By MARCEL PORCHERON 22/05/2008
Marcel Porcheron visited Turkey, to assess the impact of the global slowdown there. The view from the conference in Istanbul was more bearish on the short term outlook than in the past, where speakers included Mehmet Simsek, Minister of State of Turkey for the Economy and Huseyin Erkan, Chairman and CEO of the Istanbul Stock Exchange.
One aspect of Turkey’s strong growth has been the 20% increase in the last decade in the average Istanbul commute; the traffic sometimes slows to a standstill and were it not for the ingenuity of my taxi driver in using the hard shoulder I would have missed my return flight. In some ways this traffic problem symbolises the other challenges faced by Turkey. Strong GDP growth has not been matched by sufficient job creation and GDP per capita is still way off the European average. There was also an acknowledgement at the conference that Turkey’s economy is still sensitive to a Western European slowdown.
The Istanbul Stock Exchange
The World’s press crammed into the conference hall at the Istanbul Stock Exchange to hear Simsek’s views on the economy and his government’s ongoing reform agenda. He highlighted some of the short-term challenges to Turkish growth: the economy maintains a current account deficit and may struggle to attract external funding in the credit crunch and food and energy inflation are too high. All in all it looks as though there is downside risk to current GDP estimates although on the bright side his government has made progress on reform and has plans to diversify its energy usage, improve on the skills gap that the country faces and steps taken to encourage R&D and higher value added business in Turkey.
Capital market development was the key theme at the conference and the Istanbul Stock Exchange currently has over 300 companies traded on it with a market cap around $200 billion. Whilst market volumes are high most of the companies are relatively small as is the percentage of available shares freely traded. However, Metin Kilci the Head of the Privatisation board confirmed that the government is in the process of approving more privatisations, for example of power distribution assets and a number of share sales are expected in the next year which will increase the depth of the local equity market.
Interestingly, foreigners have purchased 66% of public offerings and domestic investors are under represented in the stock market, leaving it exposed to foreign fund flows in and out of Turkey. So far little progress has been made in finding a solution although investors in Turkey are becoming more diversified: we heard from local specialists Is Private Equity. So far there have been just 84 private equity deals in Turkey. As this area matures it could provide a pipeline of new listings on the stock market and some of the big international private equity investors are already involved.
Growth in retail banking is a key theme in Turkey as in other emerging markets. Banks are really visible in Istanbul, and the country now has 20,000 ATMs. The opportunity for consumers to borrow money for mortgages and spending could be a big boon to consumer spending, although again in the short term it looks as though most banks are still constrained from providing long term financing to private customers and small businesses.
Between 2000 and 2006 Turkey averaged GDP growth above 7% and as Devan Kaloo noted that ‘it is testament to the dynamism of the Turkish economy that whilst interest rates have been high, continuous growth has been high’. As a result he sees any weakness as a buying opportunity. Political support for economic growth has been good and a 2001 stability program seems to have made some improvements. Private sector growth has been strong and productivity gains have been good, although the public sector is still heavily involved in economic activity.
Turkey faces similar challenges on the road to development as many other emerging markets. Whilst it’s the ninth most visited country on earth is it more than just a great tourist destination? Elena Shaftan is cautious on the economy’s prospects, believing it is likely to slowdown: "The main engine of growth - monetary easing- is likely to be put on hold until political stability is re-established....and the currency could also come under further pressure." Meanwhile, the Aberdeen team see Turkey as the cheapest market in the emerging Europe region, which could benefit from convergence with the EU.
How can you invest in Turkey?
Overall, January’s 21% fall in the ISE 100 index of large companies is a warning to investors of the risks associated with investing in a single emerging market. We advise investing in Turkey through a diversified emerging markets portfolio. Elena Shaftan’s Jupiter Emerging European Opportunities, currently invests 7% there. It is also possible to invest through a global emerging Markets fund like Aberdeen Emerging Markets, which holds roughly 4% in Turkey.