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 A fast growing economy
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- Robust, more regular growth
Turkey has been experiencing rapid growth for several decades now. But this growth has proved highly sporadic, with deep- albeit short- recessions. The main reason for this volatility has been the Turkish economy's chief weakness: high inflation, fuelled by large public sector deficits.
The gradual reduction of public sector debt since 2002 has given rise to a new growth cycle, which is well established and more sustainable than was formerly the case, in a context of falling interest rates and inflation. This decline represents a sea change for Turkey, which has traditionally had to cope with a very high level of inflation and interest rates. Situated within the framework of Turkey's convergence with Europe, this change is regarded positively by investors.
Despite the volatility experienced by the currency in 2006 and again in 2007, the disinflationary trend remains uncompromised. The most likely short-term scenario is that inflation will continue to retreat over the year ahead towards the upper end of the target fixed by Turkey's central bank (between 3% and 6%).
- An economy with multiple assets…
Turkey's biggest asset is its considerable economic flexibility. The Turkish economy is highly responsive, particularly so its manufacturing sector. It enjoys high productivity that has increased significantly since 2002. The catch-up phenomenon has full hold here: the country's economic growth is set to overtake that of the countries of 'Old Europe', making the Turkish economy particularly attractive to investors.
Moreover, Turkey's allure is heightened by the steady closing of the gap between Turkish risk and that of the country's European counterparts.
Lastly, its position at the crossroads of Europe, the Middle East and Asia Minor gives Turkey the advantage of a prime geographical location in terms of trade flows.
- … but which remains vulnerable
Turkey's main source of vulnerability is its sensitivity to external circumstances.
Its current account deficit, which amounts to almost 7% of GDP, makes it highly dependent on foreign capital flows.
The global financial environment of recent years, characterised by universal liquidity and a pronounced appetite for risk, has benefited Turkey considerably. A reversal of this trend could weaken its economy.
Like other high-yield currencies, the Turkish lira (TRY) showed such vulnerability to a general rise in risk aversion in 2006 (impact of synchronised monetary tightening in the G3 countries*) and 2007 (subprime loans crisis in the United States).
However, the consequences on the economy of this external vulnerability are less acute than in the past, with a reduction in the proportion of public sector debt held in foreign currencies and an increase in the country's foreign exchange reserves. In the medium term, productivity gains and the prospect of deepened structural reforms should be beneficial to Turkish assets.
* United States, European Union and Japan
A country on the road to reform | |
- Multiple reforms undertaken in recent years
The arrival in power in 2002 of the Islamic party for justice and development, the AKP, brought an end to the unstable coalitions that had predominated for several years.
Following the financial crisis of 2001, the AKP implemented the following reforms:
- the overhaul of the banking sector,
- the reduction of the public sector deficit and debt,
- a privatisation programme,
- the initial stages of retirement and social security reform,
- certain constitutional reforms.
These reforms were carried out within the joint framework of the International Monetary Fund (IMF) programme and negotiations for entry into the European Union (EU).
There are numerous reforms still to be tackled:
- the reinitiation of the privatisation process,
- the continuation of social security reform,
- reform of the labour market at micro-economic level.
- 2007, a full political calendar
Turkey's political agenda for 2007 has been particularly well charged. The legislative and presidential elections took place in close succession in July and August. The AKP's landslide victory in the legislative elections reassured investors by guaranteeing a stable economic policy: pursuit of existing reforms, maintenance of budgetary discipline, etc.
After a 425 bp increase in 2006, the Turkish central bank introduced in September 2007 a cycle of rate cuts, starting with a 25 bp rate cut, to 17,25 %. New rate cuts should follow in the end of 2007 and in 2008.
In the medium term, the country's productivity gains combined with the application of new reforms should support the lira despite the current external risks.
- Convergence with Europe ahead?
In the very long term, the fundamental question of Turkey's convergence with the EU will come into play.
This convergence will provide a framework for reform, paving the way for the improvement of Turkey's economic and financial situation. Such a framework is essential for investors.
The EU's relations with Turkey have a significant impact on investor involvement.
The upgrading of the rating of Turkey's foreign currency sovereign debt by Moodys and S&P (to Ba3 and BB- respectively) has served to reassure existing investors and bring in new ones, attracted by Turkey's high growth rate.
Attractive financial markets | |
- Turkey is attracting investors
The AKP's budgetary and monetary policy has boosted confidence and reduced risk premiums, thereby attracting investment from abroad.
Significant steps have been made towards achieving robust and sustainable growth: Turkey's spread* and debt have been substantially reduced and inflation is now more tightly controlled.
Foreign investors are most active on the local debt market, highly attractive on account of the prospect of continued disinflation.
The prospect of convergence with the EU should lay the foundations for a strong bond market.
The progress made by Turkey in recent years has been encouraged by a favourable international context characterised by high global growth and an abundance of cash.
This has led many investors to focus on emerging markets such as Turkey, which has had to learn how to handle the risk of a credit squeeze. Interest rates have fallen in Turkey, prompting a sharp boom in consumer credit. This bank credit boom has created a risky situation.
"In 2002, bank assets stood at around EUR 109 billion, whereas this figure had risen to EUR 229 billion by 2006 and to EUR 237 billion by March 2007, with foreign banks' growing interest in Turkey" points out Naïm Koçer, Senior Country Officer at Calyon Bank Turk A.S., Calyon's Turkish subsidiary.
* The spread of a bond or borrowing is the difference between the bond's yield-to-maturity and that of a risk-free borrowing of the same duration.
Turkey's current spread is 242 bp (September 2007), despite having risen during the summer 2007 because of the sub-prime loans crisis in the United States.
- Certain sectors are particularly attractive
In the opinion of Calyon Bank Turk A.S., the most promising sectors are energy, telecommunications and construction.
There is an increasingly strong demand for energy in Turkey. It is expected that future investment will focus on the construction of power stations, hydroelectric ones in particular, and oil refineries and the privatisation of the country's power distribution networks. Moreover, owing to its strategic location Turkey is becoming a major energy hub, notably for oil and natural gas.
Competition has intensified in the telecommunications sector with the recent privatisation of Turk Telekom and Vodafone's arrival in the Turkish market. With the transition to 3G, the extension of network coverage and investment in new technologies, this sector is expected to experience significant growth.
Calyon in Turkey: a longstanding presence and recognised expertise | |
Established in Turkey since 1875, Calyon Bank Türk A.S offers its clients the benefit of its in-depth knowledge of the Turkish market.
From syndicated loans and trade finance tools to tailored capital market solutions, Calyon Bank Türk A.S. offers a broad range of corporate and investment banking products and services to its client base of leading Turkish companies, financial institutions and French and multinational companies based in Turkey.
Calyon has constantly adapted its offer in line with Turkey's changing economy.
In the words of Mr Koçer, until 2001 Calyon's principal objective had been to finance Turkey's 50 leading companies.
"During the years when inflation was high in Turkey we issued major financing loans (mainly in foreign currencies)," he explains.
"As the Turkish economy picked up, foreign investors became more interested in the country and new investment opportunities and needs arose.
As is the case for our competitors, our strategy on Turkey changed accordingly and since then the bank has restructured its businesses to offer a range of corporate and investment banking products and services. In the years immediately after 2000 foreign investment in Turkey stood at around USD 1 billion (compared with USD 18 billion in 2006) and was channelled into a limited number of sectors.
Since 2006, most of the investment projects we have seen are geared to infrastructure. Turkey had put a strong brake on investment and public spending since 2002 in a bid to improve its public sector ratios. Now that this goal has been met, investment spending has resumed at the pace required by an economy experiencing strong growth. We believe that this trend will continue in Turkey, accompanied by the development of mergers and acquisitions activity as companies are transformed from family businesses into institutional organisations. The financial sector is among those that are participating most actively in these investments."
As a partner in Turkey's economic development, Calyon Bank Türk A.S. continues to offer solutions tailored to the needs of its clients both in Turkey and overseas.
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