Turkey Economy: Fillip for FDI

Signs that Turkey's critical US$10bn stand-by credit agreement with the IMF is back on track have provided encouragement for foreign investors as they weigh up a number of substantial deals on offer in the banking, telecoms, tobacco and petroleum sectors. By happy coincidence the announcement by the IMF on April 12th that its executive board is likely to consider the Turkish stand-by deal in early May came on the same day that Belgium's Fortis Bank said that it is to acquire Turk Dis Ticaret Bankasi, a medium-sized private bank, for [euro]985m (US$1.3bn). Continued support from the IMF is essential for Turkey to manage its foreign-debt repayments. The involvement of the IMF also provides a spur for the government to carry out reforms aimed at bolstering fiscal performance and improving regulation of the financial sector.

The outline of the three-year stand-by credit agreement for 2005-07 was made public after talks between the government and the IMF in December. The IMF is to lend Turkey US$10bn, to be divided into five instalments in 2005, four in 2006 and three in 2007. This will in effect reduce Turkey's net repayments to the IMF over the three-year period from about US$20bn to some US$10bn. About US$3.7bn-worth of the repayments that the government was due to make in 2006 are to be put back to 2007.

Without this extension, Turkey would have had particularly heavy repayments to make in the year 2006. The previous three-year stand-by accord expired in February with no new deal in place, however. The delay reflected slow progress on legislation concerning the tax administration, financial institutions and the social security system, which had been set as core conditions for approving the new loan. An IMF team visited Turkey in early April, and announced at the end of its discussions that the required policy steps were "now closer to completion" and that the letter of intent covering the credit agreement has been updated and finalised. The government has pledged to move rapidly to meet the IMF's conditions for approving the deal. "The general assembly of parliament will consider the tax law today," the economy minister, Ali Babacan, said on April 13th. "Other laws will be dealt with in the shortest possible time."

The reassurance from the IMF has allayed fears that the Turkish lira, which has strengthened considerably over the past 18 months, might be headed for a sharp fall. The Economist Intelligence Unit expects an adjustment in the lira at some stage over the next two years, but this will not necessarily be abrupt or extreme. We expect consumer price inflation to decline further to a year-end rate of about 7% this year, below the official 8% target. In 2006 we are forecasting that inflation will edge up again slightly, reflecting the inflationary impact of a slight loosening of fiscal policy and a softer lira. Our forecast sees real GDP growth moderating to 5% in 2005 and 4% the following year.

The positive outlook for the Turkish economy, which has recovered strongly from the 2001 crash while achieving a steady fall in inflation, bodes well for a number of major asset sales now being pitched to local and foreign investors.

Financial targets

The financial services industry offers some of the most enticing prospects. Most Turkish banks have reported strong performances for 2004, in terms of both profits and growth. An encouraging aspect of the growth in banks' assets has been the shift away from government securities to commercial and retail lending. A number of leading Turkish banks reported increases of up to 50% in their loan portfolios during 2004.

All this is a far cry from the recent past. Between 1997 and 2003, the banking authorities had to seize 21 weak private banks from their owners. Almost all have now been merged, re-sold or wound up, although the Savings Deposit Insurance Fund is still seeking buyers for many of their former assets. The number of banks has declined from over 80 to just 48, over half of which are either small, non deposit-collecting specialised institutions or foreign banks maintaining a largely nominal presence. At the same time, prudential requirements have been tightened, and legislation is imminent that will clear up issues such as responsibility for bank inspection, the handling of troubled banks and the timetable for off-loading excessive non-financial equity investments. (Passage of this law is one of the conditions for the new IMF stand-by agreement.)

The Fortis acquisition was preceded in February by the purchase by BNP Paribas of a 50% stake in Turk Ekonomi Bankasi for US$217m. Rabobank of the Netherlands is discussing taking a stake in Sekerbank, the 15th-largest bank in Turkey in terms of assets. Deutsche Bank recently obtained a commercial banking licence in Turkey, and has just announced the acquisition of the entire capital of Bender Securities, an investment bank. Deutsche Bank took a 40% stake in the firm in 2000. HSBC Bank is currently the largest foreign-owned bank in Turkey. Italy's Unicredito half-owns Kocbank, which is about to propel itself into the top tier by taking a majority stake in Yapi Kredi Bankasi from the troubled Cukurova Group. A number of foreign banks are said to have expressed interest in bidding for three state-owned banks that the government aims to privatise: Vakifbank, Ziraat Bank and Halkbank.

In the next few months the government is also seeking to offload a 55% stake in Turk Telekom, the state-owned fixed-line telephone operator, as well as selling a tobacco company, a refinery group and Petkim, a state-owned petrochemical producer.