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Turkish devaluation to fuel growth

27 August 2014

The devaluation of the lira has not yet produced a major benefit to the economy but the effect appears only to have been delayed by a few months, finds Nicholas Clayton

Read more: devaluation lira M&A FDI

The depreciation of the Turkish lira over the past two years has driven down prices for foreign investors, but with the market still adjusting to changing risk perceptions and financing conditions, Turkey has yet to see a major uptick in foreign direct investment (FDI).

With a backlog of delayed deals created by the volatile first half of 2014, analysts and bankers say the country is likely to see a flurry of cross-border activity after the August 10 presidential elections.

On January 24, the lira dropped to 2.34 to the dollar — 24% below its value at the start of 2013. The Central Bank of the Republic of Turkey responded by raising interest rates by 550 basis points and the currency has since largely stabilised, recovering to 2.09 as Global Investor/ISF went to press. However, this remains far short of its position on January 1 2013 of 1.78 to the dollar.

Turkey’s real GDP rose 4.3% in the first quarter of 2014 on a year-on-year basis, beating the consensus expectation of 4.0% growth. This was driven largely by 11.4% growth in exports and a boost in public spending, on the outset of an election year. The Turkish trade deficit also narrowed in April to $7.2bn, a 30.3% year-on-year drop.

But beyond the broad numbers, analysts point to several weaknesses for deal-makers. Although in the first half of the year there was an frise in M&A deal volume, overall M&A value dropped 29.9% in the first half of 2014 compared with the same period in 2013, according to data compiled by Mergermarket.

In addition, more than half the country’s $7.7bn deal value consisted of the privatisations of three thermal plants, a marina and a port, from which the government reaped $4.9bn, and on July 15, the government finalised the sale of a 10-year tender to operate the national lottery, Milli Piyango, for $2.75bn.

Although several foreign consortia were reportedly interested in bidding on these assets earlier in the process, in the end none of them attracted bids from foreign groups. This reflects a wider drop in foreign entries, as a wave of protests and scandals over the past year have chilled the investment climate.

The depreciation of the lira itself was accelerated by the announcement of a high-level corruption inquiry in December, which implicated several members of the ruling elite, including the CEO of Turkey’s state-owned Halk Bank. Already suffering from the tapering of quantitative easing (QE), the lira took a nosedive.

Concerns about political stability had already been piqued when the country saw a wave of anti-government protests beginning last May centred around Istanbul’s Gezi Park. Coupled with escalating conflicts in neighbouring markets, these events have caused investors to delay deals and wait for a sign of stability.

Overall, cross-border M&A value in Turkey dropped 28.5% in the first half of 2014 compared to same period last year, according to Mergermarket data. One Istanbul-based banker says while he has not seen deals completely terminated, the succession of negative events has led the boards of his corporate clients to "keep pressing the pause button", leading to a bottleneck of stalled financings and acquisitions.

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