The changing face of Turkey
The heralding of Turkey as a new entrant to the global economy is the result of a misconception. Turkey has, in fact, been tied into the globalised economy for decades, if not centuries. As Emre Yigit of Global Securities notes: "You will never see headlines like ‘Ford Enters Turkey' because they've been here since 1925. Nor will you see intense speculation about Roche building a massive pharmaceutical plant here, because they already have: about five years after they themselves were founded." Dow Chemicals is another company that has been present in Turkey for decades, in its case for 36 years. It would, however, be churlish to deny that the scale of the recent entry of foreign investors and FDI into Turkey and the parallel success of the national economy - which has grown on average by 7.5% every year for the past five years - is striking.
What has changed is the apparent sustainability of Turkey's current burst of economic engagement with the world: built on a firm, nationally managed base of fiscal responsibility and sound macroeconomic management. A firm and frequently referenced commitment to the IMF to liberalise the economy and a clear pathway to the adoption of EU standards across many sectors have given companies the ability and confidence to plan for the long term. This does not mean that the future will be all plain-sailing, as many working in Turkey openly admit. But there is a widespread view that while Turkey will continue to experience intermittent economic volatility, future crises it will face will become smaller as the fundamental safeguards against a small crisis becoming a large one are put in place. Some, such as Ahmet Yıldırım of Yapı Kredi Yatırım go so far as to say that Turkey is in fact decoupling from other emerging economies. This may be too positive a view. After all, Turkey's recent expansion has depended to a great extent on the availability of excess liquidity on the global market as much as on its ability to attract and make good use of it. This is indicated by the fact that 72% of the shares on the Istanbul Stock Exchange are in foreign hands and the jump in FDI from $1bn (€675m) in 2005 to an estimated $25bn in 2007. Logically, the recent decision to drop all taxes on foreign investment will only serve to support this growth further.
Turkey does, however, have some significant underlying characteristics that augur well for the future economic prosperity. These include a large, young and growing population, an adequate physical infrastructure, a sophisticated and serviceable financial services infrastructure and a strong manufacturing and services base. Further, the political instability that characterised the country's government and governance in the past appears to be more or less behind it. Indeed, those working in Turkey confidently predict that the country is on its way to becoming a trillion dollar economy. There is, however, a twinge of realism to the generally positive mood, perhaps borne of too many false dawns. Serhat Gürleyen, Is Investment's head of research, notes that Turks no longer argue that their country should be considered a BRIC country: Russia and Brazil have a better credit rating than Turkey for one. Nevertheless even the more cautious are confident that the clear trend is that Turkey's economy is converging with those of the west, moving slower, perhaps, than some, but nevertheless in the right direction.
One such false dawn occurred in 2000, swiftly followed by a catastrophic economic crisis that Turkey is only now truly recovering from. As Nevzat Öztangut, president of TSPAKB says, the period between 2001 and the present has for the ‘real' economy not been a period of growth so much as recovery. But as recoveries go, it has been impressive, so much so that some are confidently predicting a probable-to-definite credit upgrade, assuming that planned social security reforms to tackle Turkey's budget deficit go through. This attempt at reform is emblematic of how Turkey has taken advantage of the relatively stable years since 2001 to tackle its long-term problems. The reform will tackle a decades-old issue and could well lead to Turkey announcing its first ever budget surplus in 10 years or so. Other important steps have been taken, including making the Turkish central bank independent, floating the lira and making interest rates - rather than the currency - the anchor for inflation.
There do however remain some sticky issues, not least of which is a growing current account deficit, a tangled legal code and a taxation system and regulatory infrastructure in dire need of continuous and deep-seated reform. Exports - which should reach $100bn in 2007 - are more damaged by discrepancies in the taxation system than they are by a swiftly appreciating lira and have arguably only been ‘saved' by the euro's trading up against the dollar. Although it looks like this situation will continue in 2008, Turkish companies are beginning to feel the pinch. According to Tugrul Arikna of Olmuksa, whose company supplies boxes to industries across the economy from automotive parts manufacturers to food and vegetable producers, the extent and sustained nature of the lira's appreciation was something that has surprised "almost everyone". Coming as it does in an environment of rising costs for labour and stubbornly high real interest rates, many firms are witnessing their competitive advantage eke away. Concern about the lira is likewise high, although more in terms of what a sudden correction could do to the economy rather than its steadily rising value. Deniz Portfolio Management's Fatih Arabacioglu voices his concerns: "There must be a correction and my fear is that the correction will be sudden, which will lead to instability in the market. I believe that there is something like $150bn in overseas borrowing by Turkish companies. If there is a sudden depreciation, this will lead to very large problems."
Another factor that is not entirely in Turkey's control, to put it mildly, is the extent to which capital will be available to sustain the recent record levels of FDI and foreign capital on the ISE. On the positive side, many express confidence that the foreign capital at work in Turkey is no longer ‘hot money', but rather here for the medium to long term. And there is some evidence of this, not least that much of the capital flight from the ISE following two recent hiccups was Turkish in origin, while the foreign capital largely stayed put. Indeed, the evidence would suggest that while the economic fundamentals are enough to convince foreign capital of the worth of investing in Turkey, it is Turkish people themselves that are more suspicious.
Of course, the sheer scale of the foreign capital invested in the economy creates a certain vulnerability to outside shocks, as Okan Altug of Daruma Corporate Finance points out. Others are less cautious, and express confidence that foreign investment in Turkey is ready to move to the next stage and become a real driver for growth through the establishment of green field investments. As Is Investment's Mert Erdogmus argues: "Speaking frankly, we are currently in a golden age. It's true that the foreign money coming in is going into structured assets, and as yet there is little sign of them making for green field investments. I'm confident that this is going to change: firstly, because eventually they are not going to find that many cheap assets to buy and secondly, because the country's prospects are good." It is also widely argued that the money that has been paid for structured assets, primarily for banks in recent years, has been reinvested by the mostly holding companies, who have in turn reinvested into other businesses, such as real estate, infrastructure and energy. And Turkey still has much to offer investors, current market prices remain cheap, the privatisation programme still has a long way to run and domestic companies are beginning to get a taste for acquisitions and expansion. More broadly, inflation and interest rates are slowly but surely coming down, encouraging a spending appetite among consumers previously noted for their ‘wait and see' attitude to big purchases. This is evidenced by electronics and white goods manufacturer Vestel's 5-6% year-on-year growth in domestic sales that allowed it to offset the lack of profit in its large European business.
A big driver behind the recent growth has been the increasing strength and confidence of the banking sector. Not only are banks more profitable than ever before, but their balance sheets are now healthier following the recent years of consolidation. Ebru Dildar Edin of Garanti Bank can attest to this having seen the size of deals that she works on increase from a base of zero to deals worth $100m with maturities of three to four years in 2003 to present deals worth $850m with loan maturities of 14 years, completed entirely with domestic lenders. At heart it seems that there are two symbiotic processes that are the real engine for Turkey's performance: on the one hand, the opportunities made possible by the availability of long-term capital - in many forms and of varied provenance - and, on the other, the capacity and willingness of Turkish companies to make use of it.
So with all of the above taken into account, what can safely be expected for 2008? This very much depends on who one speaks to. Cem Yalçınkaya of Ak Asset Management believes that in 2008, the central bank will attempt to limit consumption, leading to only moderate growth in the industries that depend on that consumption. Nor does he expect any significant change in the appreciation trend of the lira. This means that the competitiveness of sectors where human resources constitute a big portion of the costs will fall. He sees the service sector and banking sectors as the most dependable growth areas in 2008, followed by the automotive industry thanks to continuing strong exports.
According to Süha Güçsav of Akfen Holding it is regional infrastructure-based businesses that are likely to see a huge boost in 2008. He is joined in this view by Global Holdings and both companies are making preparations to invest heavily in such sectors as transport and energy. Akfen's core business is in the aviation industry, specifically airports, and it will be investing in two airports in Tunisia, two in Georgia, smaller projects in Dubai and the Czech Republic as well as very big investments in Cairo Airport and Doha, Qatar. It is also gearing up for the opening up of the energy sector and aims to be active in energy generation, distribution, whole sale and storage. Intriguingly it expects to join Is Bank in opening up a Turkish-based private equity fund and is seeking to launch $1.8bn running for 10 years and focus on the infrastructure privatisation pipeline in Turkey: toll roads, electricity generation, etc. This approach is seconded by the views of Hedef Securities which believes that in 2008 the big holding companies with fingers in many pies and the ability to invest in large, capital-intensive sectors such as energy will be the best performers in 2008.
If interest is any gauge of a sector's worth then real estate will continue to be a sector to watch, presenting as it does one of the easiest and most secure methods of investing foreign capital in Turkey.
Some see growth right across the board, Ahmet Yıldırım listing the health sector, logistics, construction, real estate, aluminium and PVC among sectors with "outstanding potential". He goes further: "Speaking frankly, we don't have enough hands for the business coming in the door. I've literally doubled my revenues for next year's budget based on contracts and mandates I know are on the way. And the variety of business is huge - it seems like everyone is looking to merge and buy. Whereas as before, you might be right to say that the dominant sector in terms of growth and activity was the financial sector - with a 24% return on equity compared to 9-10% for, say, Germany, on the ‘regular' companies side the average return is in the region of 19-20%. Of course there are variations, but as an average that is pretty healthy by any standards, especially when you take into account that the cost of labour has been rising."