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
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
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,
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
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.
Things do appear to be turning around, however.
Turkey’s capital markets have largely rebounded,
with the main Istanbul stock index reaching its highest level
in July since just before the Gezi Park protests last year.
Should the ruling party win the presidential election as
expected, analysts say there could be a busy fourth quarter
full of deal-closings that have long been on hold.
Ahmet Kesli, founding partner of Group Law Firm, says despite
recent events, foreign firms would be wise to enter Turkey
sooner rather than later. With a steadily expanding economy, a
median population age of 30.4 years and rapidly increasing
consumption, nearly all sectors in the country are primed for
growth, Kesli says.
An increasingly popular way for foreign firms to invest in
Turkey, he says, has been to partner local firms bidding on
infrastructure projects and other public private partnerships
(PPPs). Many international firms have chosen to avoid the risk
of the tender processes and have instead become involved as
lenders or equity partners in infrastructure PPPs after the
winner has been announced.
Last month, Turkish deputy prime minister Ali Babacan announced
that the country was hoping to attract $700bn in infrastructure
investment by 2023, with $200bn of that garnered through the
country’s PPP model. According to Development
Ministry data cited by Hurriyet Daily News, Turkey has signed
167 project contracts worth a total of $88bn since the
government passed its first PPP legislation in 1994.
However, it has been only in the past few years that the
Turkish government has used PPPs as a means of attracting
capital for mega-projects. Last year, the government concluded
a deal with Italian construction company Astaldi to build the
$6.9bn Gebze-Izmir toll road in a consortium with five Turkish
It is also expected to reach financial close later this year
with a Turkish construction consortium on the $29bn PPP to
build and operate Istanbul’s Third Airport for 25
Kesli says Turkey is likely to see the financial close for the
first of its hospital PPPs shortly after the presidential
elections. Turkey is aiming to add 28,000 beds to its national
hospital capacity through PPP tenders, which are currently at
various levels of completion. All and all, the hospital
projects are expected to require about $14bn in investment and
include government-guaranteed bed fees to the operators of the
Another Turkish sector all but guaranteed to grow is energy.
Turkey’s energy demand is expected to rise about
7% annually through 2020 and prices are already high. In the
first quarter of 2014, Turkey had the highest consumer energy
prices among OECD countries, with a price index 16% higher than
the OECD average.
Although the largest electricity generation assets in the
Privatisation Authority’s portfolio have already
been sold, it plans to launch tender processes for its
remaining thermal and hydro plants before the end of 2014,
according to a source close to the authority.
Speaking at the Turkey Private Equity & Venture Capital
Summit in June, Nadia Cansun, a partner at Bezen &
Partners, said investments in greenfield renewables in the
country were highly attractive. But with untested regulations
and a bottleneck of projects awaiting approval, it may be 12 to
15 months before the ideal time to invest in solar power in
Across the renewable space, she added, foreign investors
thinking of entering would need to be comfortable with the
risks attached to being a pioneer in the sector.
But beyond the lowered barriers to entry for tenders and
privatisations, the depreciation of the lira over the past year
may also make private sector acquisitions more feasible. In
addition to favourable exchange rates bringing down asking
prices, many Turkish companies may be more amenable to buyout
offers now that they have seen their debt ratios climb after
years of borrowing in foreign currencies.
Most active Turkish companies have some form of foreign
currency denominated debt on the books.
However, it is unclear just how much dollar and
euro-denominated debt is outstanding. Emre Deliveli, an
economics correspondent for Hurriyet Daily News, says that in
2012, Turkish companies had easy access to dollar financing at
4%, while lira debt was often nominally around three times as
expensive at 11% or above. When the lira hit its nadir in
January, those companies were suddenly looking at debt burdens
that were at least 20% higher than previously.
But the Istanbul-based banker says Turkish banks have remained
liquid and domestic financing continues to be relatively easy
to obtain. Therefore, he says he sees no obvious cheap deals in
the market, provided the lira remains stable.
The lira’s stability, however, is difficult to
bank on. "The lira is totally dependent on the global
environment," Deliveli says, noting that if current conditions
persist, "we will not see the same pre-crisis liquidity in
Turkey again for another 10 years".
Throughout the summer, the central bank has made modest cuts to
interest rates, dropping the one-week repo rate from 8.75% to
8.25% on July 17. Meanwhile, inflation hovers just above 9%. In
a statement at the time of the cut, the bank said the adverse
exchange rate issues were "gradually tapering off" and pointed
to rising food prices as the main factor delaying the decline
The bank added that it expected the current account deficit to
continue to improve. But developments in the region could still
pose problems. The worsening conflict in Iraq in particular is
already putting a dent in the recovery of Turkish exports. Iraq
is Turkey’s second-largest export market, worth
$12bn annually, and the Turkish Exporters’
Assembly announced on July 15 that exports to the country had
already declined 30% over the year.
Deliveli says the central bank will continue to make small
stabilising adjustments, but the full end to QE expected in
October will still make a mark