Turkey – Where East Meets West, and Prospects are Improving

Last week, we took a drive by of 2 Asian countries whose stock markets were outperforming, India & Indonesia. We also looked at some regional economies in Latin America that were holding up very well – namely, Peru & Chile. (Brazil goes without saying) Today, we’ll look at a country which was once considered the crossroads of the world, Turkey. (although in those times it was obviously not named Turkey).

Some quick and dirty facts – Turkey is the world’s 37th largest country by land mass, about 1/3rd the size of Mexico; but the 18th largest by population at over 72 million people. That’s 7M more than France, 10M more than the UK and more than double Canada. It’s also a young demographic as the stories below will highlight. GDP is similar to population, ranking it around 17 in the world at about $615B, about half that of India. Much like Indonesia, political turmoil has been an issue for outside investors …. but specific to Turkey the large question go forward is continued secular government or a shift away.

It is not an easy place for U.S. investors to get to. An ETF introduced in 2008, iShares MSCI Turkey (TUR) has about half a billion in assets and trades about 250,000 shares a day with a 0.65% expense ratio.

Product information for this instrument can be found here; unfortunately it is extremely financial heavy at the top with 4 of the top 5 holdings being financials; these 4 names are over 1/3rd of the entire ETF’s holdings. The other of the top 5 holding is Turkcell (TKC) – a regional based telecom – which is the only Turkey based stock I can find listed in the U.S.

The country caught my eye in an April BusinessWeek piece which I never had time to bring to the site; a reader also mentioned it in comments last week. The New York Times also had a piece yesterday and I am going to highlight a 3rd piece by a Seeking Alpha contributor below. Some snippets from each:

1) BusinessWeek: Turkey’s Moment

This kind of political turmoil long made Turkey radioactive as far as the financial markets were concerned. So what are investors, including foreigners, doing now? They’re buying Turkish stocks and bonds in record amounts. The Istanbul Stock Exchange index hit an all-time high on Apr. 9, capping a 52-week run that has seen stocks double in value.

Stoking investors’ enthusiasm is the conviction that Turkey’s economic fundamentals have improved so much in the past eight years that political strife won’t stop the forward momentum. “This is an economy with a deep manufacturing base and a large middle class,” says Murat Köprülü, the Turkish-born chairman of Multilateral Funding International in New York, which manages about $120 million of emerging-market assets. “[Turkey] is going to pick itself up again after a political crisis and show growth.”

Credit for this transformation goes to Erdogan and his deputy prime minister, Ali Babacan, who is a graduate of Northwestern’s Kellogg School of Management. Erdogan’s Justice & Development Party was elected with a strong majority in 2002. Speculative trading by Turkish banks in government bonds and the Turkish lira had triggered a financial crisis.

Erdogan and Babacan used their majority and capitalized on the sense of emergency to ram through numerous reforms. They reined in government spending, sold $30 billion worth of state-owned companies, strengthened financial regulatory agencies, and tightened capital reserve requirements for banks. “It was bitter medicine,” recalls Ziya Akkurt, chief executive of Akbank, one of Turkey’s largest banks.

The medicine worked. Turkey had a prosperous decade as rates came down and banks started to lend after a period in which there was precious little lending. Foreign capital from Ford (F), Vodafone, General Electric (GE), and other multinationals poured in to build manufacturing in autos, appliances, and information technology. Trade with Europe and the Mideast boomed; exports have tripled since 2002, to $102 billion.

The real test of Turkey’s financial strength came last year, as the global crisis tipped the world into recession. The country’s gross domestic product contracted almost 5%, a painful adjustment. But the lira did not crash as it once did in dire circumstances. Instead the currency has held close to 1.50 per dollar since October 2008, even as the central bank has slashed interest rates by more than half, to a record low of 6.5%.

The cost of insuring against a default on Turkish debt has plunged in the past 12 months, to 160 basis points from more than 340 a year ago. Six EU member countries, including Turkey’s neighbors Greece and Bulgaria, are more likely to default.

Turkish businesses are now preparing for a strong year. GDP increased at an annualized rate of 6% in the fourth quarter of 2009, lagging behind only China among the Group of 20 nations.

More than a quarter of Turkey’s 72.6 million people are under 15 years of age, while just 6% are over 65. Turkey is younger than China, where 19% are under 15.

For all its advances under Erdogan, the Turkish economy still has soft spots. Prices increased 9.6% in March compared with a 5.1% rise last year, prompting some economists to question whether Turkey has solved its long-term tendency to inflation, which was 39% in 2002. This inflationary bent is all the more worrisome given that unemployment remains high at 14%. If the recovery really takes off and more workers are hired and wages rise, Turkey could find itself struggling with bad inflation again.

The other soft spot, despite the market’s tendency to shrug it off, is politics. Erdogan’s battles with his adversaries aren’t over. Nor is the big question of Turkish politics settled: Whether Turkey should preserve its strictly secular traditions or follow the pious Erdogan and embrace Islam more closely.

2) NYT: Turning East, Turkey Asserts Economic Power

Today, Turkey is a fast-rising economic power, with a core of internationally competitive companies turning the youthful nation into an entrepreneurial hub, tapping cash-rich export markets in Russia and the Middle East while attracting billions of investment dollars in return.

Turkey’s economic renaissance — last week it reported a stunning 11.4 percent expansion for the first quarter, second only to China….

In June, Turkish exports grew by 13% compared with the previous year, with much of the demand coming from countries on Turkey’s border or close to it, like Iraq, Iran and Russia. With their immature manufacturing bases, they are eager buyers of Turkish cookies, automobiles and flat-screen televisions.

It is an astonishing transformation for an economy that just 10 years ago had a budget deficit of 16% of gross domestic product and inflation of 72%. So complete has this evolution been that Turkey is now closer to fulfilling the criteria for adopting the euro — if it ever does get into the European Union — than most of the troubled economies already in the euro zone. It is well under the 60% ceiling on government debt (49% of G.D.P.) and could well get its annual budget deficit below the 3% benchmark next year. That leaves the reduction of inflation, now running at 8 percent, as the only remaining major policy goal.

3) Seeking Alpha: Turkey’s Economic Prospects – As Good as It Gets?

In the short term, the Euro area crisis, Turkey’s soaring current account deficit, and domestic politics pose the biggest risks. In the longer term, Turkey must address a low savings rate and weak education system if it hopes to catch up to the fastest-growing emerging markets.

The other major long term constraint on growth is education. To improve labor force participation—currently about 50 % overall and less than 25% for women, compared with 71 and 63 %, respectively, in the EU—reform of and greater investment in the education system is needed. Turkey has largely reached quantitative targets in schooling, especially among boys; girls are lagging behind but catching up. On the other hand, the average quality of education is miserably low. The Program for International Student Assessment places Turkey second-to-last among OECD countries.

Disclosure: No position

About Mark Hanna 543 Articles

Affiliation: Hanna Capital, LLC

Mark Hanna is President and Owner of Hanna Capital, LLC, a registered investment advisory firm. Mark has been a follower of markets since the late 80s, with a focus on individual equities since the mid 90s. He has been a well known commentator in the financial blogosphere for the past 5 years, following a career in corpoporate finance and accounting. Mark attended the University of Michigan where he graduated with a degree in Economics.

As an avid reader, Market Montage is the personal blogging site for Mark to share his views on economics, markets, and the like. Occasional cynicism and wit shall be deployed in his postings.

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1 Comment on Turkey – Where East Meets West, and Prospects are Improving

  1. "last week it reported a stunning 11.4 percent expansion for the first quarter, second only to China…."

    IT IS NOT 11.4 IT IS 11.7

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