On a visit to New York in December 2003, I interviewed Jim Rogers, the renowned investor and ex-colleague of George Soros. Rogers – who, in my view, speaks a lot of sense about macroeconomics – had recently returned from the round-the-world trip on which he based Adventure Capitalist: The Ultimate Road Trip. He and his fiancée Paige Parker had driven through 116 countries, covering 152,000 miles in a custom-built Mercedes 4×4 convertible.
During the interview, in Rogers' impressive home overlooking the Hudson River, the Alabama-born investor rattled off his reasons for being hot or cold about economies that he and Paige had passed through on their travels. I was struck by his positive stance on Turkey and insistence that the EU had been foolish not to admit it as a member.
“Turkey is definitely being excluded because they’re not white enough and because they’re Muslims. [Former French president] Giscard d’Estaing said that didn’t he? That’s absolute insanity. I would beg them to join. Turkey is a very young country, it’s a big country, there are 70 million of them. So there are plenty of people you could sell to and the Turks would love to buy from you. There are plenty of educated Turks.”
Seven years on, it seems Rogers is as right as ever. From a strategic perspective, Turkey is very well-placed between Europe and the Middle East. And investors are increasingly fond of the place. Having faced the humiliation of an IMF bailout in 2000-01, the country was fortunate to have “got its crisis in early”, and reformed and restructured its $710bn economy before the global crisis of 2008-09 struck.
In a recent piece for FT beyondbrics, Mark Mobius, executive chairman of fund manager Templeton, said:
“As a result of comprehensive structure reforms in 2001, Turkey now benefits from a domestic consumption-driven economy, sound fiscal outlook (low government and private debt), solid banking system, secular disinflation trend and favourable demographics.”
A 12% capital adequacy ratio imposed by the bank regulator the BRSA – far more stringent than anything in the UK or US market – ensured the country’s banks were prudent and well-capitalised ahead of the crisis. They are now among the best capitalized in the world, with low levels of non-performing loans and high profitability. The banks are particularly sought after by emerging market investors. Mark Mobius says:
"The Turkish banks are very appealing …. Turkey still remains an under-banked market by global standards. The low penetration in almost all areas means that there is immense growth potential."
And in a recent article in Trust magazine, Baillie Gifford's emerging markets specialist Andrew Stobart said:
“Banking is a relatively consolidated sector and pretty under-penetrated; only one in ten Turks has a bank account. Given the current low ratio of credit to GDP, there is scope for strong growth in lending in the foreseeable future.”
One consequence of Turkey's post-2001 fiscal rectitude is that it has been relatively unscathed by the global financial crisis. Even though GDP fell by 4.7% in 2009, it is expected to rebound by 5.2% in 2010. Thanks to continued strong domestic demand, economists’ predict the Eurasian country will grow its GDP by a steady 4-5% for the foreseeable future.
The Istanbul stock market has been among the world's best-performing over the past 18 months. The ISE 100 index peaked at 60,737 on July 30. Even though it dipped by 3%-4% to 58,690 in mid-August, following the government’s decision to delay the fiscal reforms required to cut the budget deficit until next year, equity investors are not losing faith in Turkey.
However there are possible risks ahead. In a recent analysis article, Reuters warned:
"With foreign investors holding an estimated 70% of Turkey’s stock market, the ingredients for a reversal are there …. Credit ratings agencies also expressed concern, fuelling worry that they may hold off on a long-awaited upgrade to investment grade, a status that tends to bring in a bigger pool of international investors."
And a Bloomberg article claimed that the recent remarks from Turkish industry minister Nihan Ergun that a self imposed fiscal rule no longer had to be ahered to, were significant. In the article, Inan Demir, an economist at Finansbank in Istanbul said Ergun's remarks clearly demonstrated "that the fiscal rule does not have wholehearted backing of the government, and this lack of full commitment is obviously worrying for the prospects of approval and eventual implementation of the rule."
Further reading on the opportunities and risk for emerging markets:
- Viewpoint: Mark Mobius Emerging Markets: Reflecting on 2008 and looking forward to 2009
- Viewpoint: Justin Yifu Lin Coping with the Crisis: Risks, Options, and Priorities for Developing Countries
- Is the West mispricing emerging market assets? by Anthony Harrington [blog post]
Tags: banking , capital adequacy , emerging markets , EU , fund management , IMF , regulation