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Magazine Issues » February 2011

TURKEY: prospects improve

istanbul_roofTurkey is coming into its own as a regional financial centre and offers exciting investment opportunities, says Marcin Fiejka of Pioneer Investments

The yes vote on the referendum for constitutional changes for Turkey, which took place in September, has been viewed by many as a positive for Turkey’s prospects. This is one of the reasons that Turkey is becoming a favourite market in emerging Europe and has, in our view, a very bright outlook. We believe that Turkey stands out as offering genuinely exciting opportunities.

There have been general structural improvements in most areas. Turkey has benefited from structural reforms and much better fiscal discipline over recent years. Monetary policy is accommodative, the political landscape is more stable and, despite picking up slightly in recent months, inflation is stable and not the huge structural problem it once was.

The central bank has aggressively loosened its monetary policy by 1,100 bps since October 2008. Interbank rates are now at an all-time low of 5.75%, following the 25 bps reduction in October. The central bank confirmed its view that interest rates could remain low for an extended period as inflation should continue to fall again from the last quarter of the year. We anticipate that capacity-utilisation rates will remain below pre-crisis levels for a while longer, domestic growth will moderate after a very strong second quarter, and the external-demand picture is uncertain.

Lower unemployment
Unemployment is currently running at 10.6%, which is back to the same levels as when Lehman Brothers collapsed in September 2008. Compare this to many Western economies, where unemployment continues to climb. For instance, the US unemployment rate was 9.6% in October compared with 6.2% in August 2008, and is only slightly below the 10.1% peak last September, which was the highest level since 1983.

As well as this, Turkey has experienced strong consumption-led economic growth, exceeding the most optimistic expectations in the first half of 2010: second-quarter growth was 10.3% year-on-year, well ahead of consensus, prompting analysts to upgrade forecasts for 2010 and 2011.

This level of growth, which was largely driven by domestic demand, matched China’s as the fastest among the G20 countries. Growth is likely to slow in the second half of the year, but it still could hit around 7.5% for the full year. The other key point about growth is that because it is increasingly being driven by consumption and funded by domestic banks rather than external debt, Turkey’s exposure to global growth is decreasing. This should help isolate Turkey from an expected slowdown in Europe, which is its main export market.

Turkey has one of the most attractive demographic profiles among developed and developing countries, with a young and growing population, combined with rising GDP per capita. More than one million people join the labour force each year in Turkey. According to IMF statistics, GDP per capita in Turkey will rise from US$8,723 (€5,515) in 2009 to €8,151 in 2015, a 28.5% increase. In our view the combination of these two factors will give consumption serious momentum over the short, medium and long term.

Political tensions
There have certainly been tensions on the political front over the past year, which has knocked confidence at times, but the country appears to be in good shape politically, with sensible ideas and evidence of genuine progress. The AKP party, led by Prime Minister Erdogan, has presided over strong growth and pragmatic and generally popular policies since coming to power in 2002.

The bigger than expected support (58% of voters) for September’s referendum on constitutional changes makes it more likely that the AKP party will win a third term in office at the general election, which will be held in June 2011. The “yes” vote means that the constitution, drafted under military rule in 1982, will be overhauled. Following the referendum, the military will move more under civilian control and the government will have greater control over the judiciary and appointing judges.

Stefan Fule, the EU’s commissioner for enlargement, viewed the amendments favourably, although he reiterated that further reforms are needed in areas such as freedom of expression and religion.

It is clear that the market viewed the result positively, as the ISE National equity index hit an all-time high in the run-up to the vote, and has continued to climb since the result was announced.

Risk profile
Due to the structural improvements, strong growth and increased political stability, the risk profile of Turkey has changed dramatically. This is starkly highlighted by looking at the costs of insuring Turkish sovereign debt. As with many emerging markets, it used to be much dearer than developed markets. However, there seems to have been a paradigm shift since the credit crunch, which was epitomised by the collapse of Lehman Brothers in September 2008. Investors seem more willing to judge countries on current macro fundamentals than historic perceptions, with a blurring of the boundaries between “developed” and “developing”. This, combined with investors’ structural underweight to emerging markets, bodes well for future investment prospects.

Turkey is emerging as a regional superpower and energy hub, looking to expand its sphere of influence throughout the Mena (Middle East and North Africa) region with Turkish companies actively investing and growing their presence in the region. The country did not need IMF financing last year and there is less emphasis on EU accession due to a very resilient economy and growing confidence about its own future. For instance, there is a new Caspian oil pipeline coming into Turkey, which will boost its strategic importance to Europe. There has also been a lot of investment in oil and gas processing.

Exciting investment themes
There are many new exciting investment themes in Turkey. The recent GDP results outlined how growth is increasingly driven through the domestic economy and appears to be more resilient to exogenous shocks than in the past. This is a positive and one of the drivers behind a focus on consumption, for areas such as banking, automobiles and electronic goods. The cost of loans has come down sharply, boosting consumer loan growth and driving discretionary and non-discretionary spending progress across many areas of the market. The central bank of Turkey has stated that interest rates may have to stay low for an extended period as it expects inflation to remain contained and is mindful of exogenous shocks.

One of the new themes or trends is related to the privatisation of the energy sector and the oil/petrochemical areas. Turkey is the fastest-growing electricity market in Europe, where compound annual growth is expected to be approximately 6% and 7% between 2009 and 2018, driven by robust population growth, higher incomes and urbanisation. In order to drive the necessary growth in the sector, the government is liberalising the sector and has started privatising assets, with 37% of total installed capacity due to be sold. Thus, there may well be more opportunities over the coming year or so.

Marcin Fiejka is senior portfolio manager at Pioneer Investments

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