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