CNBC Business | Empire rebuilding

Empire rebuilding

Turkey may have avoided the worst of this year’s global economic meltdown, but with Western economies heading into recession, what does the future hold? David O’Byrne reports

If nothing else, Turkey has never had a problem attracting transport metaphors. Geographically it certainly is ‘a bridge between Europe and Asia’, while ‘Turkey at the crossroads’ works as a neat, if somewhat glib summary of the past 20 years of political and economic endeavour. It’s also arguably truer now than ever.

After a year of political turmoil following the re-election of Prime Minister Tayyip Erdogan, in which his moderate Islamist Justice and Development Party (AKP) survived a lawsuit alleging it planned to overthrow Turkey’s secular democracy, the country now finds itself in the throes of an economic  crisis not of its own making, which has  prompted foreign investors to pull out of the Istanbul stock exchange back to markets perceived as ‘less risky’.  

In such a climate economists are hopeful that more political shocks can be avoided.  

“The government needs to focus on the economy and avoid controversy,” says Inan Demir, chief economist at Turkey’s Finansbank, adding that the best thing the government could do to would be to accept the IMF’s offer of a new standby agreement. “That would certainly help reduce the risk premium and encourage foreign investors to return.”  

The good news is that having survived its own banking crisis in 2001, the country’s banks are in remarkably good shape – well capitalised and reckoned to be able to handle the higher cost of overseas borrowing and other expected shocks. 

With Turkey’s main export markets looking to be headed into recession, those shocks are expected to include a sizeable hit to Turkey’s all-important, export-driven manufacturing sector. Automotive sales to Europe, which comprise 70% of Turkey’s vehicle exports, were down 8% in September alone, with several manufacturers already announcing ‘production holidays’. It’s a problem the sector recognises but one which manufacturers are confident they can ride out. 

“The global crisis is a problem as it has hit our main export markets, so we need to focus on improving the local market,” says Cengiz Kabatepe deputy CEO of Ford’s Turkish joint venture, Ford Otosan, adding that car ownership in Turkey is still far lower than the global average and far below the rest of Europe.  

But with the lira falling, many companies are expected to face difficulties paying back the money they borrowed to fund expansion.  

“Turkey’s collective corporate short-term forex exposure is currently running at around $80bn [€62bn],” says Inan Demir, pointing out that the current weakness of the lira coupled with lower sales will hamper the ability of many companies to meet debt repayments.  

Whatever the short-term problems, many investors remain confident that Turkey will continue to offer a safe bet. 

“There is a lot of very competitively priced companies in Turkey,” emerging markets guru Mark Mobius told CNBC European Business. The Executive Chairman of Templeton Asset Management believes that the country’s record of good management further boosts its appeal.  

Stuck at an economic crossroads waiting to see which way the traffic moves, Turkey also finds itself at a political junction on the road to the EU but unsure of ever getting there.  

“The reforms required for EU membership are crucial to ensuring Turkey becomes a full democracy,” says Professor Burhan Senatalar head of 10 Aralik Hareketi, a new social democratic political movement committed to the EU accession process that plans to launch itself as a political party.  

“But there’s a crisis of confidence, with many people now doubting we’ll ever become full members,” he adds, pointing to the slowdown in the pace of reform within Turkey since 2005, and to the slowdown of the expansion process within the EU itself. 

“The global economic crisis will bring a rise of nationalist sentiment in the EU, which could slow things down further,” he says, warning that much work remains to be done both combating corruption within the political process and reforming Turkey’s local government system, which he blames for much of the corruption. “No matter what happens inside the EU the important thing for Turkey is to continue the reform process anyway.” Everything to build for 

While Turkey’s economic crisis of 2001 prompted a virtual halt to new infrastructure and energy projects, this time around things will be different, with a whole slate of projects ready to be completed either with private capital or with funding already in place. 

Foremost among these is the Japanese-funded Marmaray Rail Tunnel linking Turkey’s European and Asian rail networks and which, once completed, will allow uninterrupted rail travel between Western Europe and China parallel to the ancient Silk Road. With the pre-fabricated tunnel itself already laid, work is now progressing on the on-land sections, with the first trains expected to be running by 2011.  

Not content with one tunnel, a tender for a 5.4km-long road tunnel under the Bosphorus has already been completed. The winning consortium of France’s Vinci and two Turkish partners, Cengiz and Dogus, will construct the €1.2bn tunnel on the Build-Operate-Transfer (BOT) model, operating the tunnel for 13 years after completion. The same model is to be used to construct a third bridge over the Bosphorus and for a new highway between Istanbul and Turkey’s Aegean region capital of Izmir – which will include a combined road and rail bridge across the Gulf of Izmit. Both are expected to be tendered next year.  

It’s a similar story with Turkey’s energy sector, where private capital will be used to build new power plant needed to meet the country’s growing demand for electricity. Plants providing up to 15,000MW of wind power are expected to be constructed over the next decade, with a whole slate of  new projects for gas and coal-fired plants and hydroelectric plants all at various stages  of development. 

Despite the ongoing credit crisis economists are confident that growing demand for power and Turkey’s newly implemented free electricity market will guarantee that development will go ahead. 

“Good projects will always get credit,” says Inan Demir.  

Fuelling uncertainty 

Anyone doubting Turkey’s vital place in Europe need look no further than the proposed Nabucco gas pipeline – designed to carry Caspian and Middle Eastern gas to Europe, offering a vital alternative to increasing dependence on Russia. 

The 3,300km-long line, backed by a consortium of some of Europe’s biggest  energy companies – including Austria’s OMV, Hungary’s MOL, Germany’s RWE, Romania’s Transgaz, Bulgaria’s Bulgargaz and Turkey’s Botas – will run from eastern Turkey to central Europe carrying 31 billion cubic metres a year of gas from a variety of sources including Azerbaijan, Turkmenistan, Iran, Egypt and Iraq, securing Europe a vital alternative supply route.  

Simple enough in theory, the project faces numerous hurdles such as US opposition to dealings with Iran, and the problem of how to get Turkmen gas across the Caspian. Not to mention how to build a gas pipeline out of Iraq and protect it from terrorist attack.  

And it’s not as if Russia is standing idly by. It has its own project for a new pipeline aimed at supplying the same south and central European markets that Nabucco is looking to supply.  

Analysts agree that 2009 will be crucial in deciding whether Nabucco becomes reality. If it does, it would certainly redefine Turkey’s future role in Europe.  

Proper property mess 

With Turkish real estate prices dropping in line with the rest of the world, and Western investors deserting the Istanbul stock exchange (IMKB) now might not seem the best time to introduce new restrictions on foreign-owned companies and foreign individuals buying property in Turkey.  

However, Turkey’s new property law, which entered the statute books in July, has done just that, causing property sales to drop even more sharply and raising questions over the country’s commitment to joining the EU.  

Drafted in response to the nationalist opposition successfully challenging the existing law in Turkey’s constitutional court – which ruled that allowing foreigners almost as much freedom to buy property as Turks was ‘unconstitutional’ – the new law is a rare example of the government and opposition parties being in complete agreement 

Worryingly, the new law requires property purchases by companies ‘backed by foreign capital’ to be vetted by committees to be created by local governors to ensure the property is not located in ‘security zones’. Absurdly, the definition, in effect, includes all companies quoted on the IMKB, where foreign investors are believed to hold shares in all the quoted companies.  

Gubernatorial vetting also applies to sales to individual foreigners who can buy only in areas with a 1:1000 scale municipal master plan. This rules out most of the interesting historical property, which has proved popular with foreign buyers looking to renovate, and many of the new coastal tourism developments constructed before the new law without the newly required plans.  

As of October 2008 regulations on the formation of the committees have still not been issued, leaving several thousand foreign ‘owners’ in limbo, having paid for property they cannot get deeds for. 

Speaking on condition of anonymity, a spokesman for a Turkish legal firm that advises international companies describes the new law as a “complete mess”, adding that it is in direct contravention of Turkey’s 80-odd international reciprocity agreements. 

“Most property deals are time sensitive, introducing an unnecessary and potentially time consuming ‘vetting’ process also introduces an opportunity for corruption,” he said pointing out that the ‘security zones’ were well defined and known to local property registrars who were previously responsible for vetting sales applications.  

A spokesman for the European Commission in Ankara went further, confirming to CNBC European Business that Turkey would not be able to negotiate chapter four of its accession document with such a law in place, a sobering comment Turkey’s feuding politicians would do well to heed.

Something in the air 

In a year when more than two-dozen airlines collapsed – victims of record fuel prices and the credit crunch – it’s heartening to hear of one success story. Step forward Turkish Airlines (THY), which has not only managed to weather the storm, but has also recorded record profits: €155m for the first half of 2008, up from €55m over H1 2007. Operating figures are up, too, with passenger figures for the first nine months of 2008 up 14.3% at 16.8 million and cargo tonnage up 10.8%. These impressive results come on the back of a long-running expansion and cost-cutting programme that has seen the company growing at twice the global average and which has left it as the seventh biggest airline in Europe but with costs half that of major competitors such as Lufthansa. Now poised to take control of Bosnian Airlines, having won a privatisation tender, THY is also planning the biggest fleet expansion in the company’s history. In October, THY gave notice to Boeing and Airbus of its intention to buy 105 new planes by 2023, by which time it expects to have a fleet of 180 jets, up from the current 115.  

Not bad for a company that seven years ago, as a state-owned concern, was reckoned incapable of turning a profit, and was expected to be sold off cheap. Now, although a majority of THY shares are traded on IMKB, the Turkish state remains the biggest shareholder, albeit with plans to sell off its remaining stake – a move that, given both adverse global conditions and THY’s excellent performance, may be postponed for some time.