Features: Turkey Weathers Storm And Comes Out Strong
COUNTRY REPORT/TURKEY


With a solid reform program that remains on track and a strong privatization program in the works, Turkey is a choice destination for those investors looking to pick up assets.

When investors fled for safety from emerging markets earlier this year, the Turkish lira dropped dramatically. Unlike in previous currency crises, though, it stabilized relatively swiftly, buoyed by reforms in the banking and financial sectors and strong support from the central bank. Tim Ash, a managing director at Bear Stearns, says that the country is showing very strong debt management by the treasury, which is really improving the debt profile of the treasury. “The vulnerability of the economy to interest rate and foreign exchange rate shocks has been improving,” he notes.

But the current account deficit continues to be a weak point, adds Ash. He says that was laid bare in May when the currency corrected significantly to the downside: “Initially there was a very big correction that was not helped by the central bank, which gave the impression that they did not have a finger on the pulse because they did not act aggressively to restore balance. Basically we believe they miscalculated, but since then they have aggressively tightened their policy, and we have seen 425 basis points of rate hikes since May.”

According to Eva Sanchez-Ampudia, analyst in emerging markets research at JPMorgan, the persistent current account deficit leaves the currency highly dependent on global sentiment. “The Turkish lira will remain sensitive to the kind of flight from risky assets that we saw in May-June as a result of heightened fears over the growth-inflation trade-off in the US,” she noted in a report.

It is not only the current account deficit that is giving investors pause for thought, says Kristin Lindow, vice president and senior credit officer in the sovereign risk unit at Moody’s Investors Service. “A number of hedge funds and institutional investors repositioned themselves to protect against higher-risk countries, such as Turkey,” she says. Emerging market investors are particularly sensitive to those countries with large external financing needs, rather than a large current account surplus. “Turkey, with large external financing and refinancing requirements, got hit pretty hard in this temporary run away from the emerging markets,” she notes.

“This came even though Turkey continues to perform with respect to its IMF program,” Lindow says. “There has been a delay in some reform decisions they had made—for example, social security reforms—but in terms of fiscal reform they have been performing very well and this year look set to outperform their reform goals.”

Indeed, the pace at which Turkey has instituted financial and banking reforms has been commendable. The banking sector, according to Eva Miles, an analyst at JPMorgan, is far better placed today to weather market turbulence and a growth slowdown compared with just before the market crisis in 2001. “In terms of market risks, the sizable FX mismatches that characterized prior banking crises in Turkey appear to have been virtually eliminated,” she explains. “We see few additional risks emanating from the banking sector that could contribute to volatility."

Turkey’s banking sector is in relatively good shape, according to Miles, with good solvency ratios, with equity-to-assets at 13.5% and regulatory capital ratios of 23.5% as of March 2006; good liquidity, with loan-to-assets of 41%; and decent asset quality.

Foreigners Continue Buying Spree
The growing quality of Turkish financial institutions is clearly being recognized by international investors, as five major acquisitions were made in the banking sector over the past year. Dexia picked up 75% of Denizbank in March this year, and the National Bank of Greece also closed a deal in March for 46% of Turkey’s Finanzbank. December saw Israeli group Bank Hapoalim pick up 57.5% of C Bank, and in August two major purchases were made: Fortis bought an 89.3% stake in Disbank, and GEFC bought a 25.5% stake in Garanti Bank. In January last year Kocbank and UniCredit also picked up a 57.4% stake in Yapi Kredi Bank. A number of other deals are expected in the banking sector, including the privatization sale of Ziraat Bank and Halkbank.

The Turkish privatization program is also a key part of the Turkish development plan, both in terms of its IMF program and in preparation for EU accession. Numerous assets have been sold off, including 55% of Türk Telekom and 51% of Tupras, the Turkish Petroleum Refineries. A consortium led by Saudi Oger and Telecom Italia bought the Türk Telekom stake.

Tupras was purchased by Turkey’s Koc Holdings and its partner Royal Dutch Shell. The $4.14 billion deal was agreed in September 2005. In addition to a $2.5 billion loan signed when the deal went through, Koc recently announced that it has set up another $1.8 billion in funding arranged through Turkey’s Halkbank and a consortium consisting of Akbank, Garanti Bank, Isbank, Standart Bank and Vakiflar Bank.

In the coming years the government plans to put a number of other assets on the block, including TEDAS, the Turkish electricity distributor; the natural gas distributors; the power plants of electricity generator EÜAS; Turkish Airlines; the state-owned tobacco assets; Turkish Ziraat Bank and Halkbank.

Regional Concerns
One big issue for Turkey, and indeed other countries in the region, is the impact that Middle East issues are having both financially and in terms of foreign investor perception. The largest fallout from the situation in the Middle East, according to Ash, is being felt through energy prices. “Turkey is such a large importer of energy,” he says. “Turkey will be heavily affected because basically every one-dollar-per-barrel increase is increasing Turkey’s energy costs by around $400 million.”

However, Ash believes that Turkey could benefit over the longer term, especially in terms of foreign investment. “A lot of Middle East investors have looked toward Turkey and the region both for greater investment and as a holiday destination post 9/11,” he says. “They do not really want to go to the US or Europe, so we have seen a lot of inflows into the region.”

Another issue that is always prominent in discussions of Turkey is the continued effort to prepare for EU accession. The country recently closed its first official chapter in the evaluation process for EU accession. This is a big step forward, but as EU officials and market analysts have noted, there is a long way yet to go and a number of economic and political hurdles still to be overcome—not least the country’s stance on Cyprus.

According to analysts, EU accession is still a good 10 years away, at least. However, one big benefit of the talks is that Turkey has fast-tracked its reform plans, which makes for a stronger and more desirable market.


Denise Bedell
 

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