MENA Fund Review
MENA Fund Review
REGIONAL ROLE MODEL – 23RD JUL 2012
Turkey stands out from most other MENA countries for its political stability and economic
diversity. Sitting on the edge of Europe and the Middle East, it has benefitted from being a
bridge between both regions and taking on characteritics of each. It stands to profit further as
a bridge between developing economies in the east and developed countries in the west.
MENA Fund Review spoke to Cenk Utkan, marketing director, Strateji Asset Management,
Özgür Çati, group head of sales and marketing management, Yapi Kredi, and Alper
Gokpinar, director, Turkisfund about Turkey’s economic prospects and investment
opportunities there.
TURKEY has become a role model for the Middle East and North Africa. Its strong
economic base, politicalstability and prominent role on the world stage – the envy
of many in the region – are a result of strategic structural reforms that began over a
decade ago.
Its position has been solidified in recent years by the possibility of EU membership
and a growing role in the political arena as a result of the nearby Arab Spring
uprisings.
A number of economic factors have played in Turkey’s favour, including the increase
in global investment appetite after the FED’s expansionary monetary policy coupled
with accommodative monetary policies implemented across developed country
central banks. According to Alper Gokpinar, director, Turkisfund, Turkey benefited
greatly from the increase in inflow of capital and its asset management industry
gained momentum.
“After having successfully reduced inflation and interest rates to single digit levels,
investors only now started to have a longer term perspective on their financial
investments,” he says. “We believe that while these developments have contributed
to the growth of the asset management industry in Turkey, we are still very far from
mature levels. In fact, all indicators suggest that we are only at the very beginning of
a sustained period of expansion of the asset management industry in Turkey.”
Several factors set Turkey apart in the MENA region. Unlike a number of other
countries it is not an oil-dominated economy. Coupled with this, it is the most
industrialized country in the region. The combination of these factors mean it offers
investors good diversification away from oil related assets.
Turkey also has an entrepreneurial business culture, which is reflected in its growth
rate over the past decade, according to Cenk Utkan, marketing director, Strateji
Asset Management.
“In 2011 alone Turkey grew at 8.5 percent, which puts it in the top position alongside
China and Argentina,” he says. “This is in stark contrast with the debt doldrums of
the Western world including the EU and the US. We are also seeing an oversaturation
in the Chinese and Brazilian economies. China is controlled by a polit bureau and its property market has its own debt-laden problems. These issues have
taken their toll on China’s stock market returns since 2007.
“Turkey currently trades at a P/E of 11.5 which implies a 10 percent discount to the
MSCI Emerging Markets index. The Istanbul Stock Exchange returned 250 percent
since the Justice and Development Party (AKP) came to power in 2002. Our funds
returned circa 1700 percent during the same period.”
Liquidity and regulation also set Turkey apart from much of the region. The daily
trading volume on the Istanbulstock exchange is $1.5 billion a day and the total
market cap remains at $175 billion, which makes it easy to trade in and out of the
market. Foreigners represent around 70 percent of the average traded daily
volume, making Turkey a favoured destination with global investors.
Since 2001 capital markets regulations have been strengthened and adapted to the
EU entry criteria, according to Utkan. Asset managers submit their positions daily to
the regulator who checks concentration and position limits. A daily NAV is
ascertained for each regulated investment fund providing security for investors. The
returns and positions of each fund are also reported to the public in a transparent
way.
“That said the local asset management business still remains dominated by money
market funds and domestic equity investors only represent $700 million,” says
Utkan. “The government is clearly committed to increasing the savings industry and
has made important steps to liberalize the local asset management industry. The
regulator allowed 15 independent boutiques to launch asset management
businesses in the last couple of years. We believe these launches will change the
market structure of the asset management business, which is still dominated by
banks.
“The government also implemented a hedge fund law and a pensions reform
enabling private pensions schemes, which now amount to YTL15 billion.”
Essentially Turkey offers a combination of emerging markets growth, diversification
away from oil, a regulated and transparent capital markets law, and discounted
prices, according to Utkan.
“However, whilst the banking and brokerage businesses are well established the
local asset management industry is still at its infancy and there is plenty of room to
grow,” he adds.
One of the biggest boom areas of Turkey’s asset management industry as the
country has developed economically has been private equity. Attempts were made
to develop private equity in Turkey in the 1990s, but without much success.
“Traditionally businesses were funded by their principals and loans provided by local
banks based on relationships and a quick glimpse through the company’s recent
accounts,” according to Utkan. “As a result wealth was accumulated in the hands of
family conglomerates.”
Turkey began a process of economic liberalization and privatisation in the 1990s,
but growth came with high inflation and interest rates. Only in 2002 when the
country underwent radical political and economic changes was the door fully
opened for the industry to develop.
“For the first time Turkey had a stable conservative single party administration
which implemented economic reforms significantly improving the investment
climate for foreign investors,” says Utkan.
Today all the major private equity houses are present in Turkey including BC
Partners, Carlyle, Texas Pacific Group and Cinven and there are significant
investments made by investors from the Gulf. Other large domestic players are
Actera and Turkven who are backed by blue chip institutions.
“It is fair to say that not a day goes by without a foreign company snapping up a
Turkish asset,” says Utkan.
These economic and political changes combined with a high growth environment
have been attractive for private equity capital.
According to Özgür Çati, group head of sales and marketing management, Yapi
Kredi, “Relatively new and previously almost unregistered sectors such as waste
management, logistics, as well as IT, food and tourism sectors were the first targets
of private equity firms in Turkey.
“Compliance with EU regulations in such sectors may lead to additional need for
capital in the future and hence larger interest of private equity firms for the Turkish
market.”
According to Utkan, many commentators still wrongly perceive Turkey as a country
reliant on short-term money flows and portfolio investments.
“The fact that the private equity business has grown so significantly whilst the
public equity asset management remained so small contradicts this view,” he says.
“Most of the flows into Turkey in the last decade have been done though foreign
direct investment. Today private equity players are finding scarce investment
opportunities and are buying businesses at huge multiples. We believe the
opportunity to make outsized returns remains within the public markets.”
The long term outlook for Turkey’s economy and hence its asset management
industry looks positive. It has fully shed the boom and bust cycle that bedeviled its
economy in the 1990s. The average growth rate is now at a sustainable level just
above four percent and the country’s chronic inflation problems seem well in the
past. It is now the seventeenth largest economy in the world with a fully convertible
currency and liberal regime.
Confidence in Turkey’s economy is reflected in the fact that exports rose from
around $31 billion in 2001 to $135 billion in 2011despite the global financial crisis.
In addition, Turkey has a gradually strengthening middle class that fuels growing
domestic consumption. It also has strong energy, transport infrastructure, finance,
telecommunication, tourism, real estate, automotive, agriculture and retail
industries that attract a regular flow of foreign capital.
Alongside these relatively recent economic developments Turkey has 30 years of
uninterrupted democracy behind it and eight years of single party administration
with continuing electoralsupport.
“Macro policies have been developed to withstand internal political changes and
outside shocks,” says Utkan. “As a result GDP has tripled over the last decade from
$230 billion to $660 billion in 2011. GDP per capita is expected to reach over $12,000
by 2013. Turkey went into the crisis in 2008 and came out very quickly ahead of
everyone in the region. The debt ratings of the country have been consistently
upgraded over the last decade. Turkey is also the only country currently satisfying
the Maastricht criteria.”
The underlying drivers behind Turkey’s rapid reform are several. It has a large
domestic market of 75 million people. The population is relatively young with 26
percent under the age of 15 and 50 percent under 29. Based on UN projections,
Turkey willstill have the youngest population among European countries by 2050.
These factors have led to strong domestic consumption, which generates 70
percent of GDP.
“This strong domestic market limits export dependency during times of crises,” says
Utkan. “We are also seeing the emergence of a growing middle class with increasing
purchasing power funneled into healthcare, technology and education. For example
Abraaj made its exit from Acıbadem private hospitals at a sale price of $1.65 billion to Khazanah. TPG sold its stake in Mey Içki, a spirits maker at $2.1 billion to Diageo.
Carlyle has a significant stake in Bahçeşehir colleges.”
Another driver of Turkey’s growth has been its ability to tap relatively unpenetrated
markets quickly. For example Iraq has become Turkey’s third largest
trading partner as Europe’s share has declined and Turkish Airlines has become a
global player exploiting Istanbul as a hub between Europe and the Middle East.
Turkey has also benefited from being located at the heart of a region rich in oil and
natural gas resources, at the crossroads of the world’s energy map and a primary
energy bridge reaching out to Europe.
According to Yapi Kredi, “It should be noted that the better participation of [MENA]
region’s countries to the world economic system will boost the aggregate demand
in the region, which will create new markets for Turkish producers, contractors and
investors. Global warming and rising demand is a driving factor behind agriculture
of Turkey becoming a strategic sector. Turkey’s large lands are suitable for
cultivation with appropriate climate.”
While other countries in the MENA region felt the impact of the global financial crisis
and Arab Spring, Turkey escaped relatively unscathed and with potentially
improved long-term trade prospects. The first direct impact of the Arab Spring was
rising oil prices. Turkey’s total energy bill is almost $48 billion, more than six percent
of GDP so any upward movement in energy prices affects the country’s foreign
balances. Rising oil prices may however be offset by a better trading environment
across the MENA region, according to Yapi Kredi. The Arab Spring may be the
catalyst to a more liberal economic environment in the region, he believes. Higher
purchasing power across the Middle East and North Africa could boost Turkish
exports
“The share of MENA in Turkish exports already increased from below 10 percent in
2006 to 20 percent in 2011,” he says. “Hence Turkey could partly offset diminishing
demand from her main trade partner Europe.”
It should also be noted that Turkey had already bitten the bullet in 2001 by not
defaulting and implementing an IMF backed austerity package. Regulations on the
banking sector were strengthened and most banks had strong balance sheets in
-
As a result banks made an incredible come back in 2009, according to Utkan.
“The country has a nice problem to solve as it is trying to cool off the economy
rather than trying to revive it,” he says. “Going into 2011 the current account deficit
had risen to ten percent of GDP. The currency was sold off and the markets were
punished. The government increased the collateral ratios on banks and
implemented an interest rate corridor to micro manage the money supply during
the crisis.
“Debt to GDP remains at 40 percent which is low. Turkey’s CDS spreads remain at
historical lows. Inflation remains at 8.8 percent down from 30 percent in 2003. The
budget is running at a 2.2 percent budget deficit, which is over the EU defined
budget balance of -3 percent. We are sanguine on banks this year as their
fundamentals remain strong whist their stock price declined due to global investor
bearishness towards financials.”
Turkey’s ties to the East also helped to shelter it from the effects of both the global
financial crisis and the Arab Spring. It has long pursued a zero problems with
neighbours policy as well as signing numerous bilateral trade treaties and
implementing visa-free travel agreements. Over time Turkey’s foreign policy has
shifted from quasi-isolationism towards neighbors to fostering and taking
advantage of the cultural and historical links it shares with other countries in the
region.
“Diplomatic and commercial ties were forged and improved with most of the
countries subject to the Arab Spring,” says Utkan. “Following the uprisings the Turkish foreign policy stance has been to back pro democracy movements in the
Middle East. This is visible from its policy towards Palestine to Syria. As a result
Turkey became a credible soft power within the region.”
Turkey’s pro democracy stance during the Arab Spring uprisings had an initially
negative impact on trade volumes with some countries, including Libya and Syria.
However, in the long term its stance is likely to prove popular with pro democracy
movements that have taken power across parts of the region. In addition, Turkey’s
political model is being seen as a blueprint for many of these pro-democracy
movements.
Turkey’s support for the ongoing uprising in Syria is a more complicated issue. Prior
to the recent unrest relations between the two countries were good. The legal
framework of economic relations was strengthened with the Free Trade Agreement,
mutual abolishment of visas and the completion of several bilateral agreements in
2009 and 2010. Total trade volume between Turkey and Syria rose to around $2.3
billion in 2010 from $800 million in 2006 and the number of Syrian tourists visiting
Turkey increased more than seven-fold to about 900,000 in 2010 from 126,000 in
2002.
According to Yapi Kredi, “This increase in the momentum of political and economic
relations ceased abruptly with the uprising in Syria. Turkey tried to urge restraint
from the Assad government and organised the Friends of Syria conference to help
resolve the conflict in a peaceful manner. The ultimate outcome of the power
struggle in the country will determine the regional economic and political balance
that also includes Iraq and Iran. Sectarian tensions are likely to rise in the near term.
Syria will try to leverage its close relations with traditional allies Russia and Iran.”
The loss of trade with Syria has had a particularly heavy impact on Turkish cities
close to the Syrian border such as Gaziantep and Kahraman Maras.
More damaging though for the Turkish economy has been the ongoing nuclear
dispute between Iran and a number of world powers, according to Yapi Kredi.
“Iran has been a primary energy supplier to Turkey but due to the threat of US
sanctions, Turkey’s sole petroleum refiner Tupras had to scale back cheaper oil
purchases from Iran,” he says. “Turkey’s economy is highly dependent on energy
imports. The bulk of the country’s annual $75 billion current account deficit is driven
by the energy bill.”
Turkey’s policy of fostering new relationships where cultural ties already exist has
extended far beyond the Middle East to India where the Mughals used to rule prior
to the English, as well as Central Asia and China. A recent trade delegation to China
began its negotiations in the far western Chinese province of Urumchi where
Uyghur Turks make up a large part of the population.
Many Turkish firms are operating in China and Turkey in turn seen a number of
Chinese firms moving into the services and white goods sectors. Companies from
the Far East view Turkey as not only a market in itself but also as a door into Europe.
The investment focus in general has shifted away from the West towards the East,
according to Utkan.
“International investors are looking for new investment opportunities which are
getting scarcer,” he says. “Turkey provides a sound market infrastructure with
regulated and transparent capital markets. Also Middle Eastern investors have
historically invested in Europe and the Middle East. Today a lot of it is being
repatriated back into the region and more profitable countries such as China and
Turkey.”
Cooperation between Turkey and the Far East extends beyond trade. There has also
been increased military cooperation with China. “There is no doubt that the balance of power is shifting from the West to the East,”
according to Utkan. “The MENA region has ample commodity resources whilst
countries such as China and Turkey are rapidly expanding and need energy sources.
Turkey’s economic strength comes in large part from harsh lessons learned a
decade ago. During the 1990s and early 2000s Turkey’s economy suffered from high
inflation and periodic boom and bust cycles. The 2001 financial crisis was
“devastating” for the country and led to almost an annual contraction in GDP of
almost 10 percent. Turkey learned its lesson and with the establishment of a singleparty
government enacted structural economic reforms including the foundation of
an independent banking supervisory body, BDDK.
“Turkey’s banks are currently among the healthiest in Europe due to strong capital
bases and low degrees of leverage,” according to Yapi kredi. “The government’s
strict adherence to fiscal discipline during the past decade led gross public debt/GDP
ratio to decline to less than 40 percent whereas fiscal deficit/GDP ratio improved to
1.5 percent of GDP. Turkey also reduced the tax rate for corporations to 20 percent
from 33 percent. All of these developments led to strong economic growth, led by
domestic consumption and investments.”
Despite these strengths risks remain. Perhaps the biggest economic risk is Turkey’s
high current account deficit, which rose to around nine percent of GDP in 2011. The
Central Bank has been following an unorthodox monetary policy, trying to rein in
credit growth and manage a “soft landing” for the economy,” according to yapi
kredi.
“Moreover, the government has recently introduced certain incentives for import
dependent sectors such as petrochemicals that will improve the trade balance
through the domestic production of previously imported products. New incentives
for the private pension system have been introduced that aim to improve the
currently low level of savings rate in the domestic economy.
“One other weakness in the economy is the share of ‘unrecorded economy’. This
leads to a low tax base for the government and relatively higher share of tax on
consumption. Turkey has one of the highest tax rates on petroleum.”
Turkey’s vulnerability to high oil and energy prices, as it is an importer of oil, is also a
risk for the economy and political intervention in the Central bank has also had
negative impacts on the stock market despite the sound fundamentals of Turkish
firms
“Foreigners constitute 70 percent of investments on the Istanbul Stock Exchange,”
says Utkan. “Most of these investors are macro allocators into the large cap index
constituents. In times of increasing volatility these investors tend to sell their
holdings without any regard to the fundamentals of the underlying companies.”
Global financial conditions also pose a risk to the Turkish economy, according to
Golpinar.
“Turkey is set to be hurt by potential reversals in global risk sentiment,” he says.
“While the effects of such a scenario will clearly depend on the magnitude of the
financialstress levels, we believe that downside risks for the Turkish economy are
somewhat limited due to the Central Bank’s continued focus on pursuing a flexible
interest rate policy and the government’s proactive focus on policy coordination.”
The long-term outlook for investment opportunities in Turkey is highly positive. All
the ingredients are there for growth, including political and economic stability,
proximity to the key European and MENA export markets, favorable demographics,
rapid urbanization.
“Turkey’s economic potential has been well recognized by foreign investors as
manifested by the Foreign Direct Investments (FDI) into the country,” according to
Yapi Kredi. “FDI inflows reached $10.9 billion in the first nine months of 2011, more than doubling the amount of FDI Turkey attracted in 2010. According to latest OECD
estimates, Turkey is expected to be the fastest growing economy of the OECD
members during 2011-2017, with an annual average growth rate of 6.7 percent. Key
sectors that will benefit the most are consumer discretionary, durables, automotive,
pharmaceuticals and technology.”
The country’s relatively low inflation environment has also helped to create a strong
base for economic stability going forward that willsupport continued growth,
according to Golpinar.
“Turkey has one of the strongest banking sectors in the world with capital adequacy
ratios well above standards set by Basel and with experience in dealing with financial
crises,” he says. “With the fiscal discipline and an externally-oriented growth model
Turkey is much more resilient to economic shocks and has also gained investors’
confidence. That confidence brings additionalstability to the country’s financial
markets.”
In Strateji’s view considerable future investment opportunities in Turkey will be in
alternatives. International and local investors have done well from Turkey’s stock
market in recent years but are beginning to look elsewhere, Utkan believes
“There is an opportunity to design lower volatility equity long/short products
reducing volatility whilst delivering returns over cash,” he says. “The government is
also promoting the growth of the asset management industry in order to increase
the savings rate of the country and reduce the current account deficit. Given the
high multiples in the private equity and property market we feel that public equity
investing will deliver the most superior opportunities in Turkey.”
Confidence in Turkey’s economy is reflected in the fact that exports rose from
around $31 billion in 2001 to $135 billion in 2011despite the global financial crisis.
In addition, Turkey has a gradually strengthening middle class that fuels growing
domestic consumption. It also has strong energy, transport infrastructure, finance,
telecommunication, tourism, real estate, automotive, agriculture and retail
industries that attract a regular flow of foreign capital.
Alongside these relatively recent economic developments Turkey has 30 years of
uninterrupted democracy behind it and eight years of single party administration
with continuing electoralsupport.
“Macro policies have been developed to withstand internal political changes and
outside shocks,” says Utkan. “As a result GDP has tripled over the last decade from
$230 billion to $660 billion in 2011. GDP per capita is expected to reach over $12,000
by 2013. Turkey went into the crisis in 2008 and came out very quickly ahead of
everyone in the region. The debt ratings of the country have been consistently
upgraded over the last decade. Turkey is also the only country currently satisfying
the Maastricht criteria.”
The underlying drivers behind Turkey’s rapid reform are several. It has a large
domestic market of 75 million people. The population is relatively young with 26
percent under the age of 15 and 50 percent under 29. Based on UN projections,
Turkey willstill have the youngest population among European countries by 2050.
These factors have led to strong domestic consumption, which generates 70
percent of GDP.
“This strong domestic market limits export dependency during times of crises,” says
Utkan. “We are also seeing the emergence of a growing middle class with increasing
purchasing power funneled into healthcare, technology and education. For example
Abraaj made its exit from Acıbadem private hospitals at a sale price of $1.65 billion
to Khazanah. TPG sold its stake in Mey Içki, a spirits maker at $2.1 billion to Diageo.
Carlyle has a significant stake in Bahçeşehir colleges.” Another driver of Turkey’s growth has been its ability to tap relatively unpenetrated
markets quickly. For example Iraq has become Turkey’s third largest
trading partner as Europe’s share has declined and Turkish Airlines has become a
global player exploiting Istanbul as a hub between Europe and the Middle East.
Turkey has also benefited from being located at the heart of a region rich in oil and
natural gas resources, at the crossroads of the world’s energy map and a primary
energy bridge reaching out to Europe.
According to Çati, “It should be noted that the better participation of [MENA]
region’s countries to the world economic system will boost the aggregate demand
in the region, which will create new markets for Turkish producers, contractors and
investors. Global warming and rising demand are driving factors behind agriculture
in Turkey becoming a strategic sector. Turkey’s large lands are suitable for
cultivation with the appropriate climate.”
While other countries in the MENA region felt the impact of the global financial crisis
and Arab Spring, Turkey escaped relatively unscathed and with potentially
improved long-term trade prospects. The first direct impact of the Arab Spring was
rising oil prices. Turkey’s total energy bill is almost $48 billion, more than six percent
of GDP so any upward movement in energy prices affects the country’s foreign
balances. Rising oil prices may however be offset by a better trading environment
across the MENA region, according to Çati. The Arab Spring may be the catalyst to a
more liberal economic environment in the region, he believes. Higher purchasing
power across the Middle East and North Africa could boost Turkish exports
“The share of MENA in Turkish exports already increased from below 10 percent in
2006 to 20 percent in 2011,” he says. “Hence Turkey could partly offset diminishing
demand from her main trade partner Europe.”
It should also be noted that Turkey had already bitten the bullet in 2001 by not
defaulting and implementing an IMF backed austerity package. Regulations on the
banking sector were strengthened and most banks had strong balance sheets in
-
As a result banks made an incredible come back in 2009, according to Utkan.
“The country has a nice problem to solve as it is trying to cool off the economy
rather than trying to revive it,” he says. “Going into 2011 the current account deficit
had risen to ten percent of GDP. The currency was sold off and the markets were
punished. The government increased the collateral ratios on banks and
implemented an interest rate corridor to micro manage the money supply during
the crisis.
“Debt to GDP remains at 40 percent, which is low. Turkey’s CDS spreads remain at
historical lows. Inflation remains at 8.8 percent down from 30 percent in 2003. The
budget is running at a 2.2 percent budget deficit, which is over the EU defined
budget balance of -3 percent. We are sanguine on banks this year as their
fundamentals remain strong whist their stock price declined due to global investor
bearishness towards financials.”
Turkey’s ties to the East also helped to shelter it from the effects of both the global
financial crisis and the Arab Spring. It has long pursued a zero problems with
neighbours policy as well as signing numerous bilateral trade treaties and
implementing visa-free travel agreements. Over time Turkey’s foreign policy has
shifted from quasi-isolationism towards neighbours to fostering and taking
advantage of the cultural and historical links it shares with other countries in the
region.
“Diplomatic and commercial ties were forged and improved with most of the
countries subject to the Arab Spring,” says Utkan. “Following the uprisings the
Turkish foreign policy stance has been to back pro democracy movements in the
Middle East. This is visible from its policy towards Palestine and Syria. As a result
Turkey became a credible soft power within the region.” Turkey’s pro democracy stance during the Arab Spring uprisings had an initially
negative impact on trade volumes with some countries, including Libya and Syria.
However, in the long term its stance is likely to prove popular with pro democracy
movements that have taken power across parts of the region. In addition, Turkey’s
political model is being seen as a blueprint for many of these pro-democracy
movements.
Turkey’s support for the ongoing uprising in Syria is a more complicated issue. Prior
to the recent unrest relations between the two countries were good. The legal
framework of economic relations was strengthened with the Free Trade Agreement,
mutual abolishment of visas and the completion of several bilateral agreements in
2009 and 2010. Total trade volume between Turkey and Syria rose to around $2.3
billion in 2010 from $800 million in 2006 and the number of Syrian tourists visiting
Turkey increased more than seven-fold to about 900,000 in 2010 from 126,000 in
2002.
According to Çati, “This increase in the momentum of political and economic
relations ceased abruptly with the uprising in Syria. Turkey tried to urge restraint
from the Assad government and organised the Friends of Syria conference to help
resolve the conflict in a peaceful manner. The ultimate outcome of the power
struggle in the country will determine the regional economic and political balance
that also includes Iraq and Iran. Sectarian tensions are likely to rise in the near term.
Syria will try to leverage its close relations with traditional allies Russia and Iran.”
The loss of trade with Syria has had a particularly heavy impact on Turkish cities
close to the Syrian border such as Gaziantep and Kahraman Maras.
More damaging though for the Turkish economy has been the ongoing nuclear
dispute between Iran and a number of world powers, according to Çati.
“Iran has been a primary energy supplier to Turkey but due to the threat of US
sanctions, Turkey’s sole petroleum refiner Tupras had to scale back cheaper oil
purchases from Iran,” he says. “Turkey’s economy is highly dependent on energy
imports. The bulk of the country’s annual $75 billion current account deficit is driven
by the energy bill.”
Turkey’s policy of fostering new relationships where cultural ties already exist has
extended far beyond the Middle East to India where the Mughals used to rule prior
to the English, as well as Central Asia and China. A recent trade delegation to China
began its negotiations in the far western Chinese province of Urumchi where
Uyghur Turks make up a large part of the population.
Many Turkish firms are operating in China and Turkey in turn has seen a number of
Chinese firms moving into the services and white goods sectors. Companies from
the Far East view Turkey as not only a market in itself but also as a door into Europe.
The investment focus in general has shifted away from the West towards the East,
according to Utkan.
“International investors are looking for new investment opportunities which are
getting scarcer,” he says. “Turkey provides a sound market infrastructure with
regulated and transparent capital markets. Also Middle Eastern investors have
historically invested in Europe and the Middle East. Today a lot of it is being
repatriated back into the region and more profitable countries such as China and
Turkey.”
Cooperation between Turkey and the Far East extends beyond trade. There has also
been increased military cooperation with China.
“There is no doubt that the balance of power is shifting from the West to the East,”
according to Utkan. “The MENA region has ample commodity resources whilst
countries such as China and Turkey are rapidly expanding and need energy sources.
Turkey’s economic strength comes in large part from harsh lessons learned a decade ago. During the 1990s and early 2000s Turkey’s economy suffered from high
inflation and periodic boom and bust cycles. The 2001 financial crisis was
“devastating” for the country and led to an annual contraction in GDP of almost 10
percent. Turkey learned its lesson and with the establishment of a single-party
government enacted structural economic reforms including the foundation of an
independent banking supervisory body, BDDK.
“Turkey’s banks are currently among the healthiest in Europe due to strong capital
bases and low degrees of leverage,” according to Çati. “The government’s strict
adherence to fiscal discipline during the past decade led gross public debt/GDP ratio
to decline to less than 40 percent whereas fiscal deficit/GDP ratio improved to 1.5
percent of GDP. Turkey also reduced the tax rate for corporations to 20 percent from
33 percent. All of these developments led to strong economic growth, led by
domestic consumption and investments.”
Despite these strengths risks remain. Perhaps the biggest economic risk is Turkey’s
high current account deficit, which rose to around nine percent of GDP in 2011. The
Central Bank has been following an unorthodox monetary policy, trying to rein in
credit growth and manage a “soft landing” for the economy,” according to Çati.
“Moreover, the government has recently introduced certain incentives for import
dependent sectors such as petrochemicals that will improve the trade balance
through the domestic production of previously imported products. New incentives
for the private pension system have been introduced that aim to improve the
currently low level of savings rate in the domestic economy.
“One other weakness in the economy is the share of ‘unrecorded economy’. This
leads to a low tax base for the government and relatively higher share of tax on
consumption. Turkey has one of the highest tax rates on petroleum.”
Turkey’s vulnerability to high oil and energy prices, as it is an importer of oil, is also a
risk for the economy and political intervention in the Central bank has also had
negative impacts on the stock market despite the sound fundamentals of Turkish
firms
“Foreigners constitute 70 percent of investments on the Istanbul Stock Exchange,”
says Utkan. “Most of these investors are macro allocators into the large cap index
constituents. In times of increasing volatility these investors tend to sell their
holdings without any regard to the fundamentals of the underlying companies.”
Global financial conditions also pose a risk to the Turkish economy, according to
Gokpinar,.
“Turkey is set to be hurt by potential reversals in global risk sentiment,” he says.
“While the effects of such a scenario will clearly depend on the magnitude of the
financialstress levels, we believe that downside risks for the Turkish economy are
somewhat limited due to the Central Bank’s continued focus on pursuing a flexible
interest rate policy and the government’s proactive focus on policy coordination.”
The long-term outlook for investment opportunities in Turkey is highly positive. All
the ingredients are there for growth, including political and economic stability,
proximity to the key European and MENA export markets, favorable demographics,
rapid urbanization.
“Turkey’s economic potential has been well recognized by foreign investors as
manifested by the foreign direct investments (FDI) into the country,” according to
Çati. “FDI inflows reached $10.9 billion in the first nine months of 2011, more than
doubling the amount of FDI Turkey attracted in 2010. According to latest OECD
estimates, Turkey is expected to be the fastest growing economy of the OECD
members during 2011-2017, with an annual average growth rate of 6.7 percent. Key
sectors that will benefit the most are consumer discretionary, durables, automotive,
pharmaceuticals and technology. The country’s relatively low inflation environment has also helped to create a strong
base for economic stability going forward that willsupport continued growth,
according to Gokpinar.
“Turkey has one of the strongest banking sectors in the world with capital adequacy
ratios well above standards set by Basel and with experience in dealing with financial
crises,” he says. “With the fiscal discipline and an externally-oriented growth model
Turkey is much more resilient to economic shocks and has also gained investors’
confidence. That confidence brings additionalstability to the country’s financial
markets.”
In Strateji’s view considerable future investment opportunities in Turkey will be in
alternatives. International and local investors have done well from Turkey’s stock
market in recent years but are beginning to look elsewhere, Utkan believes
“There is an opportunity to design lower volatility equity long/short products
reducing volatility whilst delivering returns over cash,” he says. “The government is
also promoting the growth of the asset management industry in order to increase
the savings rate of the country and reduce the current account deficit. Given the
high multiples in the private equity and property market we feel that public equity
investing will deliver the most superior opportunities in Turkey.”