After five years of its most stable government in decades, Turkey faces both presidential and parliamentary elections this year, with a possible return to coalition government before the year end. Political concerns mean that it will be difficult to make tough economic decisions, but if the achievements of the outgoing government are going to be built upon, the country still has a lot to do.
The latest political news should help. The recent decision by Prime Minister Recep Tayyip Erdogan not to stand for President is positive for markets. The consensus is that this makes the continuation of majority government more likely after the November parliamentary elections, while also reducing the potential for conflict with the country's secular establishment.
That prospect of stability should encourage inward investment, which has been booming in recent years, with Turkish banks very much in demand. The last 18 months have seen a clutch of M&A transactions that have brought international banking expertise onto the Turkish high street. Foreign investment is likely to continue, but the focus is also on how banks are adapting to the changing economic circumstances.
If the news in the banking sector has been overwhelmingly positive, the picture in the various capital markets is more mixed.
In the bond market, country-specific factors – including EU accession, IMF relations and domestic politics – have diminished in importance as Turkish markets take their lead from general changes in risk appetite. Its high-beta status means that it remains EEMEA's primary casualty during times of volatility, but Turkish bonds continue to benefit from the ongoing EM spread-tightening.
Within the international bond arena, the Turkish lira has established a dominant position within the niche currency sector. Levels of issuance continue to be encouraging, and liquidity is growing as more and more participants look to get involved. With no dark clouds on the horizon, this situation looks set to continue.
It is the same rosy picture in the syndicated loan market. Typically characterised by MLA-heavy loans to banks, this year the Turkish market has been one of the most dynamic in Europe and the Middle East. With falling returns elsewhere highlighting the relative attractiveness of the market – and the country's belatedly successful privatisation programme aiding confidence and providing supply – 2007 is set to be a watershed year for the market.
For securitisation and covered bonds, the story is more one of potential, however. Most observers agree that the scope for major development is there, but it would be a mistake to assume that a wave of issuance is about to break, particularly given the embryonic stage of the housing loan market. We take a particular look at the opportunities thrown up by the new Mortgage Law, and the problems that remain to be solved.
It is also a mixed picture in ECM, where increasing political stability, impressive economic growth and a strong recovery since the sharp correction of a year ago, all suggested a buoyant ECM market in 2007. With a liquid local market and the possible return of GDR programmes, bankers remain upbeat, but it seems that issuance is likely to remain sporadic, with the elections impacting the May and November issuance windows.
With such a focus on the BRIC economies, mid-sized emerging markets must fight to get investors' attention. To judge from this report, there is certainly enough going on in Turkey to interest them.