Central & Eastern Europe Investment: Turkey: Growth, but with deficits and political uncertainty
Analysts and asset managers following Turkish markets say the main issues affecting future Turkish risk rating are Fed ‘tapering’, the development of European economies and domestic politics. Turkey is heading towards local elections in March and presidential elections in July 2014. Both will pave the way for general elections scheduled for the summer of 2015.
Turkey continues to be particularly vulnerable to any reversal of capital inflows once the US Federal Reserve trims its $85bn (€62.7bn) monthly stimulus programme because it finances its current account deficit mainly through capital inflows. Ankara expected Turkey’s current account deficit to reach 7.1% of GDP by the end of 2013, before falling to 6.4% in 2014.
“The Turkish market has slightly corrected – since the US tapering measures were announced and wide anti-government protests took place in several cities in Turkey last June – but not completely,” warns Maarten-Jan Bakkum, emerging market analyst at ING Investment Management. “We think not enough has been done to reduce Turkey’s current account deficit or to tighten monetary policy. In my view, Turkey is above the average emerging market in its sensitivity to global macroeconomic developments as well as domestic politics.”
Didem Gordon, CEO of Ashmore Turkey, accepts that tapering will impact Turkey, along with the rest of emerging markets, leading to rising interest rates. “But this will depend on a lot of factors: the timing of the tapering, how long it lasts, how much is done, and how much asset purchases will be cut every month,” she says. “We have opted for a wait-and-see stance on this.”
She points to the positive development of the gradual recovery of the euro-zone economies. “The EU is the most important trade partner for Turkey, so any recovery there has a direct, positive impact on the Turkish economy,” he observes.
Another macroeconomic challenge for the economy is its heavy reliance on energy imports, which the government is not determined to reduce. At present, only 26% of Turkey’s energy demand is being met by domestic resources, while it spends some $60bn a year on energy imports. Turkey is planning to buy oil and gas from northern Iraq, which will reduce a dependency on Russian imports and help to reduce its current account deficit.
Ari Metso, managing director of Taaleritehdas Asset Management and the manager of the firm’s Turkey fund, says Turkey’s plan to use oil resources in the areas under the Kurdish regional government (KRG) in northern Iraq, announced in November, is “good news” for investors. “This will enable Turkey to save billions in its annual energy bill and diversify its supplier base.”
Iraq has also become the second biggest export destination for Turkish products after Germany, with the potential to take top spot. “This is a significant development for the overall economy as well as for local companies,” says Metso. “Turkey’s young population structure – half of its population of 75.6m is less than 30 years old – means consumer trends have good prospects to continue to grow at home.”
Another issue, which many investors have is the evolution of Turkish politics.
“We received a lot of inquiries from large institutional investors regarding the anti-government protests that took place,” says Metso. “Investors obviously wanted to know what impact these events could have on Turkey’s risk premium. At the moment, inquiries focus on the local elections. Our view is that despite these potential causes of concern, Turkey is still an attractive investment target with an expected growth rate of 3.5% for 2013 and potentially stronger growth in 2014. On the other hand, we should note that polarisation, which seems to be increasing as Turkey prepares for local elections, rarely has a positive impact on a national economy. International institutional investors tend to be most attracted to markets where there is a strong government, but politics is still consensus-seeking.”
Bakkum agrees. “Whilst the governing AK Party seems to still have a strong hold of the voters, there is a shortage of consensus-seeking politics,” he observes. “In this setting it will be interesting to see what outcome will local elections yield.”
Gordon reminds investors that there is always pre-election uncertainty in emerging markets, let alone when one faces a set of three significant elections in quick succession.
“For now, it is too early to speculate on how the elections will affect Turkey’s political risk rating,” she says. “What is now more critical from an investor’s point of view is that the AK Party is likely to maintain its majority and Turkey’s strong fiscal position should continue.”