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Western EuropeMarch 5 2007

Growth is not a certainty

Turkey’s economy grew 5.7% in the first nine months of 2006. But economists warn that the bloated current account deficit, mounting foreign debts and rising political risks could stifle future growth, Metin Demirsar reports from Istanbul.
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Bolstered by record foreign investment inflows, booming foreign trade and a thriving construction industry, Turkey’s economy grew by 5.7% in real terms between January and September 2006, despite rising concern over the country’s yawning current account deficit and spiralling foreign debt, state statistical institute Turkstat has reported.

The developments come at a time when Turkey faces increased risks after the EU suspended membership negotiations with Ankara in December on eight chapters (economics issues) because of the Cyprus dispute. The nation is also due to hold crucial presidential elections in April and general elections in November, which some polls suggest could lead to renewed political instability in the country.

There was growth in all sectors of the Turkish economy in the first nine months of last year, except for agriculture, which declined by 1.2% due to reduced outputs of tobacco, olives and hazelnuts, the country’s main export crops. Growth was strongest in the construction industry, which recorded a whopping 20.1% expansion, buoyed by increased government spending on public housing, hydroelectric development and transport projects. The latter includes work on 700.4 kilometres of new express roads along the eastern Black Sea coast and the $4.1bn Istanbul Marmaray Project, one of the world’s most ambitious urban rail commuter undertakings.

The industrial sector grew by 7.3%, on the strength of the automotive, steel and chemical products, and electronics and textile industries. The financial sector recorded flat growth of 0.7%, as the banking system struggled to keep pace with the torrid expansion of the economy.

Turkey’s gross national product (GNP) reached $388bn at the end of September, up from $145.9bn at the end of 2001, when Turkey’s worst economic crisis since World War Two had reached its height. Per capita income at the end of September rose to $5341 from $2200 at the end of 2001. Unemployment fell to 8.8% at the end of June 2006 from 10% in December 2005, as a result of the buoyancy of the economy.

Investment pours in

Turkey drew a record $18.1bn in foreign direct investment (FDI) in the first 11 months of 2006, nearly twice the amount of FDI that entered the country in the whole of 2005, the previous high, according to the foreign investors association Yased.

About 86% ($15.5bn) of the foreign investment that Turkey attracted last year went into telecommunications, banking and finance, logistics, wholesale and retailing business, and pharmaceutical manufacturing. Turkey became one of the world’s top destinations for FDI for the first time.

“FDI is concentrating on sectors that are oriented on the domestic market and which hold a relatively high growth potential,” Kubilay Cinemre, general manager of Merrill Lynch Turkey, said in an interview with Insight Yased Magazine, a Yased publication.

The biggest single foreign investment in Turkey in 2006 was Vodafone’s acquisition of Telsim, the nation’s second biggest mobile phone services company, from a state banking receivership fund for $4.6bn. Other big transactions were Belgium’s Dexia Group’s acquisition of a 96.6% stake in DenizBank from Zorlu Holding and other shareholders for $3.2bn, and Citibank’s purchase of a 20% stake in Akbank from Sabanci Holding for $3.1bn. The National Bank of Greece acquired a 46% stake in Finansbank in April from Fiba Holding for $2.8bn.

Banks rush in

The start of Turkey’s EU membership talks on October 3, 2005, triggered a rush by foreign banks to acquire Turkish assets and drew other foreign investors to Turkey, economic analysts said. “Foreign investors are attracted by the high profit margins of the Turkish banks,” Hakan Ates, general manager of DenizBank, said in an interview. Several banking transactions were waiting for approval from Turkish banking authorities.

Greece’s Alpha Bank has been seeking to acquire a 47% stake in Alternatifbank from the Anadolu Group, and Kazakhstan’s Turan Alem Bank is negotiating to buy a 34% stake in Sekerbank for $260m. Lebanese Bank Med and the Jordanian Arab Bank, both owned by the family of slain former Lebanese prime minister Rafiq Hariri, have applied to Turkish banking authorities for permission to purchase a 91% stake in MNG Bank.

The Oyak Group, an industrial trade and finance group owned by the Armed Forces Pension Fund, has been also holding talks with British and French banks to sell its shares in Oyak Bank either partially or fully. “Oyak is interested in a partnership arrangement or total sale of Oyak Bank,” Hakan Eminsoy, president and CEO of Oyak Bank, recently claimed.

Prime minister Recep Tayyip Erdogan’s conservative government is planning to sell a 25% stake of state-owned Halkbank, the country’s sixth biggest bank, in an international public offering this spring, despite a court order banning its sale.

Nationalist backlash

Including the shares of 13 banks traded on the Istanbul Stock Exchange, foreign companies, banks and institutional investors now control 36% of the assets of the Turkish banking system.

Ersin Özince, CEO of Turkiye Is Bankasi (Isbank), Turkey’s largest bank, and president of the Banks Association of Turkey, says that foreign ownership in the Turkish banking system will probably exceed 50% with a flurry of new mergers and acquisitions. “If we are advocates of a free market economy, this will be a natural outcome,” he says.

However, Turkish economic nationalists are feeling increasingly uncomfortable with increased foreign control of strategic industries and services, such as telecommunications and banking, and have been urging the government to put limits on foreign investment and privatisation.

“The banking system represents the arteries and veins of our economy,” Öztin Akgüç, a professor of economics at Kadir Has University and board member of Eczacibasi Holding, a large Turkish conglomerate, told a television interviewer. “If excessive international control comes into our banking system, it would be like having foreign bodies roaming inside our circulatory system.”

Opponents of foreign investment in banking say that foreign-owned banks are more likely to lend to multinational corporations and Turkish companies with links to multinational firms than to Turkish firms without international affiliations. Such financial practices, they say, will throttle small and medium-sized Turkish firms, which account for 95% of Turkey’s industry and more than two-thirds of its employees. Some major sectors, such as the nation’s lucrative international contracting business, are also unlikely to receive as much financing from foreign-owned banks as they would from Turkish-controlled banks.

Current account deficit

Proponents, however, say that FDI inflows are spurring competition and efficiency in the economy and also playing a significant role in financing the high current account deficit.

At the end of 2006, Turkey had an estimated $34.3bn current account deficit, or 8.8% of GNP, fed by a foreign trade deficit of $51.9bn, up 19.8% from 2005 due to increased imports of oil and natural gas, industrial raw materials and consumer goods, Turkstat reported. Turkey’s exports in 2006 grew 15.9% to $85.1bn, while imports rose 17.3% to $137.3bn.

“Having a current account deficit that is equal to roughly 9% of its GNP is dangerous and makes the country more vulnerable to external shocks,” said Ozgur Altug, chief economist of Raymond James Securities, in a report on foreign investment in Turkey.

But Turkey has the chance to finance 90% of its current account deficit through greater FDI inflows in 2007, financial analysts claim. “The current account deficit has reached a level that can’t be maintained in the long run. But Turkey has the means to accomplish a soft landing,” Mr Cinemre told Insight Yased Magazine.

Foreign debt

Economists are also concerned by Turkey’s growing foreign debt, which stood at $198.3bn at the end of 2006, according to the Central Bank of Turkey. About $115bn of this debt belongs to the Turkish private sector, which has resorted heavily to foreign borrowing to finance growth over the past three years because of a strong Turkish lira and declining interest rates.

“Turkish companies need to be careful. If they aren’t, Turkey could face the same kind of crisis that the Asian countries underwent a few years back because of the risks they were carrying,” Murat Üçer, a member of the teaching staff of Koç University, told the magazine Turkishtime.

But much will depend on the government’s ability to maintain the country’s privatisation drive, continue the EU process and defuse political risks associated with the coming elections, economists are saying. “Political risks should be managed wisely since political stability is one of the most important long-term criteria of FDI,” says Mr Altug.

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