Turkey: Built for change

Author: | Published: 1 Oct 2008
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If you had stopped someone in the street 18 months ago and asked them what they thought about the then nascent credit crunch, they probably would have thought it was a new breakfast cereal. Not any more. The credit crunch is now affecting all levels of society, from former financial powerhouses Lehman Brothers and Merrill Lynch to modest first-time homebuyers around the world.

So what effect is the credit crunch having on Turkey? So far Turkey has been spared the worst of the fallout. According to the latest data, the economy is continuing to grow at a healthy 4.5%. Ironically for a country where seatbelts are merely decorative and motorcycle helmets protect more elbows than heads, our banks appear to have avoided taking the excessive risks that led to the downfall of certain Wall Street institutions. Indeed, Turkey's big banks have continued to post healthy profits since the onset of the crisis last year. However, the service industry accounts for 58% of Turkey's real GDP, and financial services make the biggest contribution to this figure. Any disruption to this industry therefore has a heavy impact on Turkey's overall economic health.

Turkey is also integrated into the global economy and is by no means immune to troubles abroad. Lehman Brothers' implosion last week caused a sharp fall in Turkish stocks (especially after the closure of the Russian stock market) and it remains to be seen how the markets will respond to the efforts of the US Fed and the central banks in the big economies to inject liquidity back into the markets.

Foreign direct investment in Turkey has also been steadily increasing in recent years, reaching $22 billion in 2007. With credit scarce and risk appetites declining, interest in emerging markets such as Turkey may wane. Less foreign direct investment due to plummeting liquidity means that the treasury will have to raise more debt to meet its foreign trade deficit and the high interest rates under prevailing market conditions will indeed increase the overall costs that Turkey incurs to cover these shortfalls.

For the moment, however, there is no shortage of work for Turkish finance lawyers. The investors still invest and the lenders still lend, but the rules of the game have changed somewhat. The credit crunch has triggered a marked shift in the balance of power between lenders and borrowers. Until recently, banks were falling over themselves to lend and borrowers were able to dictate the terms of their borrowing. Now the banks are taking shelter behind stricter financial covenants and are demanding much higher interest rates to compensate for the increased default risk. Therefore, it would not be incorrect to say that there is now far less scope for borrowers to negotiate.

This pattern remains true for all types of financing deals, including energy and project finance. However, the strongest crops survive even in times of drought, and a number of high-profile project finance transactions are due to close in the coming months.

As history has shown, markets are cyclical and are sure to bounce back. The question is, how long will this take? As always, I remain optimistic that Turkish markets will weather the storm and investors will continue to invest in projects here. Turkey has shown remarkable resilience to the domestic crises of yesterday and I am sure they will successfully navigate the global crisis of today. Whether lessons in the finance industry have been learnt and we have entered a new age of more risk-averse lending remains to be seen.