflation, implementing fiscal discipline and pushing through reforms”“Since the financial crisis Turkey has performed as one of the best economies in the world from the perspective of job creation,” said Murat Ulgen, senior economist at HSBC. Turkey has increased the employed population by around 4.1m since the end of 2007 to nearly 25m in late 2012.But some feel its actions have not lived up to its talk, with tax and labour market reform two specific areas that require further reform, said Keller.The government’s main focus appears to be elsewhere. Turkey needs to diversify its energy sources, which may explain its enthusiasm for nurturing its relations with its oil-rich neighbours. A deal with Kurdish Northern Iraq, if it materialises, could go a long way to resolving Turkey’s energy conundrum, reducing its reliance on the energy markets, a major cause of its persistently high CAD.The country’s commitment to privatisation has also won plaudits. The public sector debt-to-GDP ratio plunged from about 80% in 2001 to around 37%.“The privatisation agenda is loaded and may help beat the 2013 fiscal targets,” said Nilufer Sezgin, chief economist at Erste Se