A Remarkable Economic Turnaround…
As with Brazil, global investors used to joke that “Turkey is the country of the future, and always will be.” Saddled with 80%-plus inflation rates and macroeconomic policy reminiscent of Latin America in the 1970s, Turkey was a poster child for economic instability throughout much of the 1990s. It was remarkably reliable in only one (unflattering) way. Sure as day follows night, you could always count on Turkey’s economy — and stock market — to blow up on a regular basis.
That all has changed over the last decade. Since its last serious, domestically induced economic crisis in 2001, Turkey has been run by a largely pro-business, single-party government headed by Prime Minister Recep Tayyip Erdogan. And the ensuing political and economic stability has altered the country’s investment landscape beyond recognition.
On the political front, Erdogan’s neo-Islamist Justice and Development party has a publicly stated goal of joining the European Union. Although more cosmopolitan Turks are less than enamored with the party’s political leanings, Erdogan’s reforms have reversed decades of corruption, economic instability and a disturbing authoritarian streak in government. And on the economic front, IMF-backed reforms implemented after the 2001 financial crisis introduced wide-ranging structural changes, including cuts in government spending, acceleration of privatization and introduction of corporate tax cuts.
The results of these reforms have been impressive. After decades of double-digit percentage increases, core inflation in Turkey hovers around 5% — the lowest levels since 1970 and close to the IMF-agreed target of 4%. According to investment bank Morgan Stanley, Turkish labor productivity has risen by 42.5% between 2002 and 2008. Business investment spending has jumped by 120%. Corporate profitability has soared. Even more remarkable is that Turkey’s record growth has been achieved against the head wind of tight monetary policy, with real interest rates substantially higher than in other OECD countries.
Over the past few years, Turkey also has enjoyed an unprecedented inflow of foreign direct investment (FDI). The $10 billion that poured in during 2005 was more than during all of the years of the previous decade combined. This doubled to $22.1 billion by 2007 before dropping back to $17.7 billion in 2008. Much of the FDI boom reflects foreign investors’ optimism that Turkey is set for a sustained period of economic growth and structural reform. Increased FDI and foreign ownership also generally mean more effective corporate governance, better transparency, and improved implementation of existing laws.
In many ways, Turkey weathered the credit crunch better than other emerging economies. Partly thanks to tough regulation, not a single Turkish bank has gone under. Unlike many Western banks, they have few toxic assets and limited mortgage exposure. By Q4 of 2009, the Turkish economy grew at an annual rate of 6%, as Germany and France, the two largest export markets for Turkey in the eurozone, recovered.
Turkey: A Volatile Ride for Investors…
U.S. retail investors have not been able to invest in the Turkish stock market as a whole until recently, with the iShares MSCI Turkey Invest Mkt Index (TUR) only launched in June 2008. Over the past 12 months, this ETF is up 132.4%.
But as impressive as this one-year chart versus the S&P 500 looks, it masks some stomach-churning volatility, including a close to 20% drop in the market in the last weeks of January and early February. But after enduring another sharp pullback in early March after the news of the arrest of some military officials who plotted a coup back in 2003, the Turkish market is back on track, recently breaking out to new highs.
But therein lies an important lesson if you invest in Turkey. Although it has gotten its macroeconomic act together, Turkey will always test your investment mettle. Strap yourself in, and hang on for the ride.