By Massoud A. Derhally
Turkey’s powerful economic growth stands in stark contrast to its neighbours in the European Union. Policymakers in the country are now looking to the Middle East and Asia to help spur even further growth
Once dubbed the sick man of Europe, modern-day Turkey — unlike the Ottoman Empire from which it emerged — is anything but ailing. Just a few years ago, neighbouring European countries were bitterly debating the country’s accession to the European Union. The country’s eligibility was questioned by European states because of the rising force of political Islam and whether that was compatible with the goals of the EU and whether the interests of the two could ever be aligned.
If anything, the rise of moderate Islamist Recep Tayyip Erdogan and his AKP (Justice and Development) party has anchored the country, and brought an element of confidence to Turkey. Erdogan’s coming to power has provided political stability, economic prosperity and saliently proven that the future of Turkey does not necessarily depend on nor is defined by membership of the EU. There are alternatives for Turkey in the Middle East in terms of partnership and the country has a dynamic and growing economy. Power in the country has traditionally emanated from the military establishment, though under Erdogan Turkey is certainly no longer the sick man of Europe.
As Europe ponders the future of the euro and how to deal with Greece’s debt crisis, Turkey’s economy today, in stark contrast to its economic woes of the late 1990s and 2001, is booming. Unemployment is declining, and industries are expanding. If anything, the country’s Istanbul Stock Exchange is an illustrative barometer of how the country has fared.
In the first eight months of the year, 22 companies went public on the bourse raising $265m. That’s in addition to the Turkish market recording a sales volume of more than $20bn in corporate bond issuances so far this year as investors seek higher returns and companies look for more efficient forms of financing.
Turkey’s bourse, which has 398 listed companies, may have as many as eighteen additional initial public offerings (IPOs) by the end of this year, which could increase the amount of liquidity added to the market to $500m, Ibrahim Turhan, chairman and CEO of Istanbul Stock Exchange says in an interview with Arabian Business on the sidelines of the HSBC Global Connections MENA Turkey Forum in Dubai.
“According to the documents we have so far, we expect that this number can go up to 40 companies this year,” Turhan says, adding that the number of companies selling shares to the public in 2013 is likely to exceed 40.
“We have a target of having 1,000 companies listed in seven years’ time, so to reach this goal we have to keep going,” the former central bank official says, adding that he anticipates the listing of foreign companies on the Turkish bourse. “Istanbul is the centre of liquidity and is among the most liquid markets in the region,” he says. “I expect companies from South Eastern Europe, West Asia and the Middle East and North Africa to apply to be listed.”
With European economies expected to contract this year, liquidity is abundant and growth has been stellar. The country has enjoyed political stability for the past decade, has a rapidly growing young population that creates a vibrant domestic demand base and manageable debt. Turkish households, the corporate and public sectors are not heavily leveraged, and total public debt as a ratio of GDP is 40 percent which is pretty low when compared to Europe and other emerging markets. Lebanon’s debt to GDP ratio was 136 percent at the end of last year, one of the highest in the world.
For Turkey, the mix of low debt and fast growth is an advantage, and with a well-regulated banking industry and the dynamics of the country and economy as they are, that, for a long-term investor, means that the country is an attractive emerging market, says Paul Doany, the former CEO of Oger Telecom.
“Our first investment in Turkey was in 2005 and at that time we foresaw economic stability, strong leadership and governance and these are complex projects that require legislation and a single party government made a big difference,” says Doany, who, while with Oger Telecom, led the largest single foreign investment in Turkey with a 55 percent block sale ($6.55bn) of Turk Telekom in 2005.
“The overall economy was improving and providing for a more stable exchange rate and a young population. Data is driven by young people. When we moved in 2005, we had around half a million customers and we closed the year at 1 million and now it’s around 8 million. That kind of growth excites an investor.”
With $60bn in capital flows coming to Turkey last year, loose monetary conditions domestically, and a credit and import demand driven boom, the country’s economy — the sixteenth largest in the world — grew 9.2 percent in 2010 and 8.5 percent in 2011, according to official government figures. Tourism generated $23bn last year. Gross domestic product (GDP) grew 2.9 percent in the second quarter this year from a year earlier, a slowdown from first quarter growth of 3.3 percent and growth and GDP in 2102 is likely to fall to 2.7 percent (below the government’s projected four percent) due to the crisis in Europe, says Melis Metiner, an economist at HSBC in Turkey.
“At the end of last year, we had this stellar growth performance and a good improvement in employment, but at the same time consumer inflation had gone above ten percent and Turkey’s current account deficit had widened significantly at ten percent of GDP $77 bn,” she says.
“This year the story of Turkey is going to be a rebalancing one, domestic demand and import growth are going to slow down. Meanwhile, export growth is going to be much stronger,” says Metiner.
Turkish exports to the Middle East and North Africa region in the first seven months of the year increased 55 percent from the same period a year earlier, so though demand in Europe may be contracting, strong demand from the MENA region has allowed the country to maintain a moderate pace of export growth this year. Only thirteen percent of Turkish exports ended up in the Middle East and North Africa in 2000 with the majority going to the EU.
“Obviously if there is a crisis in Europe that would impact Turkey negatively,” says Metiner. “The government set out consciously to change this picture, to diversify Turkey’s export destination away from Europe towards the Middle East. They signed a lot of bilateral trade agreements, free trade agreements, eased visa restrictions and essentially made it easy to conduct business and to trade.”
The resilience of the Turkish economy is also evident in the foreign direct investment that’s making its way to the country. Despite Europe’s economic crisis, Greece’s woes and a forecast contraction in the euro zone of 0.7 percent, FDI into Turkey reached $8.9bn in the first seven months of 2012. About 80 percent of the FDI was from EU countries and only ten percent from the Middle East. Last year, the country attracted about $16bn in FDI.
The ratio of EU investment in Turkey compared with that emanating from the Arab world however, is beginning to shift, says Melis. Of the 30,000 foreign companies operating in Turkey, 3,500 are from the Gulf region and the interest is growing.
In 2002, MH Alshaya Co, possibly the largest retail conglomerate in the Arab world, which runs over 2,000 shops in nineteen countries, started operations in Turkey. It now runs everything from food and beverage outlets like Le Pain Quotidien and Starbucks to retail shops like Debenhams.
In 2007, National Bank of Kuwait — the largest bank in Kuwait — acquired a 40 percent stake in Turkish Bank and in July of this year, NBK Capital, the investment bank owned by NBK, bought 50 percent of Bavet, a distributor of animal pharmaceuticals in Turkey.
Aramex PJSC, the Middle East’s largest courier company, will spend as much as $100m on acquisitions by the end of next year and is eyeing Turkey, CEO Fadi Ghandour said in an interview with Arabian Business this May.
“Turkey is a very interesting market for us,” Ghandour said at the time. “Even if we’re not looking at a specific acquisition, if something comes up opportunistically we will actually go ahead and do it.”
The Arabs may have rebelled against the Ottoman Empire but Turkey under Erdogan has gained a special standing in the region and is on a different footing. Erdogan became a hero to the Arabs after the Gaza war in 2008, when he walked off the stage after an angry exchange with Israeli president, Shimon Peres, during a panel discussion on Gaza at the World Economic Forum.
Turkey’s popularity has soared as it adopted principled positions towards the wave of revolutions that swept the Arab world, toppling leaders in Tunisia, Egypt, Libya, Yemen and threatening the rule of Bashar Al Assad in Syria. The Ottoman empire may have stubbornly refused to grant Arabs their rights to self-determination, but modern-day Turkey has been the first to recognise the winds of change.
“I wouldn’t say we have been apart from each other since the collapse of the Ottoman Empire; we have always felt close to the Middle East region, but because of the latest developments in and around us this gained pace in the last decade,” says Vural Altay, Turkey’s ambassador to the UAE. “The Arab Spring is still continuing and it will take some time until it’s finalised. We hope that our relationship will grow with all those countries in the years to come.”
Arab countries have shown an interest in possibly buying land for agriculture development as some like the UAE have done in Sudan, Eastern Europe and Asia.
The UAE and Turkey have a joint economic committee formed in 2011, and areas of cooperation include renewable energy, petrochemicals, and agriculture, says Mohammed Al Shehhi, Undersecretary of the UAE Ministry of Economy.
Growth of the global economy in the future will be underpinned by countries like Turkey, says Tim Reid, head of HSBC commercial banking in the MENA region.
“We’re going to see countries that we currently call emerging, power growth in the next four decades,” he says. “We are going to see significantly higher growth in emerging markets than that in the Western world.”