Lira Fate Tied to Real Assets as Hot Money Flees: Turkey Credit

Turkish Lira
Turkish 100 lira bank notes are stacked in this arranged photograph in Istanbul, Turkey. Photographer: Kerem Uzel/Bloomberg

Foreign demand for real assets may provide some relief for Turkey as it seeks to narrow the second-largest current-account deficit in developing nations amid a graft probe that is sucking cash from financial markets.

Foreign direct investment this year will at least match the 2013 level of $13.7 billion, or 1.7 percent of gross domestic product, according to Ilker Ayci, head of the Ankara-based Investment Support & Promotion Agency of Turkey, or Ispat. Turkey’s current-account deficit was 7.2 percent of GDP in the third quarter.

Investment in Turkish companies and real estate may help buoy the nation’s capital markets after foreigners sold a net $3 billion of bonds and stocks this year. The lira lost 2.3 percent in 2014 and two-year note yields climbed to the highest since 2011 after a corruption investigation targeting the government of Recep Tayyip Erdogan erupted in December.

“In Turkey, where there is a savings deficit, FDI will help finance about one third of its current-account deficit,” Yarkin Cebeci, an Istanbul-based economist at JPMorgan Chase & Co., said in e-mailed comments yesterday. “If the political stability is maintained in Turkey, FDI flows will rise, especially in view of the fact that a depreciated lira caused asset prices to come to suitable levels.”

FDI to Turkey has dropped from more than $20 billion in 2006 and 2007, and the country will probably need more than $5 billion a month to service its 2014 current-account deficit, according to estimates compiled by Bloomberg.

3M, Sumitomo

About $9.5 billion of the inflows in 2013 were so-called greenfield investments that create new assets rather than acquisitions of existing projects and companies, Ayci told reporters March 25. 3M Co., which started a $500 million plant near Istanbul, and Sumitomo Rubber Industries Ltd., building a tire plant with a local partner for $516 million, are among companies investing in Turkey.

Qatar Islamic Bank started negotiations to buy a stake at Asya Katilim Bankasi AS, the Istanbul-based sharia-compliant lender also known as Bank Asya said in a filing to Borsa Istanbul yesterday. Canada’s Public Sector Pension Investment Board bought 45 percent of Polat Enerji Sanayi & Ticaret AS, a Turkish wind power operator, in January. Lesaffre et Cie SA bought yeast maker Dosu Maya Mayacilik AS for $220 million in the same month.

Ispat is “in close contact with Volkswagen” to have the German carmaker build a production plant in Turkey, Ayci said. “The company will sooner or later invest here.”

Political Crisis

Turkey’s current-account deficit more than doubled to $8.3 billion in December from a month earlier, taking last year’s tally to $65 billion, equivalent to about 7.9 percent of GDP, based on government estimates of the size of the economy. The ratio was 6.1 percent in 2012, data compiled by Bloomberg show.

Its third-quarter reading of 7.2 percent compares with a 9 percent deficit in Ukraine, a 6.4 percent gap in South Africa and 3.6 percent in Brazil, according to data compiled by Bloomberg. China has a surplus of 2 percent while Russia’s is 1.8 percent.

Turkey’s political crisis, which began on Dec. 17 when the corruption investigation became public, peaked in the currency market on Jan. 27 as the lira sank to a record 2.39 per dollar. The currency has gained 4.5 percent since that day and was 0.3 percent stronger at 2.1855 as of 5:27 p.m. in Istanbul.

‘Maturing Democracy’

The $3 billion of outflows from Turkey’s bond and equity markets this year compares with $5.5 billion from Russia, according to EPFR Global, a Cambridge, Massachusetts-based company that tracks fund flows.

Investors may be seeing through the turmoil to Turkey’s growing population and attractive demographics, according to Bora Tamer Yilmaz, an economist at Istanbul-based Ziraat Investment.

Turkey’s 80 million people have an average age below 30. Its economy will expand at 2.3 percent this year after a 3.9 percent gain in 2013, according to median economist estimates compiled by Bloomberg.

“Long-term prospects look good for Turkey,” Yilmaz said by e-mail yesterday. The nation has a “high share of working-age population combined with increasing levels of education,” he said. “Investors may well think that political jitters are just an integral part of a maturing democracy.”

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