Turkey’s dream of becoming a trillion-dollar economy has gone up in smoke—at least for the foreseeable future. Last year’s severe currency crisis sparked spreading economic turmoil and appears to have delivered a mean recession. President Recep Tayyip Erdogan and his Justice and Development Party (AKP) will step up campaigning for the upcoming March 31 local elections attempting to avoid sheepish acknowledgement that the growth party is over. The International Monetary Fund (IMF) expects Turkey’s nominal GDP to come in at $631bn for 2019. That would mean the country retaining its position as having the world’s 17th largest economy, but the anticipated output figure pales in comparison to 2017’s $849.5bn.
The Erdogan administration must be keenly aware that a wheel has come off. Consumers have been rocked by the hard landing. So how will the populist president (Turkey’s first near-all-powerful “executive president” since his June 2018 re-election was secured and triggered constitutional changes) keep a majority of the electorate on his side as he approaches two decades at the top?
Erdogan's 2023 vision promoted back in 2011. How many of its goals will survive the economic mire Turkey finds itself in?
Erdogan’s popularity sinking
Opinion polling is rather unreliable in Turkey but there are enough pointers to conclude that there is a good case Erdogan’s popularity with voters has sunk below 40%. But Erdogan is a master at pressing the right buttons with Turkish constituencies, opportunistically appealing to nationalist instincts when advisable such as by blaming Turkey’s economic woes on “foreign plots” or whipping up sentiment around Turkish military adventures chasing Kurdish “terrorists” in Syria and Iraq. Expect more of that as the polling date nears. And, despite the pressing economic imperatives, don’t count on Ankara to run the tightest of fiscal, or even monetary, ships in the first quarter.
In late November, it became clear that a pre-election stimulus fest was getting under way. Erdogan announced Turkey was to launch a fresh investment and employment mobilisation campaign. Among other measures, Turkish lira (TRY) 734mn ($139mn) was allocated for 2,545 small and medium sized enterprises (SMEs) to create 6,055 new employment openings. Adding to the campaign season generosity, December 31 brought reports that officials are lining up a 10% discount on 2019 gas and electricity prices for households and businesses.
The government, meanwhile, has been encouraging local lenders to “voluntarily” cut lending rates and private businesses to slash prices under the government’s “All-Out War on Inflation Programme” amid the high policy rates brought in to fight double-digit inflation.
Some analysts feel Erdogan may set out to convince voters the show is more or less still on the road until election day is negotiated, but will then seriously consider turning to the IMF for a rescue. That would be serious tail-between-the-legs stuff given that he rose to power partly on his rejection of the idea that Turkey cannot do without the international financial institution.
Pursuing hugely ambitious mega-infrastructure projects over the years has been another vote-winner and Erdogan demonstrated in early December how he has not given up on such bravado and grandeur when he vowed to go ahead with the $16bn and 45-km-long Canal Istanbul project connecting the Black Sea to the Sea of Marmara. His declaration came despite earlier pledges that amid the country’s new economic realities the government would rein in state infrastructure investments for the sake of austerity and fiscal prudence. Many experts say the canal, which will turn the western side of Istanbul into an island, will not even provide much extra value to shipping, but the cancellation of the long-hailed investment would be difficult to swallow for the president.
No V-shaped recovery?
Turkey’s problems, however, are very real and investors will want to see no let-up in ministers grappling with them in earnest. The fear is that despite the country’s dynamic legions of SME business people, blessed with a market buoyed by a relatively young population, there will be no V-shaped recovery this time around, with something like an L-shape looking all too possible and unemployment going through the roof.
The extent of the economic woe was underlined in late November when it was reported that over a six-month period Turkey had plunged to the bottom of a Bloomberg list of attractive emerging markets. The scorecard took on a range of metrics, including predictions for gross domestic product and the current account, sovereign ratings and stock and bond valuations. “In a similar scorecard done almost six months ago, Turkey was ranked No. 5,” the ranking compiler noted. “The economy is expected to grow 0.8 percent in 2019, down from an estimated 3.5 percent this year, according to [our] survey of economists. Inflation reached 25.2 percent in October, the highest level since 2003, hurting valuations of real yield.”
Geopolitical guessing game
On the geopolitical front, Erdogan continues to keep everyone guessing, one moment talking up the prospects of a Moscow-Ankara axis holding sway on crux issues, the next moment implying that as various rows with the US have been resolved—for instance, US pastor Andrew Brunson’s fate was resolved when a Turkish court allowed him to fly home in October, and the US alliance with Kurdish forces deemed enemies by the Turks appears to be dissolving given Donald Trump’s late December decision to withdraw the American military from Syria—Turkey might be set to work more closely with the Trump administration.
But who knows what U-turn Trump will announce next and there are still some knotty disagreements that could yet cause more ructions between Turkey and the US. These include Turkey’s refusal so far to back Trump’s sanctions-led economic war against Iran; the stance of Turkey, a Nato member, that despite the US okaying a potential purchase by Ankara of American Patriot missile systems, it will still go ahead and buy Russia’s S-400 missile system, which Nato members see as a security threat to hardware it could be tested against (though the Kremlin might pull the deal if major anxieties emerge that the testing could be conducted the other way around, thus potentially exposing performance data of the S-400 to Washington); the prospect of the US blocking the delivery of any F-35 stealth fighter jets to Turkey if it does not scrap the S-400 purchase (interestingly, in early December a US air force official remarked that cutting Turkey from the F-35 programme may have minimal impact on the industrial base formed for the development and making of the plane), and Erdogan’s closeness to the Maduro regime in Venezuela.
Another unknown is whether Erdogan might still place obstacles in the way of Trump preserving his backing of Saudi Arabia’s de facto ruler Mohammed bin Salman, whom the American president continues to support despite key Republican senators, briefed by the CIA, stating that they believed the crown prince gave the order for the October murder of self-exiled Saudi journalist Jamal Khashoggi inside Riyadh’s consulate in Istanbul.
Potential flash point: Cyprus gas
Meanwhile, gas reserves off the divided island of Cyprus remain another possible flash point. In mid-December, a senior US state official warned off Ankara from obstructing drilling in Cyprus’s exclusive economic zone. The previous month, Erdogan cautioned foreign oil companies against energy exploration near Cyprus, describing those defying Ankara as “bandits of the sea” who would face a similar response as Turkey’s foes in Syria.
Soon after Erdogan spoke out on the matter, a Turkish opposition leader, Meral Aksener, a former interior minister known as the “she wolf” who heads the Iyi (Good) party, caused jitters by calling for consideration of a possible repeat invasion of Cyprus, amid rising tensions over who has the rights to tap potential oil and gas reserves in the eastern Mediterranean. Aksener voiced the code phrase Turkey’s army used to launch an assault on the island in 1974.
The European Union, of course, is also watching over the interests of member state Cyprus at a time when Turkey’s bid to make progress in acceding into the bloc is going nowhere.
Ankara may have ended the country’s two-year-long state of emergency—brought in after the attempted coup in 2016—in July after the snap elections, but Brussels remains deeply unimpressed by Turkey’s disregard for basic human rights. It was a case of barbs not bouquets in late November when EU foreign affairs chief Federica Mogherini and enlargement commissioner Johannes Hahn came to Ankara for a high-level political dialogue meeting. “A strong Turkey means a democratic Turkey,” Mogherhini told a press conference, declaring substantial concerns over the detention of some prominent academics and civil society representatives.
Indeed, the massive purges launched under the emergency regime after the failed putsch do not appear to be at an end and in mid-December it was reported that nearly 2,000 of the tens of thousands arrested have been sentenced to life imprisonment.
As 2018 neared its end, the annual survey of the Committee to Protect Journalists (CPJ) confirmed that Turkey remains the world's biggest jailer of journalists. The country has claimed the ugly distinction for a third straight year.
“Turkey seems to be undergoing a much harder landing than I think many people expected,” Timothy Ash, senior sovereign strategist for emerging markets at Bluebay Asset Management said in a note to investors on December 18.
“Looking at the data flow of higher frequency indicators, these are suggesting a much steeper slowdown—much worse than the 1.5% the 2019 GDP growth prediction in the central bank expectations survey would suggest, perhaps even a negative full year print… In previous periods of crisis—back in 2008/09, and then 2013/14, 15/16, the economy bounced back very quickly—a reflection I think of the underlying vibrancy of Turkey, with a young growth population, pro business culture, strong banks and sovereign balance sheet. As many people have argued—this time is likely to be different.”
Some analysts think Turkey has already slipped into a technical recession and in October the IMF cut its growth outlook for Turkey to 3.5% in 2018 and 0.4% in 2019 in the latest edition of its World Economic Outlook. Its previous forecast, issued in April, predicted expansions of 4.2% and 4%, respectively.
Renaissance Capital responded that even with their low growth forecasts the international financial institutions (IFIs) were probably still being overly optimistic. “We still think consensus and the IMF have to revise down their over-optimistic view on Turkey’s economy in 2018. Bloomberg consensus STILL has GDP rising 3.5% in 2018 and then slowing to 0.6% in 2019… The IMF in October forecast Turkey slowing to 3.5% in 2018 and 0.4% in 2019. Our numbers now have Turkey’s GDP slowing to 1.3% in 2018 and 0.8% in 2019.
“This is important because markets try and price in growth a year ahead, and accelerating vs decelerating growth matters. If the IMF and Bloomberg consensuses are right [on 2019], you should not touch Turkey with a bargepole—given the massive slowdown which they think will be as big as the hit that Argentina and Turkey received in 2018 (vs 2017). We think Turkey will slow—but similar to China and Chile—and that implies there may be decent stories to find in the market.”
The jarring slowdown is sobering for a country that recorded ‘warp-drive’ growth of 7.4% in 2017 (beating China) and an almost identical figure to that in the first quarter of this year. The second quarter brought 5.3% y/y, after which the trouble truly began to hit home with just 1.6% y/y posted for the third quarter. The quarter brought the worst of the currency crisis with the lira falling by as much as 47% to TRY7.24 against the dollar, year-to-date. By the end of the year it had recovered to around 30% down and had exhibited relative stability throughout December.
“The effects of August’s currency crisis caused Turkey’s economy to contract in Q3 and more timely evidence suggests that the downturn deepened and that the Turkish economy has probably entered a technical recession in Q4. Over 2018 as a whole, GDP growth is likely to come in at around 3.0%—although that will almost entirely reflect the strong start to the year. Our expectation for the economy to contract by 0.5% in 2019 is below the consensus forecast for growth of 0.6%,” Jason Tuvey of Capital Economics said in a research note entitled “Economy contracts, technical recession on the cards”.
ABN Amro is forecasting a Turkey contraction of 1.5% in 2019 before a return to slow growth of 2.5% in 2020 and a prolonged period of subdued growth during the recovery.
By the first quarter of 2020, lower inflation will allow the central bank to reduce interest rates, thus stimulating the credit flow and therefore boosting investments, ABN Amro said, anticipating when the recovery would get under way. But growth of 2.5% is still well below the country’s trend growth of around 4%-4.5%. To improve on this rate, Turkey needs to reform its economic model from credit-oriented to one that is driven by boosting productivity gains.
“This time we’ll grow below potential”
In early December, Refet Gurkaynak, a professor of economics at Bilkent University in Ankara, warned: “This time [coming out of an economic reversal] we’ll grow below potential.” Predicting that Turkey’s unemployment rate of 11.1% was set to soar, he added: “What we have seen in previous years was a push to boost demand in order to achieve growth above the economy’s potential. Now we are paying the price of that decision.”
Turkey's double-digit inflation has started falling at a faster rate than expected but footfall is markedly down on busy shopping thoroughfares such as Istanbul's Istiklal Avenue.
Early December brought news that Turkey’s annual consumer price inflation rate had fallen for the first time since March—and sharply. November saw it fall 3.62 percentage points from October's 15-year high of 25.24% to 21.62%.
The change was partly ascribed to Turkey’s belated adoption of a bit of orthodox monetary policy by bringing in a major interest rate hike, but Serkan Gonencler of Seker Invest put out a research note detailing how voluntary price discounts and tax cuts loomed large in the latest inflation numbers. “Durable goods played the major role in the inflation moderation,” he said. “Actually, food inflation and energy inflation (both at -0.7%) are broadly in line with our expectations. That said, it seems that price discounts related to the temporary tax cuts and all-out war against inflation, and partly due to the TRY’s strengthening, were somewhat higher than expectations.”
He added: “The moderation in inflation is positive, but not yet a cause of relief. All in all, there has been more than a 3.5pp fall in annual CPI inflation, which is without doubt positive and supportive of current market sentiment. Nevertheless, it should also be kept in mind that this decline is mostly due to seemingly temporary factors, such as tax cuts and voluntary price discounts, which might be reversed in early 2019. As a result, we still advise some caution as to the disinflation trend until we see a sustained decline in inflation (which might probably take place in 2H19),” Gonencler warned.”
Demonstrating the degree of the economic descent, Turkey’s Purchasing Managers’ Index (PMI) for manufacturing in November slightly rose to 44.7 but remained in contraction territory, below the 50-level, for the eighth straight month since April, IHS Markit said on December 3.
Fear of premature easing
Despite the pain, the central bank appears to have been making the right noises as regards sticking to difficult-to-swallow monetary medicine, but the political pressure for generosity from the Erdogan administration ahead of the local elections in three months’ time could, fear some analysts, prompt premature easing from the central bank.
“The greater-than-expected fall in Turkish inflation in November increases the chances that the central bank pushes ahead with an interest cut in the coming months,” Jason Tuvey of Capital Economics said in an early December research note entitled “Fall in inflation could bring rate cuts further”, adding: “Against the backdrop of a stronger lira, falling inflation and weak economy activity, further interest rate hikes are now completely off the table. Instead, with political pressure on the central bank to loosen policy likely to mount, there’s a growing risk that policymakers decide to loosen policy even earlier, and more aggressively, than we currently anticipate. For now, though, we are keeping our forecast for the benchmark one-week repo rate to be lowered from 24.00% at present to 20.00% by the end of next year.”
Industrial growth run ends
A 23-month-long stretch of uninterrupted calendar-adjusted Turkish industrial production growth stretching back to October 2016 was declared over with the arrival of the September data in November. The recorded 2.7% y/y decline for the month, and the subsequent 5.7% y/y drop posted for October, were taken as more evidence of rough recessionary conditions.
The Turkish Automotive Manufacturers Association (OSD) said on December 15 that vehicle production declined by 21% y/y to 128,875 units in November, while the 11-month cumulative production decline was 7.5% y/y to 1.43mn units. Turkish automakers had thus far addressed the punishing slump in domestic sales via their dependence on the dominance of exports in their sales. However, the recent contraction seen in vehicle sales in Europe, Turkish automakers’ main export market, could start to seriously weigh on the Turkish auto industry.By mid-November analysts were describing Turkey as in the midst of an ultra-intensive economic rebalancing with the latest trade data showing the country recording a second straight monthly current account surplus. The surplus for September came in at $1.83bn, according to central bank figures announced on November 12. Not since 2015 had Turkey seen a current account surplus in two consecutive months. The October current account surplus showed the trend had accelerated, coming in at a record monthly high of $2.77bn. Turkey's trade deficit shrank by 93.8% to $456mn in October, to hit its lowest monthly level since 2001, official data confirming preliminary figures showed on November 30.
“Rebalancing by anorexia”
Atilla Yesilada of Istanbul Analytics wrote of “rebalancing by anorexia”, adding: “Core deficit shrinks at an incredible pace. This may be good news for lira, but augurs very poorly for the consumer, [ruling party] AKP in local elections [scheduled for March 2019].”
Turkey, hooked on foreign-currency debt, is usually talked of as enduring one of the worst current account deficits in the world, with its economic health dangerously reliant on hot inflows of foreign external financing to enable growth. Over the long term, the political and economic outlook in the country has not been secure enough to attract sufficient longer-term stable foreign investment capital.
Fitch Ratings expects Turkey's current account deficit to narrow significantly, to $12bn in 2019 from around $33bn in 2018 and $47bn in 2017, as the slowing economic growth and a materially weaker lira suppress imports and boost exports. However, the country's financing requirement will remain large as a proportion of liquid foreign assets due to maturing external debt.
Turkey is expecting a 2018 budget deficit of TRY72.1bn, or 1.9% of GDP, according to Treasury and Finance Minister Berat Albayrak, Erdogan’s son in-law. Albayrak added during a mid-December speech in Ankara that the 2019 budget would support ongoing economic rebalancing and that Turkey would continue with uncompromising fiscal and budget discipline.
It was comments from Erdogan six weeks prior to the June parliamentary and presidential elections that once he became executive president he would tighten his grip on the economy and assume a greater role in setting monetary policy that played a big part in sending the lira into a nosedive. As the currency crisis went from bad to worse, the president, who pushes the curious view that high interest rates help to drive inflation, backed off and in mid-September the rate-setters brought in a 625 basis point hike, helping to pull the lira out of its tailspin.
However, as executive president Erdogan now single-handedly appoints the central bank governor and all the monetary policy committee members, there is still tangible market anxiety that he may once again dabble in monetary affairs he should steer clear of.
TRY seen hitting 4.70 by May
According to Renaissance Capital, in 2019 if annual inflation hovers around 25%, the TRY might recover to 4.70/$ by May 2019 (on January 1 it was trading at 5.27 levels compared to the all-time worst 7.24 recorded as the currency crisis hit its trough five months ago). But at a better inflation rate of 22%, the currency may strengthen to 4.55/$, it added.
ABN AMRO has predicted that Turkish inflation will stay around 21% until mid-2019, before coming down swiftly to an estimated 12% in December.
The negative impact of the lira depreciation on the Turkish economy will last for 6-7 months until the spread between the producer and consumer price inflation figures closes, Japan Credit Rating (JCR) Eurasia Rating head Orhan Okmen said on December 14 in a written statement.
Turkey’s retail sale numbers in October were the worst on record. Turkey's calendar-adjusted retail sales volume index declined by 7.5% y/y in October, marking the biggest annual contraction since the data set was first compiled in 2010, national statistics office TUIK reported on December 18. The previous contraction, of 3.4% in September, was the first seen since February 2017 and it was also recorded as the most extensive until the October data arrived.
BoP sudden stop and a lira credit crunch
“Turkey's credit crunch—which began with the BoP [balance of payments] sudden stop on Aug. 13—has been morphing from a complete shutdown in FX-denominated lending to a credit crunch now in TRY-denominated new lending, with contraction in TRY-denominated lending worse in Q4 than Q3,” Robin Brooks of the International Institute of Finance (IIF) noted on December 17 in a tweet.
On November 13, Brooks had observed: “Rollover of medium- and long-term external debt in Turkey's financial system fell to 43% in Q3, down from 103% in Q2 and 88% in Q1. This was widely expected and ‘isn't news.’ In fact, it's just a lagging reflection of the credit crunch playing out since early August. The credit crunch in Turkey has been unlike any other, in that the BoP sudden stop in August caused credit flow to turn negative, after a large positive credit impulse in 2017. We estimate the negative credit impulse to be around -3% of GDP, bigger than in 2008/9.”
Real private consumption growth declined to 1.1% y/y in Q3 from 6.4% y/y in Q2 and 9.1% in Q1 while private consumption’s share in Turkey’s overall GDP based on current prices also declined. It hit a historically low level of 56% in Q3, moving down from 59% in Q2 and 60% in Q1, according to the latest GDP data.
Property market hurting
Amid the hard landing, Turkey’s property market is also hurting. Home sales in Turkey declined by 27% y/y to 89,626 units in November while mortgage sales for the month sank in tandem, by 86% y/y to only 5,324 units, following the 79% y/y fall seen in the previous month.For January-November, home sales declined by 3% y/y to 1.24mn units, with mortgage sales down 39% y/y to 269,672 contracts.
Isbank announced on December 20 that it had joined state trio Halkbank, Ziraat Bankasi and Vakifbank in cutting monthly mortgage rates to 0.98% for consumers in a move designed to support the collapsing construction industry, a sector that not too long ago was still seen as the growth engine of the Turkish economy.
Turkish private lender Akbank has received regulatory approval from the Capital Markets Board of Turkey (SPK) to issue up to TRY1.5bn (€247mn) worth of mortgage-backed securities abroad, according to an SPK bulletin released on December 6.
The finance ministry announced on December 7 that Turkiye Kalkinma Bankasi (Turkish Development Bank, or TKB) completed the issuance of TRY3.15bn (€521mn) worth of asset-backed paper based on mortgage-backed securities to be issued by Ziraat Bankasi, Halkbank and Vakifbank and private lender Garanti Bankasi.
Rescue plan for construction, real estate firms
Last month, the Ministry of Treasury and Finance devised one rescue plan that would allow construction and real estate companies to offload unsold stock to a state-backed fund. Subsequent proceeds would then be channelled into repaying banks beset by mounting bad debts amid the lira crisis.
In late August, the government backed the latest campaign in Turkey to stimulate home sales. Turkish property developers were targeting the sale of at least 25% of 100,000 discounted homes to be included in a campaign to run from August 29 to October 31, urbanisation minister Kurum said.
Kurum said on September 20 that more than 3,000 homes were sold under the scope of the campaign, according to BloombergHT.
There are a total of 1.5mn-2mn unsold homes in Turkey, according to sector representatives.
The country’s construction industry saw a pronounced collapse in activity in the third quarter of this year.
The industry contracted by 5.3% y/y in the quarter versus a 6.7% y/y expansion in the first three months of the year.
Global credit insurers have cut exposure to some Turkish builders, retailers and other industries in what could be an early warning sign of a spike in bad debts, it emerged on December 13.
France’s Coface told Reuters it had observed a “need to be more cautious” towards the domestic-focused construction, retail and other industries, as the weaker lira and higher interest rates led to a slowdown in domestic demand.
Bad loans expected to double
The volume of bad loans on Turkish banks’ books can be expected to approximately double over the next 12-18 months to around 6%, rating agency S&P Global said on December 3. The lenders’ total credit losses will at the same time grow to as much as 2.5% from the recent average of 1.4%, it predicted.
Using a wider definition of problem loans that includes restructured loans, the rating agency added that NPLs already exceeded 10% of total loans and could move up to 20% over the next year under the rating agency’s base-case scenario amid the country’s credit crunch. “This is because we expect the economic slowdown, deleveraging, continued lira depreciation, and increased interest rates will start weighing on asset quality over the next 12-18 months,” S&P said.
It added: “Turkish banks' high reliance on short-term external debt compared with peers is key to our assessment of Turkey's industry risk. This reliance exposes the industry to conditions in external debt and capital markets. Despite adequate banking regulation and supervision, along with the banks' ability to adequately price risks, Turkish banks' strained performance in the next 12-18 months will weaken industry stability. We will continue to monitor the president's interference in the central bank and the regulator, which has affected our assessment of Turkey's institutional framework.”
Debt weight switched to banks ‘under government pressure’
Two weeks before the curtain came down on 2018, it was apparent that anxiety was mounting in Turkey that the debt weight difficulties of large companies amid the country’s economic turmoil were being transferred to the balance sheets of banks under government pressure. Such a line was taken by Atilla Yesilada of Global Source Partners, who on December 17 told VOA: “I understand through my conversations with bankers, AKP [Turkey’s ruling party] or government officials are intervening in favour of large companies, for the banks to restructure their loans. The problem is shifting from corporate balance sheets to bank balance sheets.”
When it comes to the strain of Turkey's massive debts, ministers are said to be intervening in favour of large companies rather than banks.
As a result of the situation, banks cannot issue new loans, Yesilada, said, adding: “… so this is a vicious circle from which there is no way out. The solution is you have to inject fresh cash, fresh resources, fresh capital into the economy. We are talking $50-60bn to fill the tank and get the car going. No one has that kind of money, except the IMF.”
“All the [opinion] polls show me, the main concern for the voters is the economy, and they are going to register their protest in [the upcoming] local elections,” Yesilada was also reported as saying. “My estimate, AKP will lose five percentage points; I expect AKP to suffer great losses, I would not be too surprised if they lose Istanbul or Ankara.”
The Turkish private sector had obligations to repay $64.75bn in foreign-loan principal payments within one-year as of end-October, down from $66.3bn at end-September, the central bank said on December 14. Turkey was obliged to repay a total of $173.8bn in foreign debt within one-year as of end-October, down from $176bn at end-September, the central bank added on December 17.
Turkey’s domestic bond strategy raises eyebrows
In mid-November, eyebrows were raised when Turkey sharply cut domestic bond offers at auctions, suppressing yields which fell below market interest rates. The situation reminded veteran economists of Turkey’s 1994 economic crisis.
“This is a perilous method. Looks like nobody left at the Treasury remembering the 1994 crisis,” Orhan Karaca of monthly magazine Capital said in a tweet.
Ibrahim Turhan, a former central bank deputy governor and a former chairman of Borsa Istanbul, wrote on Twitter: “The Treasury’s move to cut domestic bond sales and to weigh on eurobonds would not seem to be a wrong step given lira borrowing costs. But it must be careful. Risks would boom if it keeps taking cosmetic steps in the absence of a stability programme that will permanently lower lira financing costs. Especially, the cost of face-saving decisions that would mislead the market and hurt predictability would be high in the medium and long-term. The year of 1994 is an example of how this truth was learnt at a fairly high cost.”
In early November, Erdogan said that he and US President Trump had discussed state-owned Halkbank, the lender that faces potential US fines following the conviction in New York of one of its deputy CEOs, Hakan Atilla, for taking part in a scheme designed to help Iran evade US sanctions. Erdogan did not provide more details but said that Trump promised to give instructions to his top officials in regard to the case. His comments raised hopes that any penalties facing Halkbank could be reduced or scrapped.
On December 18, Halkbank said it was to issue up to $2bn worth of subordinated and/or unsecured bonds abroad with different maturities ranging up to 12 years. The issue would mark Halkbank’s first eurobond issuance since Atilla was arrested in the US.
Wealth fund to borrow on international markets
Turkey’s sovereign wealth fund, Turkey Wealth Fund (TWF) plans to borrow $1bn from international lenders early in 2019, three people with knowledge of the plan told Bloomberg on December 12. According to one cited source, TWF plans to inject the borrowed cash into companies in its portfolio. That includes some of the country’s largest companies such as Turkish Airlines, Turk Telekom and lenders Ziraat and Halkbank. On December 12, the country’s postal service, PTT, was transferred to the fund.
In September, it was announced that Erdogan had ousted the entire management staff of the sovereign wealth fund and appointed himself chairman.
Russian state-owned banking giant Sberbank on November 1 said it had delayed the sale of its Turkish subsidiary Denizbank until the end of 2018 or the beginning of 2019. Earlier, Sberbank had expected to sell its Turkish assets to the Arab bank Emirates NBD before the end of 2018.
Fitch Ratings on December 14 affirmed Turkey's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB' with a negative outlook. “Turkey is set for a prolonged period of below trend growth against a backdrop of tight domestic policy settings and tough external conditions,” Fitch said, adding that external financing conditions would tighten in 2019, while a premature loosening of domestic policy settings could lead to renewed pressure on the lira.
The Istanbul stock market has also been hit by Turkey’s dreadful 2018 and it is unlikely to recover in 2019 due to sub-par growth. The Borsa Istanbul began 2018 with a bounce, as the benchmark BIST-100 climbed to its all-time high of 120,845 through the end of January. However, as Turkey’s currency crisis and other economic woes mounted, the index gradually fell to as low as 84,654 by August 17. By the end of 2018, it was treading water in the low 90,000s.
Erdogan and Azerbaijani President Ilham Aliyev at the October inauguration of Turkey's first new refinery since 1975.
Turkey and its close political and business ally and neighbour Azerbaijan emerged as star performers in the latest World Bank Doing Business ranking.
Ankara gained 17 places to stand at 43rd among the 190 ranked economies in Doing Business 2019 while the Azerbaijanis gained 32 places to 25th. Turkey was praised by the survey assessors for achieving “top improver” status for the first time, after pushing through a record seven reforms.
In its comments on the Doing Business performance of Turkey—where Azerbaijan now ranks as the top foreign investor given new Southern Gas Corridor (SCG) pipeline investments and the opening of a $6.3bn oil refinery, namely the STAR facility near Izmir, the first refinery launched in Turkey since 1975—the World Bank said that “starting a business in Turkey became easier with the elimination of the minimum paid-in capital requirement”.
It added: “Other improvements involved electronic processing of documents and provision of more information related to payment of taxes and improved access to credit. However, an increase in the cost of transferring property in Turkey made property registration more difficult.”
The STAR refinery investment, made by SOCAR Turkey, a subsidiary of Azerbaijan’s SOCAR national oil company, is aimed at saving Turkey around $1.5bn annually in oil product imports and reducing dependence on foreign countries for oil products. Set on the Aliaga peninsula on Turkey’s Aegean coast, it neighbours major petrochemical producer Petkim, a company also controlled by SOCAR to which it will provide raw materials.
Petkim is yet to make an investment decision on whether to push ahead with a petrochemical “supersite” at the location, but whether or not that project is green-lighted there is no doubt Turkey is making a big move into petrochemicals. BP is exploring the creation of a petrochemicals joint venture to produce purified terephthalic acid (PTA)—mainly used in the manufacturing of polyester fibre—alongside STAR with SOCAR, while Turkish conglomerate Ronesans Holding and Algeria’s state-owned energy and chemicals group Sonatrach have teamed up to construct a polypropylene plant. It is to be built in the recently declared Ceyhan Mega Petrochemical Industrial Zone near Adana, close to Turkey’s Mediterranean coast.
In another new business move in Turkey, SOCAR was on December 31 reported by sources spoken to by Reuters as in advanced talks to acquire the energy business of Germany’s EWE in Turkey by the first quarter of 2019. EWE, the fourth-largest natural gas supplier in Turkey in terms of customers, has previously stated it was looking to sell its local distribution units after being hit by the devalued lira.
Turkey’s mega airport doesn’t get off to a flying start
An artist's impression of how things will be at Istanbul Airport... once the 'Potemkin village' phase is over.
Airlines will in 2019 watch with interest progress in obtaining the “world’s biggest airport” status which Turkey craves for its $12bn Istanbul Airport, inaugurated in late October with no shortage of hyperbole. Unfortunately, the scepticism surrounding the inauguration—those with a jaundiced eye noticed that guests were actually being presented with something of a Potemkin village, as the airport was nowhere near complete and was only ready to deal with a handful of flights—appears to have been entirely in order. By late December local reports told how the switching of staff and services from Istanbul Ataturk Airport to the mega airport had been postponed by three months to March 2019.
As well as intending to use the airport as an international transit hub, Turkey is increasingly ambitious for its tourist industry. It aims to roughly double its number of foreign visitors to 70mn by 2023, Culture and Tourism Minister Mehmet Ersoy was cited as saying by Hurriyet Daily News on December 18. Such a visitor volume would produce earnings of around $70bn, he reportedly added.
Official data showed Turkey on track to attract towards 40mn arrivals in 2018.
Turkey has so much to offer the tourist, Ersoy reportedly said, adding: “Take Dubai for example. They have two things: The worldwide-known global airline company Emirates, then, they have a promotion agency. What does Dubai have to offer to the tourists? They only have a desert and seaside. Seeing a desert would be interesting for tourists, but what else do they have?”
BTK railway to open to passengers
Further boosting Turkey’s transport infrastructure, the Baku-Tbilisi-Kars (BTK) railway linking Azerbaijan, Georgia and Turkey is to open for passenger traffic in the third quarter of 2019, according to Azerbaijan Railways. The line was formally opened a year ago for rail freight, a full decade after the agreement to build it was signed. The 826-km railway connects Azerbaijan’s Caspian coast to Turkey via Georgia, and will considerably cut travel time between China and Western Europe.
Erdogan and Russian counterpart Vladimir Putin met to celebrate the completion of the offshore, undersea section of the €7bn TurkStream (aka Turkish Stream) gas pipeline, which runs along the bottom of the Black Sea to the coast of Turkey. It is expected to be complete and ready for operation by the end of 2019.
Putin said the pipeline would help ensure European energy security. He added that Turkey would become a "major European hub" for the energy sector.
Landmark tank deal
In the defence industry, Turkey continues to work towards independence in arms production, although attaining that status is not something experts see as realistic any time soon.
The government signed a landmark deal with private defence firm BMC on November 9 for the mass production of Turkey’s first domestically made main battle tank, the Altay. The tank contract includes mass production and logistical support for 250 units. BMC has pledged to deliver 40 tanks in the first batch, with the initial tanks to be delivered within 18 months.