Eight months after Prime Minister Recep Tayyip Erdogan won an election landslide vowing to build roads, bridges and power plants, his plans are threatened by a financing shortfall of at least $15 billion.
Deals worth $5.5 billion to build a third bridge over the Bosporus in Istanbul and operate other projects were postponed since December. Another $10 billion of power grid sales were cancelled or delayed since the start of 2010 because companies couldn’t get loans, according to the state asset sales agency. Project financing costs for Turkish firms rose to an average 300 basis points over benchmark rates since October from 222 in the first nine months, data compiled by Bloomberg show. The spread globally increased to 303 basis points from 295 after Europe’s debt crisis made borrowing harder.
“Project financing today will not be impossible, but it will be difficult,” Suzan Sabanci Dincer, the billionaire chairwoman of Akbank TAS (AKBNK), Turkey’s largest listed bank, said in an interview at her office in Istanbul on Feb. 24. “Investors are more picky about long-term lending because of the problems in Europe. Companies with low equity will find it difficult to borrow.”
Erdogan, 58, is seeking investment from abroad to finance a current account deficit that surged to more than 10 percent of gross domestic product last year and caused the lira to slide 18 percent against the dollar, the most worldwide. The premier, who’s vowed to quadruple output to make Turkey a top 10 economy by 2023, is calling on local banks to cut rates from as much as 20 percent and free up lira loans for businesses. Economic growth will slow to 4 percent this year from 9.6 percent in the first nine months of 2011, the second-fastest after China among major economies, according to Erdogan.
Highway by Astaldi
Projects include construction of a $6.5 billion highway by a group led by Astaldi SpA (AST) stretching 421 kilometers south from Istanbul to the third-biggest city of Izmir and featuring the world’s second-longest suspension bridge after the Akashi Kaikyo Bridge in Japan. The Astaldi-led group wants $3.5 billion of loans and may seek more later, an official for the company said from Rome by telephone yesterday on the condition of anonymity because the details are private.
Erdogan’s press office in Ankara didn’t return e-mails or phone calls seeking comment on a possible financing shortfall for the projects he plans. The government stands ready to provide more state guarantees for key infrastructure projects such as the third Istanbul bridge to help with financing, Deputy Prime Minister Ali Babacan, who is in charge of the economy, said at the World Economic Forum in Davos, Switzerland on Jan. 26.
“We couldn’t meet our privatization targets in the last two years,” Finance Minister Mehmet Simsek, 45, said in a phone interview on Feb. 23. “If global conditions are suitable, we want to make up for the disappointment caused by companies not being able to meet their obligations in power grid auctions and meet this year’s 10 billion liras ($5.64 billion) asset sales target.”
The building industry expanded 12.7 percent in the first nine months of 2011, beating overall economic growth of 9.6 percent, according to the Turkish Statistical Institute. Construction grew an average of 12.5 percent over the past eight quarters compared with 8.8 percent in the wider economy, according to the statistics office.
Infrastructure projects lured $3.7 billion of foreign direct investment between January and September last year, almost a third of the $11.4 billion total, according to data from the central bank and the Investment Support and Promotion Agency of Turkey’s website.
“Countries that deliver on infrastructure have the best growth rates, China is a good example of that,” Tim Ash, the head of emerging markets research at Royal Bank of Scotland Group Plc (RBS), said in a telephone interview in London on Feb. 24. “Turkey is at least focusing on it. They need to improve infrastructure and energy is top of the pile because of the current account deficit.”
The yield on Turkey’s bonds denominated in dollars has fallen 39 basis points, or 0.39 percentage point, this year to 5.38 percent, JPMorgan Chase & Co.’s EMBI Global index shows. The decline is less than the average 47 basis-point decline in emerging market yields to 5.61 percent. Yields on Turkish bonds were unchanged on Feb. 24.
The extra yield investors demand to hold Turkish dollar debt rather than similar-maturity U.S. Treasuries grew eight basis points yesterday to 337, according to JPMorgan’s EMBI Global index.
Two-year benchmark bond yields in liras were down 4 basis points to 9.30 percent in Istanbul today, extending their decline to 171 basis points this year, the biggest decline among 19 major emerging markets tracked by Bloomberg. The lira rose 0.5 percent to 1.7582 per dollar, extending its gains this year to 7.6 percent.
The cost of protecting Turkish bonds using five-year credit-default swaps was down 7 basis points to 242 basis points today, compared with a spread of 188 for Russia, 201 for Poland and 155 for the Philippines, which has the same rating of BB from Standard & Poor’s. The figures are provided by CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers in the privately-negotiated market. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail or be unable to adhere to its debt agreements.
Companies in Turkey have raised $725 million in project finance this year, a 30 percent jump from the same period of 2010, data compiled by Bloomberg show. Ictas Insaat Sanayi & Ticaret AS, a Turkish builder, borrowed $700 million from Istanbul-based Turkiye Garanti Bankasi AS (GARAN) and other domestic lenders in January to buy and run a $575 million power grid in northwestern Turkey until 2035.
Energy made up 22 percent of Turkish imports last year, or $54.1 billion, according to the statistics office. The country gets 97 percent of the energy it consumes from abroad because it has virtually no oil or natural gas resources of its own, data in a strategy document published on the Energy Ministry’s website show.
Erdogan plans three nuclear plants by 2023. The first will be in Akkuyu on the Mediterranean coast and will cost $20 billion and produce 4,800 megawatts of power. The plant, to be built by Moscow-based Rosatom Corp. and ZAO Atomstroyexport, will be ready in six years, Erdogan said on Jan. 13.
One of the focal points of Erdogan’s election campaign was a project to build a new canal to divert tankers from the Bosphorus, expected to cost more than $20 billion. Labeling it the “crazy project” in April last year, he pledged to complete the planning stage within two years and deliver by 2023.
Delays on Grids
Power grid sales were delayed after bidders failed to make payments, an official at the asset sales agency in Ankara said by phone on Feb. 23 on the condition of anonymity, citing government rules.
Offerings of grids located in areas including the resort city of Antalya and the European side of Istanbul were cancelled, the official said. The agency is continuing talks with companies that submitted lower bids for grids on Istanbul’s Asian side, the southern city of Adana and the eastern Van and Dicle regions, he said.
Enerjisa Enerji Uretim AS, the Turkish electricity provider owned by Vienna-based Verbund AG (VER) and Haci Omer Sabanci Holding AS (SAHOL) in Istanbul, dropped its bid for the power grid on Istanbul’s Asian side “due to the ongoing economic and financial crisis in Europe,” the company said in an e-mailed statement on Dec. 30.
Turkey will find it difficult to finance some of its more costly projects, said Simon Daws, executive director of project finance loan syndications for Europe, the Middle East and Africa at WestLB AG in London.
“The reason why deals are taking so long is that the projects are ambitious,” Daws said in a telephone interview on Feb. 17. “They are looking for long-term tenors and large amounts and in the current economic climate that does not appeal to everyone.”
Astaldi expects to complete the first phase of financing for the highway in the third quarter, the company official said by telephone from Rome yesterday on the condition of anonymity because the details are private. Mehmet Cosan, chief financial officer of Otoyol A.S., the Ankara-based company formed to lead the highway project, didn’t respond to phone calls and an e- mail.
“In Turkey, people are really not that interested in investing very long term, partly because there is abundant liquidity, but it’s all short term,” Mert Yildiz, an economist at Renaissance Capital Ltd. in London, said by telephone on Feb. 23. “It’s quite difficult right now for European banks or any investor to find credit for the next 10 years, which is what you need to actually bid for a bridge. And it’s going to take years for it to be completed.”
Turkey’s $735 billion economy is the eighth biggest in Europe and about half the size of Russia’s. The budget deficit shrank to 1.4 percent of GDP last year from 3.6 percent in 2010, Simsek said on Jan. 16. The government targets a deficit of 1.5 percent for 2012, according to a medium-term economic program published on Oct. 13.
“I don’t think Erdogan would go out and try to borrow $10 billion on the bond markets just to start these projects,” Yildiz said. “Erdogan knows the dangers of fiscal expansion.”
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