A Turkish rennaissance

By bne IntelliNews April 6, 2012

Justin Vela in Istanbul -

Renaissance Capital has officially established itself in Turkey with the acquisition of local brokerage Mira Menkul Degerler. But the Moscow-based investment bank's enthusiasm for Turkey is tempered by a close eye on the fundamental flaws it sees in the country's growth strategy.

On March 7, Renaissance announced it had completed the acquisition of the Istanbul-based brokerage to create Renaissance Capital Menkul Degerler. "We went through five or six choices in the market," Burak Akbulut, head of Turkey Execution at Renaissance, says of the acquisition. "We did due diligence on several companies, and in the end after all our research, basically it seemed like the best fit for us."

Akbulut comes to Renaissance with 15 years experience in Turkey's capital markets, having served as a sales trader, manager and shareholder at Deutsche bank, Citibank and Oguz Securities. "It was the right time for RenCap to open up Turkey operations as Renaissance Group specialize in emerging markets and Turkey is one of the major countries in emerging world."

For Renaissance, Turkey's story is one of cautious opportunity. The country is very dynamic, with a higher growth rate than most of Europe and a young, vibrant population, Turkey's greatest asset. At the same time, though, Turkey is struggling with a massive current account deficit that in January hit $6bn, inflation around 10%, and a sense that the government is not prepared to take the necessary steps to adjust the economy if it means losing the growth the country has become famous for in the last few years.

At just 1.3%, Renaissance has one of the lowest economic growth forecasts for Turkey in 2012. However, Akbulut is still bullish, reminding investors to look at the full combination of factors when deciding how and where to invest in a country. "You have to understand Turkey's economy. It is a bit different than the other countries in the region and that is why it is one of the major emerging markets," he says, pointing to its young population that's spending a lot of money, fueling growth.

Although savings are low, growth is high and inflation is manageable, he says. "I don't believe that Turkey is very much an overheated economy... I don't believe that it is going to be a crisis story or anything like that in Turkey," he says. "The biggest, most important data that we should focus on about Turkey is its young population. This is Turkey's biggest advantage, as well as the location. That Turkey has this geopolitical advantage is very important. And Turkey so far is using this advantage."

Akbulut sees Turkey's banking sector as especially solid compared to those in other emerging markets. "The banking sector has always been the leading sector," he says. "The country has a growing expertise in the energy sector as well. Consumers are very strong in Turkey as well."

Caution ahead

Moscow-based Renaissance economist Mert Yildiz says that while there is much to be enthusiastic about in Turkey, no matter how dynamic the country is, the economy still needs fine-tuning.

One of the reasons he forecasts such low growth for Turkey this year is that the country is very dependent on global liquidity. "It is a nation without savings. To grow, Turkey needs savings from other countries."

So far, 2012 has seen high global liquidity, but Yildiz says that the situation is an anomaly that will dissipate and he is not moving to upgrade his forecast. "The biggest [domestic] contributor to growth in Turkey has been wages," he says. "Those will not be increasing this year. More people entering the job market puts downward pressure on wages."

He adds that banks are coming under more scrutiny, which means that there will not be as much credit available for consumers, another key driver of growth. "Turkey is a consumption-driven economy; 70% of the economy is consumption," he says.

Lower consumption will equal lower growth, but Yildiz does not necessarily think that this will be a bad thing. For growth to be sustainable, he explains, productivity needs also to grow, but Turkey is not investing enough in its people, in education or skills training for jobs. "Most of the country has hardly graduated from primary school and you are trying to compete with the Organization for Economic Cooperation and Development countries where the average person is educated at least until 18."

The effect of this can be seen in the manufacturing sector. Turkey has been a producer of automotives and white goods for some time, but the country is expected to lose its competitiveness in these areas because the products increasingly require the installation of complex electronics and artificial intelligence systems. "Turkey does not have the knowhow to build artificial intelligence systems into cars," Yildiz says. As such, automotive manufacturers are likely to move their plants out of Turkey to countries such as Hungary, Slovenia, and the Czech Republic where locals have the skills to build cars that require more electronic work.

The young population is also not an unalloyed good. A gift and a curse, a young population means there's a lot of entry-level workers who push down wages and attract foreign investors seeking inexpensive labour. There is also generally a high male percentage to young populations, which can lead to instability. "If you pull out the young population card, I always say that Egypt has a young population and it has not really worked out for them."

"If you educate them, they will become an advantage," Yildiz says. "Asia invested in its young people in the 70s and 80, and today they are very strong."

Perhaps surprisingly, Yildiz did not see such a problem in the high current account deficit, believing that as long as the economy keeps growing, financing it will be possible. Rather, the real risk for Turkey is when the economies of the West pick up again, and "the money that flew into Turkey will fly out."

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