Fixed Income Investors keep faith in Turkey

Viewed from the short-term angle, the immediate prospects for the Turkish economy show that there may be some tough times ahead. Following a period of staggering expansion between 2011-2015, during which GDP growth averaged 7.1%, the growth slowed to 6.1% in 2015 and to a disappointing 2.1% in 2016.

The Turkish Lira lost almost 18% of its value in the three months prior to the start of this year (exerting upward pressure on inflation) and consumer prices rose by 8.5% across the board in 2016. The economy downturn and heightened geo-political risks have been reflected in the downward trajectory of Turkey’s investment rating.

Despite this, investors have continued to show faith in Turkey’s long-term potential—albeit at an elevated price. When the government launched a $2 billion 10-year benchmark in January at an attractive 6% coupon, it generated demand of close to $7 billion. There was a similarly encouraging response among investors when Turkey reopened the issue for another $1 billion (with a coupon of 5.65%) in February, resulting in an order book of $4.7 billion.

Investors’ continued support for Turkey is a reflection of their pursuit of those rare guaranteed fixed income returns in what is currently (globally) a low-yield environment. Furthermore, it also possibly indicative of their confidence in Turkey’s longer range potential as an economic powerhouse.

The government’s targets for this long-term growth are laid down in the Agenda 2023 program, a blueprint for economic growth, improvement of living standards and an upgrade in infrastructure (as the Turkish Republic approaches its 100th year).  It is intended that the Agenda 2023 program will position Turkey among the world’s 10 largest economies (up from an estimated 18th in 2016) by doubling GDP from around $0.8 trillion in 2016 to a little over $2 trillion in 2023 (increasing GDP per capita from $14,000 to $25,000). Over the same period, exports are projected to rise from $200 billion to $500 billion, unemployment to drop to 5% and inflation and interest rates settling in at single digits. Agenda 2023 is based on a “decisive” continuation of privatization and a reduction in the state’s role in power generation and telecoms, as well as in the management of ports, bridges, and highways. It also sees Istanbul becoming one of the top 10 financial centres in the world, with a minimum target of at least 1,000 companies listed on the city’s stock Exchange with a high proportion of them  from overseas.

Istanbul’s credentials as a regional financial centre were given a boost at the end of 2015, when the European Bank for Reconstruction and Development (EBRD) announced the acquisition of a 10 percent stake in Borsa Istanbul.

Even if Turkey falls short of the goals set out in Agenda 2023, its growth potential over the coming decade will provide opportunities for investors across a wide range of industries, underpinned by a growing population, favorable demographics and an entrepreneurial culture. “Turkey is a large and diversified economy with a vibrant private sector,” notes Fitch (ratings agency), adding that the ‘Human Development and Doing Business’ indicators are stronger than in many comparable countries. Financial services is a likely beneficiary of Turkey’s demographic profile. As Akbank highlights in its most recent investor presentation, 50% of the population is under the age of 49, and some 48 million Turkish citizens are categorized as “unbanked” or “semi-banked.” According to the Akbank numbers, loans and deposits in the Turkish banking system are a modest 65% and 54% of GDP respectively. Household debt to GDP, meanwhile, is 17% – this compares favourably with many developed countries where the debt to GDP ratio is over 100%.

The growth potential implied by the under-development of banking services in Turkey is also reflected in the forecasts for continued expansion.  At Akbank, for example, they project annual growth of between 3%-3.5% and to post compound annual growth rates (CAGR) of 11%–13% in loans and deposits between 2017 and 2019.

Over the longer term, the Turkish banking industry looks well-positioned to weather the political and economic turbulence that currently casts a shadow over its performance at present. As Standard and Poors (ratings agency) observed earlier this year, “we believe that Turkish banks have adequate asset quality, sufficient earnings, and good capitalization, such that they can absorb potential moderate volatility without adversly impacting their financial profiles’’.

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