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Portfolio > Economy & Markets

Macro Prospects Dim for Turkey, but Niches Attract Investment

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The Turkish central bank’s recent move to raise interest rates is a much-needed step in the right direction to help an economy that, albeit very attractive to foreign investors, is also extremely vulnerable to global economic shocks, and has suffered greatly from the general reticence investors have had and continue to exhibit toward emerging markets.

While some argue that the interest rate should have been raised much earlier, the Turkish central bank’s moves has nevertheless acknowledged the higher premium investors have been demanding to hold Turkish financial assets, said Paul Rawkins, sovereign analyst covering Turkey for Fitch Ratings in London. Also, Turkey’s vulnerability to short-term capital outflows, which is its biggest problem, is reduced, he added.

Interest rate hikes could help to stabilize the currency, Rawkins said, and reduce pressure on Turkey’s inadequate international reserves, while a weaker Turkish lira could speed up current account adjustment.

However, Turkey is also overly reliant on short-term capital, a dependence that together with its large current account deficit has contributed to its external vulnerability, Rawkins said, adding as risk averse investors have been selling their Turkish holdings and backing out, this is proving problematic for the nation. So much so that despite its inclusion in the MINT group of countries (the others are Morocco, Indonesia and Nigeria), which are touted as being the next big global economic story, some analysts and investors have a rather dim view on Turkey in the immediate future.

“The Turkish economy was fueled by very fast credit growth, which partly explains the current account deficit,” Rawkins said. “Although the economy had successfully avoided a bust in 2011-2012 thanks to fiscal strength, monetary policy tightening and a reasonably strong banking sector, recent rate hikes will dent domestic demand and could renew concerns about an economic ‘hard landing’ in 2014.”

In the years leading up to the 2008 financial crisis and even after that, Turkey depended heavily on all forms of cross-border borrowings, said Alec Moseley, a senior portfolio manager based in Schroders’ New York office, and the extremely rapid growth in the domestic consumer and corporate sectors has been fueled by debt.

“One of Turkey’s greatest vulnerabilities lies in the corporate sector, because two-thirds of all credit growth in the past decade has happened there,” Moseley said. “As such, most Turkish corporates are running a large, net-short foreign exchange position, which means their foreign exchange liabilities are greater than their assets and this makes them vulnerable to exchange rate weakness.”

Although the dependence on foreign capital as well as rising inflation in Turkey finally pushed the central bank to raise interest rates, “the odds for a very deep economic recession, one that’s likely to be much higher than what consensus is currently expecting, are very high,” Moseley said. “Everyone knows that there will be a slowdown in growth. The question is the magnitude of that.”

Political risk is also an issue in Turkey, but still, Turkey remains an attractive destination for numerous investors and venture capitalists like Roland Manger, co-founder and partner of German venture capitalist firm Earlybird, are finding great opportunities in the technology sector.

Turkey is well advanced in terms of mobile and Internet penetration across the country, but ecommerce and businesses coming online is still a growing field and one that’s rife with investment opportunities, Manger said.

“Internet businesses are connected to the economy, but when you’re substituting an off-line business, you basically have the introduction of completely new services that haven’t existed until now, so when you’re creating a market from scratch, you have demand and there is growth even in a contracting economy,” he said.

Companies such as Trendyol, which is the leading online fashion retailer in Turkey, is a great investment opportunity, raking in triple digit revenues in U.S. dollars, he said, as is a company like Metre Carre, a real estate portal that brings together people looking to rent homes.

“The real estate business in Turkey is huge and very dynamic, with more people moving into the cities, looking for places to live,” Manger said. “It’s still a wide open market that we are covering.”

Also on the more positive side, Turkish exporters are quite competitive and adept at switching markets, Rawkins said, and as the Eurozone continues to recover, it’s quite likely that Turkish companies will benefit from their improved economies. “Turkey is also close to countries like Iraq and Iran, so if the west continues to ease relations with Iran, this dynamic could benefit Turkish companies, too,” Rawkins said.


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