The View From Istanbul
Among other things, I’m just wrapping up a three-day working trip to Istanbul, where I participated in an investor’s conference focusing on the Central and Eastern Europe (CEE) region as well as met BMI clients to discuss views from the ground level. I figured I would take the opportunity while I’m waiting for my flight back to London to report on the situation.
Certainly, I have been below consensus negative on the 2009 Turkish outlook for some time, and this is reflected in BMI’s -5.7% growth forecast for this year. That said, what country in CEE isn’t going to be contracting by a huge number this year? To get the true gauge of the relative value in a market like CEE, a better measure is to look beyond 2010, when international credit markets are expected to stabilise. When this happens, I stand by my view that a country like Turkey will be among the best positioned in CEE to lead a recovery. Here are a couple of the key factors:
• The banking sector is fundamentally sound. Turkey went through its own financial crisis in 2001 and this helped to clear out the toxic assets from the banking system while also establishing a much more conservative business model thereafter. There was no investment in toxic assets, loans-to-deposits ratios were kept well below 100%, domestic leverage growth was minimal relative to the rest of the region and capital adequacy ratios remained very high as a result. To be sure, this was reinforced by high local interest rates which effectively priced out private borrowers in the system and resulted in high domestic treasury purchases by the banks. That the banking system is solid means that Turkey will not have to go through a painful and prolonged period of deleveraging and thus also means that it will be able to benefit from a strong capital market when other countries in the region like Romania and Bulgaria are still clearing bad assets from their systems.
• The domestic consumer will be crucial. Not only do I see Turkey benefiting from a resumption of foreign capital flows quicker than other countries, but I believe the domestic consumption story has huge potential as well. I have long believed that the rise of a greater middle class in Turkey is going to present tremendous strategic opportunities, especially considering the size of market (population around 70mn). The stability of the banks certainly means that there is the basis of a good capital system by which credit can expand in the country. This though, is only going to be reinforced by a long-term trend of tightening interest rates and stabilising inflation. Interest rates for the first time in memory are in the single digits now, and with consumer price growth coming in below 6% recently, I believe we are now seeing the roots of a crucial structural shift in domestic credit and price conditions that will ultimately be hugely positive for private consumption.
Speaking with Turkish investors and local consumers though, I’ve also picked up on some key ‘grass roots’ themes from Istanbul which have helped to reinforce my long-term positive view on the country.
• First, I have been reminded of the strong and positive business culture in Turkey. Corporate clients, investors and creditors alike maintain a focus on growth and opportunity. In this regard, I found it impressive that almost every client I met, although representing domestic Turkish firms, had broader regional ambitions. There was very limited inward focus among the business community here, and they understood the country’s potential as an economic hub for not only Europe and the Middle East, but also for the Caucasus, Central Asia and North Africa as well.
• Secondly, while there is a strong sense of optimism, I stress that there is also a very good understanding of the country’s risk profile as well. Most clients were willing to accept that Turkey was going to contract in excess of 5% this year and were also cognizant of the country’s lingering political risks and its need to broaden its export base. An important point I noted was the level of criticism the business community maintained for the government’s slow reaction to the crisis. I, having witnessed how slow the British, Canadian and many other governments in CEE were to accepting that their countries were going into recession, felt that the Turks were being unduly harsh. That said, I was encouraged that the investment community was keeping up pressures on Ankara and thought it was a very health sign of the realism present in the community.
• I also was reminded of the strong appetite for outside ideas and new research, especially among the private equity community in Istanbul. To be sure, the local research community is very good, but I also believe that there is an openness to a diversified set of opinions and analysis. This too helped to reinforce my sense that there is an underlying psychology within the Turkish market that will be a key factor for continuing convergence and integration over the long run.
Ok, I’ve just got the boarding call, so will leave it there. Enjoy the Eurovision Song Contest this weekend!
May 18th, 2009 at 3:12 pm
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