Turkey’s Hyped Hub and Spoke Peddling
After presenting an ambitious pre-presidential election bid to transform Istanbul into a regional financial services hub despite the darkening shadow from Iran and Syria, Prime Minister Erdogan hailed one ratings agency’s assignment of sovereign investment grade after urging launch of local competitors to achieve it. The award diverted attention from the verdict in the long-running “sledgehammer” trial which found hundreds of military officers guilty in a coup plot. The delicate civilian-army and religious-secular balance remains a “credit challenge” in the view of Moody’s which along with S&P has resisted the return to top-quality status lost decades ago. Foreign inflow momentum was boosted in the aftermath, as stocks moved ahead 50 percent for the year on the MSCI index and 2-year benchmark bond yields fell below 7 percent. GDP growth was more than halved in Q2 to 3 percent, and the 5 percent inflation target is elusive on food and energy costs. Fiscal performance has slipped on lower tax collection and spending, including Syrian refugee accommodation, with the deficit seen at almost 2.5 percent of GDP. The medium-term strategy envisions public debt at 30 percent of output with a range of structural reforms bringing higher privatization and FDI proceeds. The current account deficit will continue at 6-7 percent in a lasting improvement over 2011’s double-digit figure which can steady the lira. $7 billion in exports through September already topped last year’s total as Egypt and Libya were again destinations and gold sales jumped to Iran and the UAE as bank transactions are under stricter international sanctions. Tourism has been strong as a Europe and Mideast draw and the number two trade partner after Germany is now Iraq’s Kurdish enclave. Unorthodox monetary policy with multiple rates and tools has slowed credit expansion to just above 10 percent, although banks’ loan-deposit ratio is over 100 percent. Despite capital adequacy above 15 percent of assets, they continue to borrow heavily abroad with debt outstanding at $125 billion according to industry trackers. These lines are needed to supplement the short-term deposit base at home where average maturities are 75 days.
Corporate and financial institution Eurobond issuance in 2012 is at a record $10 billion aided by QE-fueled high-yield appetite. Private equity may also be rising according to the latest statistics by professional group EMPEA which put penetration at 0.1 percent of GDP in 2011. In regional categories European and MENA activity have rebounded at the same time Asia’s portion has roughly halved. Through the third quarter global emerging market fundraising was $27 billion, $10 billion behind the full last year total. Developed market activity in Europe was also off dramatically, and the BRIC traditional favorites were spurned for lesser known potential commercial and capital market hubs.
