The IMF has slashed its 2014 growth forecast for Turkey from 3.5 to 2.3 per cent. Investors are now hoping the aviation and energy markets will provide some comfort
Turkey may put the ‘T’ in the MINT group of flavour-of-the-month emerging economies, but recent political and economic developments could be souring the taste for international investors.
The controversy swirling around prime minister Tayyip Erdogan, his dislike of suggestions he and his government are no strangers to corruption and his attempts to quash social and conventional media dissent are all well-reported. While all this has given global money players some pause for thought, their ears will have pricked up even more at recent figures suggesting the booming economy is starting to slow.
The IMF slashed its 2014 growth forecast for Turkey from 3.5 per cent to 2.3 per cent against a backdrop of a slowdown in private consumption driven by tighter monetary policies, a significant lira depreciation and higher interest rates.
Indeed, Turkey’s central bank recently whacked up interest rates from 7.75 per cent to 12 per cent.
The IMF growth forecast is far below that of another group of global crystal ball-gazers, the Paris-based Organisation for Economic Co-operation and Development, which has Turkey down for 4.1 per cent growth this year.
Other IMF indicators also make for worrying reading. Turkey’s inflation rate will hit 7.8 per cent by the end of this year, say the Washington-based gurus, a staggering 2.5 per cent increase over October’s forecast.
The jobless picture is also worse than predicted, heading for 10.2 per cent this year rather than an earlier forecast of 9.5 per cent.
One bright point in the IMF’s predictions is the suggestion that Turkey’s current account deficit will shrink to 6.3 per cent of GDP this year, considerably lower than the 7.3 per cent forecast previously.
Despite the mixed picture, Turkish lawyers maintain the jurisdiction is ripe for development and international investment – especially in aviation, energy and finance.
Insurance and PE to fill the gap
At a London briefing organised jointly by The Lawyer and Turkish firm Herdem & Co, local practitioners are bullishly optimistic.
“The prime minister may have blocked Twitter,” says Herdem & Co managing partner Safak Herdem, “but that should not take attention away from the foreign investment opportunities in Turkey. We have many problems with legislation and with some legal principles, but the sustainability of growth rates in Turkey is good – there’s a lot of potential.”
Nonetheless, Herdem’s colleague, finance expert Altug Atilkan, acknowledges that deal work has dropped dramatically. Overall, says Atilkan, the value of M&A last year tumbled from $22.5bn (£13.5bn) to $17.5bn. And the picture is even worse in the finance and banking M&A sector, which he says is 70 per cent down.
However, Atilkan maintains there is a phenomenon in Turkey that dictates “when one sector dips, another emerges – that’s the most important truth in the market”.
In this instance, experts say insurance and private equity investment are filling the gaps. The latter, according to Atilkan, increased by 20 per cent over the past year.
One insurance sector deal almost single-handedly propped up the market. Last March German giant Allianz snapped up Turkish insurance company Yapi Kredi Sigorat for €684m (£566m), in a move interpreted as another example of global insurance companies looking to perk up bottom lines by moving into developing markets as revenues continue to be hit in more traditional jurisdictions.
Other areas show promise too, according to local lawyers, with the pharmaceutical and technology sectors said to be worth $10bn each.
But it is the aviation, aerospace and energy fields that are holding most promise for international lawyers. Historically, Turkey has been seen as a bridge between East and West, and its modern incarnation is moving towards being an air passenger hub.
Development has been quick. No more than a decade ago national carrier Turkish Airlines – still 49 per cent government-owned – was, according to Holman Fenwick Willan aviation head Giles Kavanagh, “an antiquated carrier that had major accidents every three or four years”.
Since then, he adds, “it has transformed itself into an airline with one of the highest operating margins in Europe, an airline with which leading international football stars are not afraid to be associated with in terms of advertising. And an airline that has transformed the country into an international hub that vies with the likes of Dubai”.
As far as Kavanagh is concerned, that trend will continue.
Airport development dramatically illustrates the point. While London tears itself inside out debating the merits of Heathrow expansion, Turkey is planning to build one of the biggest airports in the world.
The country already has significant capacity, with 44 airports – two of which are in Istanbul. But those are reaching capacity, so ground has been broken on a third, planned to open in 2019. This airport – which will boast a staggering four terminals and six runways – has planned capacity of 90 million passengers annually at launch, rising to 150 million in 10 years.
Part of the attraction of the aviation sector, according to lawyers, is that it is one area where domestic laws and rules have been modernised. Kavanagh points out that Turkey’s aviation regulatory environment to a large extent mirrors that in the EU, not least in the important area of buying and selling airport slots.
Likewise, airline passenger rights in Turkey are governed by an equivalent to the EU regulation 261/2004, which sets out rules on compensation in the event of cancellations and delays.
But Turkey does not see its future exclusively as a landing strip bridging East and West. It also fancies producing aeroplanes, with Turkish Aerospace Industries developing a jet to rival the Europeans and Chinese.
Lawyers also see Turkey’s energy sector as promising, again because of its geographical position.
Hogan Lovells of counsel Colin Graham says: “The real opportunity is quite obvious if you look at where Turkey sits on the map and where the resources that Europe will be looking to over the next few years are – it’s a natural transit country.”
The sheer volumes of energy potentially flooding through Turkey are impressive. One Japanese-backed project involves construction of a 3,000km pipeline starting in Azerbaijan and going through Turkey to Albania and Italy.
Then there is the issue of whether a trans-Caspian pipeline will be built. In this ambitious proposal, a submarine pipeline would run from Turkmenistan to Azerbaijan and then link to an existing pipeline to Erzurum in Turkey. After that, the natural gas would be channelled to destinations in Central Europe, squeezing out energy supply hotspots Russia and Iran in the process.
Despite the opportunities, there are pitfalls in the Turkish energy sector. Atilkan notes there is concern about the position of the six Turkish energy companies on the local stock exchange. If they become involved in joint venture ownership plans for the exchange they could become part of the decision-making process for electricity spot prices. Problems will arise, forecasts Atilkan, as those companies will operate in the electricity sector, raising the spectre of potential allegations of insider trading.
“There’s a big debate around the Turkish electricity markets and I don’t expect it to be resolved this year,” he says.
Wider legal system issues also cause concern. While legislation around the aviation sector more or less meets international expectations, regulation elsewhere is more complicated and problematic.
“Local and national approvals have to be obtained,” Kavanagh notes. “And there’s often no co-ordinator of those processes. So while the environment is generally favourable to foreign investors, it’s not always easy to navigate.”
International law firm experience of the Turkish commercial courts is often frustrating too, with the biggest criticism focusing on delay.
“The speed of justice is not swift,” says Kavanagh, pointing out that first-instance decisions can take three to four years, followed by a lengthy and expensive appeals process.
“If you want to appeal it can take eight years,” he says. “Rather like China, Turkey is a country where economic growth has outstripped the legal system. Our experience of the Turkish court system is variable – in some cases it’s a bit like being in Lincoln County Court in 1957.”
Local lawyers maintain there’s nothing like a spot of domestic legal knowledge to guide global firms and their clients around potential perils.
As Altikan says: “The Turkish market has a lot of pitfalls and opportunities – if you don’t know the right people and the way the market works, you’ll have problems.”
Around the table
Joanne Harris, special reports and Europe editor, The Lawyer
Safak Herdem, managing partner, Herdem & Co
Altug Atılkan, finance expert, Herdem & Co
Colin Graham, of counsel, Hogan Lovells
Giles Kavanagh, partner and head of global aviation team, Holman Fenwick Willan
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