Looking for a Fresh Locomotive for Growth

Economic Contraction

Looking for a Fresh Locomotive for Growth

In October 2008, the columnist Murat Yetkin compared Prime Minister Erdogan to a man with the flu, wandering naked in the snow and shouting he was fine. Even in late November, the Minister of Finance, Kemal Unakitan, was arguing that as Turkey had been through destructive crises in the past, it would be “immune” to this one.

Such arguments fly in the face of the facts. During the summer, the Turkish economy showed signs of leveling off, with GNP in the third quarter only 0.5% above a year earlier, but since September it has been in near contraction. The Istanbul Stock Exchange index has fallen in dollar terms by two thirds over the past year. Turkey has, in other words, moved in parallel with the world economy – with all the questions and anxieties this raises.

One sensitive indicator of the trend has been consumption of electricity. In the second quarter of 2008, this was running 6.5% above a year earlier. In the third quarter, the increase was down to 3.8%. In October and November, it was 3.2% below, and in December 6.5% below.

Manufacturing activity has been showing a similar, if even less reassuring pattern, with activity in the third quarter of 2008 1.3% below that in 2007, in October down 7.2% and in November down 13.9%.

How could it be otherwise? Steel companies have cut their output. Vehicle factories have been laying off staff as, after a strong start in the year, production in October fell to 81,463 vehicles, 22% down on a year earlier. White and brown goods companies have been cutting shifts, closing plants for weeks at a time, and slashing personnel levels.

It would be some comfort if this were only the result of a slowdown in exports and the domestic market had remained strong, but such is not the case. Indeed, throughout the summer and early autumn, exports were running at a healthy one-third higher than a year earlier. Only in October and November have they begun to drop, but the drop is severe, with the $8.7 billion of exports this November 23.5% down on November 2007. The increasingly anxious European consumer is no longer looking for the vehicles, televisions, washing machines and dishwashers which form the backbone of Turkish exports.

With export markets taking about one-sixth of Turkey’s production, the dark clouds looming over these markets is a serious problem for manufacturers.

However, just as the export figures tell us of a slowdown in foreign demand, so Turkey’s import figures confirm how importers have cut back their orders since October as the situation at home begins to bite. Indeed, in November imports too were 24% down on a year earlier.

The signs of the crisis are everywhere. The main streets have started their sales three weeks before the New Year. The shopping centres are largely empty, causing some such as Istinye Park to launch help-their-tenant packages. Istanbul’s infamous traffic has become more manageable as less people feel they can afford to take out their cars.

All this is spilling through into unemployment. Akbank laid off 1,400 people in November. One textile company, Aksu, is laying off 250-300 people, while Sonmez Iplik has closed its doors. One of the two cement units at both Afyon and Eskisehir’s cement plants has been shut down, and Viking packaging has lain off 10% of its staff. Toros has stopped its fertilizer operations, Tofas has delayed production of an electric car, the Fiorino, and orders for 160 ships for Tuzla ship yards been cancelled.

In Izmir, the organized industrial zone says that in the past six weeks 17 firms have closed down and 3.500 jobs been lost. All in all, job losses to early December total 100,000, according to Ergun Atalay, the Financial General Secretary of the Turk Is labour confederation.

Far from offering wage increases, many companies are telling their employees that the best they can hope is still to have a job. Many people are changing their expectations: one waitress told me she had been a development engineer in Vestel before taking, happily, her current post.

It is also affecting project financing and privatization. Companies approaching banks for financing for new power plants are reporting to be facing a tough time, as are those who are seeking to fund bids they have made for state assets. The deal that Vestel was developing with Whirlpool to set up a 50:50 joint venture for white goods in Europe is only one of many which are now on hold.

The Privatisation Administration had planned to sell the National Lottery and various highways. It is now considering delaying these until financial markets firm up, though argues there is still interest in the electricity distribution companies whose privatisation was expected to earn Turkey $5-10 billion. To date, the main victim of the downturn in financial markets appears to be the Ankara municipality: it had received a bid of an ambitious $1.6 billion for its natural gas distribution company, but the winner – a consortium led by Global Invest – has not yet been able to arrange the required funding: the deadline given to it of December 15, 2008 has now been extended by three months.

By comparison with a number of countries on the periphery of Europe, Turkey’s financial sector has so far been relatively lightly hit by the sub-prime and related crises in the US. Turkish banks had made limited use of what financier George Soros calls the “alphabet soup of synthetic financial instruments … CDOs, CDO squared, CDSs, ABXs, CMBXs etc”. They have relatively limited exposures to the mortgage markets. But some do depend heavily on building up the liability side of their balance sheet with syndicated loans – and then using these to increase their loan portfolio.

Garanti Bankasi was able to arrange a $575 million syndication in November, representing an 80% roll over of a $700 million two-year syndication arranged in November 2006, though at a 2% spread over LIBOR compared with about one-quarter of this two years earlier. About the same time, Turk Ekonomi Bankasi rolled over a similar share of a €240 million syndication, at similar financial terms. Since then, YapiKredi, which had raised a $1 bn credit in September at 0.75% over Libor, deferred rolling over a $700 million credit to Spring 2009, arguing it had less needs. Mr Unakitan says that the banks have around $14 billion of syndications coming due by end-2009. Bankers interviewed for the Guide believe that, while US and European banks may have limited funds for Turkey, Middle Eastern banks still need to lend. The net result is that Turkey’s banks should be able to roll over 60-80% of their syndications – and then lend against these. The missing sums are equivalent to around 2% of total bank credits outstanding on December 2, 2008.

“The overall ratio is not frightening, but we are going to see Turkish banks cutting back on their lending, and this will aggravate the forces leading to a contraction in the economy,” says one economist.

Before the crisis, Turkey had been looking for 5% growth in 2008 and in June set a similar target for 2009. In November, the Central Bank reduced its estimate for 2008 to 3.3%. Its forecast of 2009 growth was then reduced to 2.7%, a figure above the OECD’s forecast of 1.6%, Morgan Stanley’s 1.9%, and the Economist’s 1.7%. Given all that is happening, any growth in 2009 would seem a major success.

For its part, the International Monetary Fund has apparently been urging Turkey to settle for zero growth in 2009. This request appears to have been one of the major sticking points in negotiations between the IMF and Turkish government for an 18-month $25 billion stand-by agreement.

For Arzuhan Dogan Yalcindag, Chairman of the employers’ group, Tusiad, such an agreement is essential. For her, whatever the country, the sector or the company, the international crisis represents a serious threat. She welcomed the way the Government had broadened rediscount possibilities for exporters and reduced the compulsory deposits on foreign credits. But she argued that an agreement with the IMF was necessary to remove uncertainty, ensure policy predictability and increase the country’s credibility in international markets. She also said that, with Turkey due to repay $50 billion of debt in 2009, the agreement would win Turkey breathing space.

The prospects for the New Year are thus mixed. Turkey had gross international reserves at the end of September of $117 bn, equivalent to a healthy seven months of imports. Inflation is in the range of 10-11%, well above the 4% target which it had set in October 2007, but showing no signs of accelerating. The budget deficit has been kept under control and the current account deficit, though large, has to date proved sustainable.

The autumn’s downturn has seen the Turkish lira weaken by 20-25% against the US$ and the Euro, corrections which give Turkish exporters a more reasonable return on their sales abroad. But what is missing is the locomotive for growth.

In the current decade, the Turkish economy has benefited from the take off of automotive and consumer durable exports; from surges of foreign investment, not least in real estate; from a boom in interest in energy; and from the continuing strong performance of Turkish contractors abroad. Now, the outlook is more somber. It is a tough world outside Turkey’s borders. Just as Turkey this autumn has followed the world downwards, so it now has to hunker down and use this lean period to carry through the market and tax reforms which business leaders like Guler Sabanci have long been urging as essential for Turkey’s long-term competitiveness.

David Tonge, Managing Director of IBS Research & Consultancy, which assists energy and other companies build their business in Turkey and Central Asia. (www.ibsresearch.com)