Third Bridge Reminder Of Opportunities Amidst Turmoil
BMI View : Despite a difficult short-term economic and political outlook impacting project financing, the long-term picture for Turkey's infrastructure market remains positive. Good existing assets undergoing privatisation, a strong project pipeline and good fundamentals means Turkey will remain one of our top European markets for infrastructure opportunities.
Part of one of the largest infrastructure projects currently underway in Turkey has been awarded to Hyundai E&C and their partner SK Engineering and Construction, who are to complete the 2.16km third bridge over the Bosphorus Strait in Istanbul as subcontractors . The bridge is p art of the US$2.5bn North Marmara Highway being built by a consortium of ?çta? ?n?aat Sanayi Ticaret and Italy's Astaldi. Ground was broken on the initial stages of the bridge in May and the remaining work, worth US$697mn, will now run until 2016. Hyundai E&C said it holds a 60% stake in the project, or US$418mn, while SK E&C holds the rest. The bridge itself is indicative of the continued opportunit ies available in Turkey's infrastructure sector, which despite recent political unrest in the country we still believe to be some of the most attractive assets in Europe.
The country has embarked upon a large privatisation drive; roads, railways, hospitals, power stations are amongst the assets which have so far been sold off to the private sector. In addition to these existing assets, there are numerous high-profile projects which are going to require private backing to get off the ground. Istanbul's 150mn passenger third airport, the extension of Turkey's high-speed network and the US$35bn Sino-Turkish line are just some of the projects in the pipeline or underway. As such, Turkey's offerings to investors over the medium to long-term time horizon remain strong.
In our Risk/Reward Ratings (which quantify the level of risks and rewards in the industry across all our markets) it is Russia and Turkey which offer the greatest Industry Rewards in Central and Eastern Europe. However, though risks bring both countries' score down, they are far more prevalent and engrained in Russia (where we see political risk and corruption as severe deterrents of private capital inflows); whereas Turkey has had much more success in opening itself up to private investment.
|Strong Growth Picture On Good Fundamentals|
|Turkey Construction Industry Value (TRYbn) and Sector Real Growth (% Year-on-Year)|
Whilst investor confidence has undoubtedly been shaken by the protests, given that Turkey still presents an attractive medium to long-term growth story, we remain positive on the market. Turkey's political unrest started in June and has since expanded in scale and scope, although now it has taken a more peaceful tone. Even at its height though, anger was directed at ruling AKP Party and its leader Prime Minister Recep Tayyip Erdogan for their increasingly authoritarian and Islamist policies, rather than their economic record. It should however be noted that big public projects, like the third Bosporus Bridge, were also targeted as icons of government wastefulness and arrogance.
The unrest came just after the country achieved its second investment grade rating, opening the door to the investors which had been looking to Turkey's burgeoning infrastructure sector for good long-term yields in a growth market. Because of the strength of Turkey's fundamentals we do not believe that the infrastructure sector will be much affected by the protests as they are not expected to lead to any policy or political change prior to the 2015 elections. Indeed, we have still registered interest from the financial sector for investing in Turkey's infrastructure, although we could see some short-term momentum fade due to the political unrest, especially in light of the hostility expressed towards infrastructure mega-projects.
That short-term momentum loss will likely be off the back of challenging macro conditions, which are set to further exacerbate one of the major downside risks to our view on Turkey which has been project financing. The awarding of investment grade status to Turkey should have helped to remedy this problem. However, the protests coupled with the country's excessive reliance on external financing saw Turkey hit particularly hard by the recent emerging market rout brought about by the prospect of the US Federal Reserve ending its quantitative easing policy. As such, the lira has heavily depreciated, which BMI's Country Risk now believe will see the Turkish Central Bank stepping in to address by raising interest rates. Consequently, borrowing costs are set to increase which will affect those parties looking to raise capital in the domestic market to invest in the country's infrastructure plans. We expect that the if interest rate hike materialises, it will mean the next twelve months are to prove more challenging for Turkish banks, which are likely to see funding costs rise as tightening global liquidity and domestic unrest unseat investor confidence in the economy.