Erdogan Boom Under Threat as Greek Crisis Exposes Turkey’s Financing Risk
The boom that turned Turkey into Europe’s fastest-growing economy may be imperiled by the debt crisis in neighboring Greece, the continent’s worst performer.
Prime Minister Recep Tayyip Erdogan hailed Turkey’s 11 percent first-quarter expansion as “magnificent” on June 30. It hasn’t prevented the lira from sliding to a two-year low against the dollar and a record to the euro, as the country’s trade deficit widens on surging demand for imports. Turkey needs increasing flows of cash to finance the gap -- just as investors take alarm at the risk of default in Greece, where output shrank 5.5 percent.
“There will be global risk and of course Turkey will suffer” if Greece’s problems worsen, Lutz Roehmeyer, who helps manage about $17 billion at Landesbank Berlin Investment and is “underweight” on Turkish bonds, said in a telephone interview. “When the fear trade starts they sell big and liquid currencies first, and that’s usually the Polish zloty and the lira.”
Erdogan’s drive to cool the economy looks enviable from Athens, where his Greek counterpart George Papandreou must impose budget cuts and fight to fend off debt default. Turkey’s success can help, Papandreou said.
“This dynamic economy is something which we can profit from too,” the premier said in a July 19 interview in Athens. “We have the biggest city in Europe right next to us, which is Istanbul, a very dynamic city. We know the Turks well, they know us well, we have a boom in tourism.”
The neighbors traded $3 billion of goods last year, with Greece enjoying a surplus for the first time in more than a decade, selling mineral fuels, oil products and plastics, according to Turkish government figures.
The flipside is that Greece could also derail the Turkish rebound. A Greek default could trigger a flight from investments seen as risky, depriving Turkey of the short-term funding it needs. That would undermine Erdogan’s claim to have ended a decades-old cycle of boom and bust and turned his country into the region’s economic powerhouse.
Under Erdogan “the word crisis has been thrown in the trash,” Trade Minister Zafer Caglayan said in Ankara today. “But that doesn’t mean we’ll escape the impact from abroad.”
The lira is already down about 7.9 percent against the dollar this year, the biggest loser among emerging market currencies. It was trading 0.3 percent lower at 1.6676 at 6:00 p.m. in Istanbul. It fell 1.4 percent to 2.3970 per euro, the lowest level since the euro was introduced on Jan. 1, 1999.
Buying insurance on Turkish debt is getting more expensive. Credit default swaps for five-year debt rose to about 195 basis points this week, the highest for more than a year, according to CMA prices. That’s about 40 points above Russia, whose debt cost more to insure than Turkey’s at the start of the year.
Erdogan, re-elected for a third term last month, has won praise from investors for his economic record. He completed two International Monetary Fund accords, reducing debt to about 40 percent of gross domestic product from 74 percent.
Turkey had a budget surplus in the first half of this year as tax income surged. Greece forecasts a deficit of about 10 percent this year and debt of 166 percent of GDP by 2012.
“If I were an investor I’d be overweight Turkey because it doesn’t suffer from the fiscal problems that are hurting everyone else,” said Cevdet Akcay, chief economist for Yapi Kredi Bankasi AS, the lender co-owned by Italy’s UniCredit SpA.
Turkey’s ISE-100 stock index has risen more than 500 percent in dollar terms since Erdogan’s party came to power in 2002, beating the 300 percent gain in the MSCI Emerging Markets benchmark. When National Bank of Greece SA bought Turkish lender Finansbank AS five years ago, the parent’s market value was five times that of its new unit. Now, Finansbank is worth more.
The acquisition reflected closer economic ties that followed a thaw between two historic rivals.
Greeks and Turks fought a series of wars in the century after Greece gained independence from the Ottoman Empire in 1821. In 1955 Turks rioted against the Greek minority in Istanbul, which has dwindled to about 2,500 from 200,000. More recently, the countries clashed over Cyprus and territorial rights in the Aegean Sea.
Papandreou, foreign minister at the time, helped start the detente at the end of the 1990s. “We hadn’t signed any treaties or agreements for about four years,” he recalled, pointing to “about 30, 40 agreements in all kinds of areas” reached since.
Turkey’s $740 billion economy is more than double the size of Greece’s. Per capita, Greece -- a European Union member since 1981 -- is about twice as wealthy, according to IMF figures.
That gap is narrowing. Turkey’s economy has grown more than 5 percent a year under Erdogan, who sold state assets, built roads and railways, and boosted trade ties with the Middle East.
What he didn’t do is cut Turkey’s import bill to make growth less dependent on foreign capital.
Erdogan’s government “didn’t push for change,” such as improving vocational training and making it easier for companies to hire and fire, said Sarp Kalkan, an analyst at Tepav, the Ankara-based research group that monitors the budget. “The link between growth and the current account has not been reduced.”
Finance Minister Mehmet Simsek promised on July 15 a “more interventionist” industrial policy. The country can shave at least $10 billion off the current account gap by making car parts locally and using domestic scrap steel, Trade Minister Caglayan said July 12, announcing incentives for six industries that account for at least $30 billion a year in imports, due to enter force at the end of the year.
Until then, Erdogan is leaving the task of closing the trade gap to Turkey’s financial authorities, who are trying to rein in the credit boom that’s spurring imports. The central bank, while keeping interest rates at a record low this year, has ramped up reserve requirements for banks, and the financial regulator is demanding higher provisions. Lending is still growing at closer to 40 percent a year than the government’s target of 25 percent.
“Given the scale and trend in the current account deficit and bank credit growth, we think that there is still uncertainty” that could delay a credit upgrade, Ed Parker, managing director at Fitch Ratings said in a phone interview. Fitch ranks Turkey the highest among the three biggest ratings companies, at one level short of investment grade with a positive outlook.
Deputy Prime Minister Ali Babacan said the current-account deficit is sustainable until the measures start working. It’s mostly financed by short-term inflows to buy stocks and bonds, so-called “hot money,” not longer-term investments.
More than half of the $7.8 billion gap in May was financed by inflows that the central bank can’t exactly classify and lists only as “net errors and omissions.” Foreign direct investment dropped to $8.9 billion last year from a peak of $22 billion in 2007. International companies mostly stayed away as the government sold assets including gas and electricity grids, raising more than $10 billion.
Turkey has experience of boom-and-bust. Cem Akyurek, an economist at Deutsche Bank AG in Istanbul, points to the lira slumps of 1994 and 2001 that reversed periods of expansion.
Papandreou cites Turkey’s 2001 experience as offering hope for Greece. “They went to the IMF, and went through a difficult period, and they were able to revamp their economy and make it more dynamic,” he said.
Still, such setbacks have kept Turkey’s long-run growth below that of some emerging markets, especially in Asia. Since 1980, South Korea’s output has jumped about sevenfold, while Turkey grew less than half that much, according to IMF data.
Erdogan says his government has ended the era of crises. “Turkey’s global standing is now very different,” he told voters at an Istanbul rally on May 5. Plastered across billboards nationwide during the campaign was one of his party’s slogans: “Lasting stability, continued growth.”
The precedents aren’t favorable, Akyurek said.
“An orderly adjustment is not something we have seen in Turkey in the past,” he said. It will require tighter budgets, higher interest rates and an acceptance of slower growth, “not to mention some luck,” he said.
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