Lira fate tied to real assets demand as hot money exits Turkey

A money changer counts Turkish lira bills at a currency exchange office in Istanbul. Turkey’s political crisis, which began on December 17 when the corruption investigation became public, peaked in the currency market on January 27 as the lira sank to a record 2.39 per dollar. The currency has gained 4.4% since that day.

Bloomberg

Istanbul

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 $13.7bn, or 1.7% 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% 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 $3bn of bonds and stocks this year. The lira lost 2.3% 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 on Wednesday. “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 $20bn in 2006 and 2007, and the country will probably need more than $5bn a month to service its 2014 current-account deficit, according to estimates compiled by Bloomberg.

About $9.5bn 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 $500mn plant near Istanbul, and Sumitomo Rubber Industries Ltd, building a tire plant with a local partner for $516mn, are among companies investing in Turkey.

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

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

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

Turkey’s political crisis, which began on December 17 when the corruption investigation became public, peaked in the currency market on January 27 as the lira sank to a record 2.39 per dollar. The currency has gained 4.4% since that day.

The $3bn of outflows from Turkey’s bond and equity markets this year compares with $5.5bn 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 80mn people have an average age below 30. Its economy will expand at 2.3% this year after a 3.9% 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.”