Uncertain times

Author: | Published: 27 Apr 2016
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Jonathan Moore of the IFLR1000 discusses the challenges facing Turkey as it seeks to overcome political and economic turmoil and return to the path of economic growth


The last 12 months were always going to be a challenge for Turkey. An election year, with economic forecasts downgraded and one of the more brutal civil wars of recent memory raging on its doorstep; that there have been obstacles is unsurprising. Few would have predicted 12 months ago, however, the difficulties the country is now facing.

"Things are not going very well and at this point we are not very optimistic about the rest of the year," says Muhsin Keskin, a partner at Esin Attorney Partnership in Istanbul.

"There will be a bit of activity in the Turkish market, of course; there always has been, even in the worst times right after the crisis and ever since then. But this won't be the record high year some were expecting it to be last year."

The first few months of the year went reasonably well, according to Keskin. After a difficult 2014, thanks in part to the running of both local and presidential elections, the first six months of 2015 were very positive by comparison.

However, from July onwards the problems started to mount. An indecisive general election at the end of June left the country politically in limbo for several months. Unable to come to any kind of coalition agreement, the hung parliament was forced to form an interim government made up of all parties and independents until new elections were called in November.

"We have new interest from clients in the eastern part of the world, China, the Gulf, Japan and Korea"

At the same time, the fragile peace that had lasted for almost two years with the country's Kurdish militias began to break down and the conflict on Turkey's south-eastern border had an increasing impact on domestic policy. On top of the refugee crisis – Turkey is currently home to almost 2 million displaced persons – Daesh and the Kurdistan Workers' Party (PKK) have between them engaged in several acts of aggression since July 2015 (there were no recorded attacks by either group in the first half of 2015).

Then, as if to double down on existing problems, in late November Turkish forces downed a Russian Sukhoi Su-24M bomber aircraft near the Turkey–Syria border. While the incident did not escalate into a full-scale conflict, it did lead to a significant cooling in Russia-Turkey relations. As one of the country's most significant trading partners and a major source of tourist revenue, this incident represented a significant blow to the already struggling economy.

The political and security concerns that now engulf the country have, unsurprisingly, had a negative impact on its already stumbling economy. Among those working in the financial and corporate sectors there is a strong feeling that this could again be a difficult year.

"[Not so long ago] I was talking to some merchant bankers and they were saying that 2016 will be a record high year in terms of M&A and banking activity," says Keskin. "That is not a reality anymore. Yes, there will be activity and we will still be busy, but this activity will only serve to recover the wounds of last year. Things are not great, but we'll still survive."

Despite the gloom, and despite the many challenges the country still faces, there is some optimism in the market, most notably in the energy sector. While corporate activities and direct foreign investment have taken a hit, Turkey's unquenchable need for new sources of energy remains unchanged and this sector may be the one shining light in the economy in 2016.

"We are receiving less and less foreign investment from clients in the western part of the world," says Kemal Mamak, a partner at Hergüner Bilgen Özeke. "That's a given due to the elections and the question marks related to the political climate," he adds.

But Mamak believes there are reasons to suggest things might go well. "First, we have new interest from clients in the eastern part of the world, China, the Gulf, Japan, Korea. We also have seen at least two projects, M&A deals, where the private purchase price was over $1 billion, which is interesting as in both deals the investor was not from the western part of the world, neither North America nor Europe.

Mamak is also seeing a number of refinancing deals and bond offerings. "If you are a lawyer working in Turkey these days you need to be able to work with clients from all different places. Until now, we have been used to working with mainly western clients from America or Europe, but I think the client portfolio is changing the culture."

"The renewable energy side is becoming active"

Each year Turkey brings online new capacity equivalent to the entire output generated by small-to-mid-sized nations. That is largely fuelled by new demand so there is activity in the energy sector across the board. Even where some sectors face challenges – three years of lower than average rainfall have left the hydro industry struggling, with many companies undergoing restructuring or refinancing – others look to pick up the slack, whether in renewables or the landmark nuclear projects at Akkuyu and Sinop.

"The renewable energy side is becoming active," says Mamak. "The Energy Market Regulatory Authority (Emra) has announced they will be adopting a new regulatory regime, but it has not come up yet. It will be introducing the concept of unlicensed generation, which will have an impact on the market."

Unlicensed generation has, without doubt, been the hot button issue in late 2015 and early 2016. By removing the administrative burden on small-scale generation, the government has opened up the market to thousands of new potential investors and seen a surge in interest in solar, the most cost-effective method of generating on that scale.

The original draft proposals underwent significant amendments when it became clear large-scale investors were buying up multiple projects looking to profit from the feed-in tariffs designated by the government. These changes are designed to ensure small-scale investors are able to maintain an interest.

Outside of that, Keskin also sees the potential for activity in the financial sector. "There are a couple of small banks that are on sale," he says. "We might expect some more activity in financial institutions next year. Of course, not the major ones. The smaller ones, Islamic banks especially, because Islamic banking is becoming more popular in Turkey and the government is really getting behind it."

There is no question Turkey is facing a number of challenges. But those on the ground are confident there are still potential avenues of growth and sources of work. While the challenges are many, they believe the country can still flourish.