Turkish Infrastructure: At The Cross-Roads
The allure of Turkey as an investment hub is growing stronger. Its attractive traits are easily quantifiable, especially for Western investors seeking higher yields: strong real economic growth (4.4% in 2012) compared to a flat Eurozone; a young and growing population; and a comparatively contained debt-to-GDP ratio of 42%. In fact, for many crisis-ridden European countries the varieties of Turkey's economic fundamentals are enviable.
Indeed, this macro context also translates well when looking more specifically at the infrastructure sector. Turkey's status as one of the most dynamic emerging economies globally is creating a strong demand for infrastructure, both from sponsors and developers domestically, but also foreign private equity and financiers; with both sides seeing potential for first-mover advantage and strong long-term returns.
We see an attractive pipeline ranging from roads and airports, to gas stations and hospitals. According to our key projects database there is currently US$100bn worth of projects planned over the coming years. In fact, the Turkish government has embarked on an extensive privatisation scheme aiming to modernise and expand its underdeveloped infrastructure fleet via a continued support for the public private partnership (PPP) model.
|In Need Of New Long-Term Capital|
|Construction Industry Value (US$bn), Real Growth (%)|
However, hitherto we have highlighted that the asset-liabilities mismatch in the domestic financial sector is a crucial impediment to the development of the Turkish project finance market. The government has indeed to a certain extent harnessed and promoted PPPs in the economic and social infrastructure spheres, yet while projects have taken off, financing and regulatory issues remains prohibitive and onerous.
Still, following on from our bullish Turkish assets view - which was reinforced by Fitch's move to ascribe investment grade status to Turkey - we see the possibility of full investment grade status as a watershed moment for the Turkish PPP and wider project finance market. Hence, when Turkey is officially deemed investment grade by the ratings agencies, which BMI believes will happen in 2013, then we see developments for project finance moving at a very rapid pace, with institutional investors rushing to enter the market.
This will in turn enable the already strong pipeline of projects to become even stronger and we would anticipate a rapid take up of projects and commitments from investors. We expect Canadian, Japanese and European pension funds, and infrastructure funds to spearhead new capital inflows into infrastructure projects. Likewise, new funds can be raised via infrastructure bonds and targeted Turkey-focussed infrastructure mutual funds. These are all necessary steps for Turkey to harness its economic and geographically strategic position, at the cross roads between East and West.