Politics, Trade and Growth in Turkey

David Nadel

Mark Rayner and I recently met with 10 companies in Istanbul. We attended HSBC's 4th annual Turkish conference, which interestingly had dozens of companies, but just 50 investors; HSBC also arranged a dinner with Mr. Ali Babacan, Turkey's Deputy Prime Minister and Economic Minister. Istanbul is a lively, strategic city, with its bridges connecting Asia to Europe over the pretty Bosphorus. As the financial center, wealth is permeable; indeed it has more billionaires than any city other than Moscow, New York and London. Istanbul houses 14 million of Turkey's 73 million inhabitants. 

Turkey's demographics make it one of the more important countries of the future: it is young and relatively unlevered.  Compared to China, the U.S., and, of course, Western Europe, Turkey is younger by a long shot than all of them, with a median age of just 26, more than 25% of its population below the age of 15, and just 6% over 65.¹ Household debt is running at just 25% of disposable income, compared to 100%+ for the U.S. and U.K., and mortgage debt comprises just 5% of GDP.²

With these healthy ingredients laying the groundwork for consumption-driven growth, GDP growth has averaged 4.4% (including a 4.7% contraction last year) in the 8 years since the Erdogan administration was elected, making Turkey among the world's fastest-growing major countries during this period. In 10 years, I believe Turkey's GDP will surpass those of some European countries, and its GDP ranking will advance from the current #16, perhaps to the top 10. GDP per capita is $8.8k, or $13.6k on a purchasing-power parity basis.³

Turkey has recovered quickly from the global recession. Long victimized by emerging market boom-and-bust cycles, which were accentuated by risky government policies and an unsound banking system, Turkey cleaned up its act and its bank's balance sheets after the 2001 crisis, which helped the country to perform remarkably well through the recent global financial crisis. Turkey did not have to rescue a single bank in this crisis, in sharp contrast to neighboring Greece (not to mention many G-7 members, including the U.S.). It is declining an IMF credit line worth as much as $40b, and its own modest fiscal deficit is well below many EU countries. Turkey's government debt is running around 50% of GDP, reflecting Turkey's fiscal restraint versus Greece (125%), Italy (115%), or even the US or the average of the European countries. Nowadays, Turks actually debate if EU membership is worth it.⁴

Are these Turkey's true colors, or just an aberration? There are still plenty of structural challenges. Inflation has rebounded to 9.5% in the past few months, after spending a year at just 5% until last Fall.⁵ Unemployment is running around 14%.⁶ and, perhaps most worryingly, savings rates are low, so Turks are dependent on sometimes-fickle foreign investment, which can exacerbate the extremes of business cycles. Foreign investors own 70% of Turkey's benchmark ISE-100 stock-market index (albeit with just 20% of the trading volume; clearly the locals enjoy trading!).⁷

Political risk is an overhang issue for some foreign investors, including controversy surrounding term limits, and (less relevantly) the political hot-potato of whether to label 1915's killings of Armenians as genocide. In general, some bears claim the Erdogan government is cozying up too much to Islamists, and worry that the military (whose Mustafa Ataturk founded modern Turkey, and which has long been a dominant force, pushing out 4 governments since 1960) has recently become too passive in allowing this influence to go unchecked.

The truth is probably somewhat more nuanced: Turks are in theory predominantly Muslim, and indeed only 40% of the population drinks alcohol, but Western-style profit-maximizing capitalism is embraced, mosques are mostly empty, and all but perhaps the rural elderly aren't ready to give up the social freedoms the society has won in the last generation or two.⁸ Not one to eschew capitalism, the Erdogan government has privatized $30 billion of government assets during its 8 years in power so far. Exports have tripled to more than $100 billion during this time, fueled by trade with the Middle East. Still, Turkey has a persistent trade deficit.⁹

Turkey is actively courting trade with Africa, a fact that became clear when the country's Deputy Prime Minister Ali Babacan gave a speech to the HSBC conference and then joined the dinner table at which Mark and I sat. After establishing a flurry of diplomatic consulates, Turkey now covers 95% of Africa's population. State-aided Turkish Airlines (the 4th largest European carrier by passenger traffic) has set up an extensive route network with Africa. While the Deputy Prime Minister emphasized Turkey's goodwill projects (school-building, agricultural teaching, etc), its aims most likely are also practical: Turkey is dependent on importation for raw materials and commodities, and like the Chinese and the Indians, they need Africa.

¹ Source: Bloomberg, HSBC
² Source: HSBC
³ Source: HSBC
⁴ Source: Barron's
⁵ Source: Bloomberg
⁶ Source: HSBC
⁷ Source: HSBC and Akcansa Cimento
⁸ Source: Anadolu Efes Beverage Grp
⁹ Source: HSBC