Feeling cash crunch, Turkey scraps bridge project

By DAVID ROSENBERG / THE MEDIA LINE
January 14, 2012 17:41

Bidders skeptical they could finance, in omen of challenges to come for economy.




Turkish FM Davutoglu, Turkish-Italian Forum

Turkish FM Davutoglu, Turkish-Italian Forum_311. (photo credit: Reuters/Murad Sezer)

In a sign of how the unfolding global finance crisis is putting the country’s miracle economy at risk, Turkey was forced this week to rescind a tender for a marquee highway project that would have spanned the Bosporus Strait between Europe and Asia with a third bridge.

Observers say bidders for the $5 billion project were probably deterred in part by the strict terms Ankara imposed on the contracts. But equally important to the multinational companies that had been expected to place bids, they say, was the international funding squeeze.

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Among the bidders who failed to file were Japan’s Mitsubishi, Italy’s Astaldi, Russia’s Moskovskiy Metrostroy, and Spain’s FCC, all based in countries that have been hit by the Eurozone financial crisis and its global reverberations. They would have had to find the capital for the project in return for the right to build and operate the highway and bridge for 25 years.

Their hesitance to take on such a commitment served as a reminder that Turkey itself has huge external financing obligations to meet over the coming year at a time when the supply of capital is growing increasingly tight. The country is running a massive current account deficit while it has medium- to long-term debt on the order of $35 billion to $40 billion to roll over every year, according to a recent Citigroup Global Markets report.

“A lot of the Turkish macro picture is about external financing. We still have a very wide current account deficit, although it’s narrowing. This has yet to be resolved. Unless the global environment improves, I think there is still a risk of a relatively hard-ish landing,” Murat Ucer, Istanbul-based adviser for Global Source Partners, told The Media Line.

Economists agree that Turkey is heading for a major slowdown this year, with growth probably slipping to less than 3%, compared with something close to 8% in 2011. Policy makers’ job is to ensure that the deceleration doesn’t slip out of their control and spoil the so-called soft landing they are seeking.

They got some encouragement on Wednesday from the industrial production index for last November. It climbed 8.4% from a year earlier, signaling continued strong growth for the economy. But the index recorded a 2.5% fall from October 2011, the largest drop in close to 18 months. Ozgur Altug, chief economist at BGC Partners, said he expects a “sizeable” slowdown in the December figure.

Turkey’s economy has been expanding at a breakneck pace, outstripping China to post the fastest growth of any economy in the G-20 industrialized and developing nations in the first half of last year. But since 2010, the country has seen its current account deficit widen to a worrying level equal to 10% of gross domestic product as the economy sucked in imports.

That has worried investors, who have shrugged off otherwise strong economic data and traded down Turkey’s lira 18% last year, the biggest depreciation among emerging-market currencies. In a sign of how sensitive the markets are to the current account, the currency strengthened on Wednesday after Turkey reported the deficit narrowed to $5.2 billion in November from $6 billion a year ago.

Even with that news, however, the problem of the deficit is far from being resolved. Citi estimates that it will narrow this year but remain a hefty 8% of GDP. Adding to the worries is the source of the finance to cover the short-fall. Whereas in the past, it had been financed by foreign direct investment and long-term portfolio investment, since the 2008 financial crisis, Turkey has come to be more reliant on fickle short-term financing.

Add in the weakness of the lira, the heavy foreign currency exposure of Turkey’s corporate borrowers and retrenchment by European bank lenders, analysts see the making of a financial crunch ahead.

In a report released on Wednesday, Moody’s Senior Analyst Martin Kohlhase called the outlook for Turkey’s non-bank corporate borrowers “stable” but “cautious.” He noted that economic growth will slow to as little as 2.5% this year.

“Debt could become harder to repay and service if the Turkish lira continues to depreciate,” he warned in a special comment. “Although this provides relief to exporters, it is a burden for corporates that have significant amounts of dollar-denominated debt.”

In December, two of Citi’s economists – Ilker Domac and Gultekin Isiklar – warned that an external shock that prompts a decline in capital flows into the country could result in a repeat for Turkey of its experience during the 2008-09 global financial crisis. Then, the Turkish economy contracted by about 5%, they recalled.

Turkey’s central bank is determined to reverse the lira’s deprecation. “Those who invest in the lira will gain in 2012,” Erdem Basci, the bank’s governor, declared boldly in a speech last week.

But he is using unorthodox methods that economists worry may not work or even backfire.

Rather than increasing the benchmark weekly interest rate, Basci last year introduced a confusing system that makes banks borrow at more expensive overnight rates and has taken to intervening in currency markets with increased frequency. Since August, Turkey has spent some $15 billion to stabilize its currency and in the days around New Year’s pumped $5 billion into the market.

“It’s a little bit of a tricky bet coming from a central bank governor,” said Ucer of Global Source Partners. “It’s a very risky call, I think, but he believes in it and he wants to take the risk.”


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