Demographics and soft landing of the economy fuel optimism on Turkey, HSBC AM says

There are many reasons to be optimistic about the Turkish economy, according to Ercan Güner, head of equity and structured funds Turkey Equity at HSBC Global Asset Management.

“Thanks to an aggressive privatisation program that has reduced state involvement in basic industries, banking, transportation and communication during the last decade, Turkey has recorded a real GDP growth rate of 5.1% per annum since the implementation of the structural economic and political reforms in 2011,” Güner said.

In 2012, the economy has been soft landing towards an expected growth rate of 3% and in 2013, HSBC GAM estimates that the Turkish economy will return to a sustainable annual GDP growth rate of around 5%.

On the back of the continuation of buoyant domestic demand driven by a demographic opportunity window, low levels of corporate and household debt, low level of real interest rates and the government’s recent efforts to tackle the structural current account deficit.

“Moreover, Fitch upgraded Turkey’s sovereign debt credit rating to investment grade at the beginning of November and a similar move is also expected from at least one other international rating agency in the near future, giving Turkey full investment grade status,” he said.

The potential impact of investment grade status could be summarised in the acceleration of capital inflows and M&A transactions, improvement in the financing quality of the Current Account Deficit (CAD), increasing access to cheaper and long-term sources of funds for the corporate sector, higher potential growth rate, upside risks to growth rate forecasts over the coming years and a lower risk premium for the equity market and higher valuations.

The monetary policy of Central Bank of Turkey seems to be moving in the right direction. What do you think?

On the back of strong growth and low interest rates starting in 2009, the Central bank feared Turkey was overheating in 2010. The CBT raised the reserve ratio, draining liquidity from the market. At the same time, strong domestic demand, high reliance of importation of raw and intermediate materials and weakening external demand were the major factors behind the widening current account deficit (CAD) in 2011.

In October 2011, the CBT restored liquidity through a reduction of the reserve ratio but increased interest rates. The aim of the CBT is to have a flexible monetary policy to respond quickly to changing economic and market developments.

Moreover, compared to developed countries, the Turkish banking sector is underpenetrated and growing thanks to low level of corporate and household indebtedness, very well managed banks which includes tight banking regulations that were introduced after the 2001 crisis, credit quality in a good shape and improving and a slow down in credit growth which can be seen as part of macroeconomic rebalancing process.

“In our opinion, a 7% current account deficit (CAD) is sustainable for Turkey with an estimated potential growth rate of 5% per annum. Turkey’s official CAD is overestimated because of unrecorded border trades with neighbouring countries and tourism revenues,” Güner said.

As of October 2012, Turkey’s 12-month rolling CAD declined to $53bn from $77bn in November 2011 thanks partly to slow down in the domestic demand and partly to strong export performance. The diversification of exports away from EU countries to MENA region have led to strong export performance this year in spite of deteriorating economic conditions in the eurozone countries.

“The surge in Turkey’s net gold exports this year, which reached $5bn during the period January-October 2012, has also contributed to decline in CAD to some extent,” he added.

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