Stumbling, not falling

Author: | Published: 24 Apr 2015
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Jonathan Moore looks at the recent troubles in the Turkish economy and how the country is managing to remain a growing force in the world

It could be said the writing is on the wall for Turkey. As was widely expected, the latest figures show the country failed by some margin to meet the government's 3.3% GDP growth goal for 2014, achieving a rate of just 2.9%. While concerns about inflation were somewhat calmed by the massive drop in oil prices in the second half of the year, that rate was still an issue when it reached around 9% year-on-year by November, with some sectors like food prices rising above 14% in the same period. According to the World Bank, while disinflation is expected to take place in 2015 the renewed depreciation trend in the Turkish lira remains a potential downside to the positive inflation news. Indeed, in dollar terms the nation's GDP actually shrunk by 2.8% in 2014 as the local currency slumped 9% against the US dollar.

Civil unrest continued to grip the populace. Following from 2013's Gezi Park protests there were various marches and demonstrations throughout the year. The government's new internet laws sparked outbursts early in the year and later demonstrations demanding more action be taken in Syria saw the deaths of at least 19. A local human rights group says that more than 11,000 people were arrested by Turkish authorities in the year 2014.

Probably the most savage conflict being fought in the world today is taking place on the country's south east border, with floods of refugees crossing that boundary in a bid to escape the violence. On top of all this the country also suffered the worst mining disaster in its history when fire raged through a mine in Soma, killing 301.

With all this going one, it would be easy to say Turkey is on the verge of, if not in, a crisis. Yet speak to people on the ground and they are very positive about the future.

"There was some impact from the elections last year and with the controversy [related to corruption] there was some slowdown on government-backed infrastructure projects," says Ender Özeke, a partner at Hergüner Bilgen Özeke. "Private finance has been progressing pretty much as planned, though. We don't expect a huge in-flow of projects but we are involved in a number of large ones already and if they pick up we will be very busy in 2015."

Positive shoots

While the disappointing GDP figures could be seen as a negative, they are actually higher than some analysts predicted. While they do represent a slowdown, commercially 2014 could be described as a staccato year for the Turkish economy. Local elections in March and the presidential election in August caused a lull in projects and deals as parties held firm on concluding matters until later in the year. While there were fewer deals completed in 2014 than in 2013 the total value of deals actually went up. With the election season concluding with the general election in June 2015 many of those in the market expect to see a better year this year for work across the board.

"If Turkey is to succeed, the energy market will play an enormous part"

The government expects that too. While sluggish growth in Europe and around the world certainly contributes to the economic slowdown Turkey experienced this year, government ministers point out that its growth remains above that of many other emerging market economies – expected to be around 2.7% for 2014.

A robust local banking sector – shaped by reforms brought in before the global financial crisis that shielded them from some of the worst problems faced by other nations' banks – and a strong local entrepreneurial spirit mean the country remains an attractive investment prospect. But foreign direct investment actually declined by 1.7% in 2014 and many say this figure will need to increase if the economy is going to see the kind of growth hoped for by the government.

Energising the market

If Turkey is to succeed, the energy market will play an enormous part. In 2014 the country brought online 5,500 megawatts of newly-installed capacity, the equivalent to the total installed capacity of a country like Ecuador being brought online in a single year.

As a consequence, the demand in the market is enormous across the board. There is an appetite for all projects – recent deals have seen renewables, nuclear, imported coal, domestic coal, hydro, wind, geothermal and gas power plants complete financing or begin construction – and a steady stream of this work is coming through on a regular basis.

"The interest and the opportunity exists in all areas of power and infrastructure and I think it's up to the skill of investors to really find the deals that are more attractive than others," said Aygen Yayikoglu, founder of Crescent Capital. "Turkey is a country which is trying to keep up with demand for power so in terms of additional capacity coming online and the pipeline of projects in the coming years it is renewables, thermal, and all types of other projects."

There are a large number of examples to demonstrate this trend, among them the Yukari Kaleköy hydro-electric power plant project, financing for which was finalised in August. This was one of the biggest hydro projects of 2014 in Turkey and, unusually, the financing was achieved through a consortium of only Turkish banks including: Yapi ve Kredi Bankasi, TC Ziraat Bankasi, Türkiye Halk Bankasi and Finansbank.

"The energy market was also where the most significant developments in legislation were seen this year"

Many of Turkey's biggest infrastructure projects are also related to the energy sector. This year the biggest deal – indeed the largest project financing in Turkish history – saw the State Oil Company of Azerbaijan Republic (Socar) complete a $3.29 billion financing with 23 banks and export credit agencies as part of the $5.5 billion Star refinery project. This will see the construction of an oil refinery off the Aegean coast to supply petrochemicals maker Petkim and help cut the country's dependence on imported refined oil products, a major part of the national energy plan.

The energy market was also where the most significant developments in legislation were seen this year. The Electricity Market Law enacted in 2013 brought new clarity to private investors. Subsequent secondary legislation enacted by the Energy Market Regulatory Authority (Emra) has provided even more. Most notably this deals with licensing and helping new players come to market more quickly, but there are also a number of other changes aimed at making the whole process clearer for new investors.

Building for the future

As part of former Prime Minister – now President – Recep Tayyip Erdogan's ambitious plan to bring Turkey into the top 10 economies of the world by 2023 the government is also heavily involved in a number of large-scale projects.

The biggest of these is the ongoing work of the Republic Of Turkey Prime Ministry Privatization Administration. In 2014, nine of the 20 biggest deals in the market were privatisations and this will continue to be one of, if not the, biggest drivers of transactions for the near future.

In terms of transactions, the ongoing work related to the construction of Yavuz Sultan Selim Bridge and Istanbul New Airport, both multi-billion dollar long-term construction projects in Istanbul, show the government is still strongly investing in new projects. There are also a number of highway developments in the works, including the Gebze-Izmir Motorway project, the largest in the nation's history.

Turkey's meteoric rise has certainly faltered of late, but the political troubles and economic slowdown seem to be more hiccup than long-term malaise. While the country still has a way to go before it achieves its bold ambitions there remains optimism within the market. It certainly seems that as far as Turkey is concerned the future is not yet written.