Turkey seeks fresh credit with sovereign wealth fund
Facing a falling currency, rising inflation and low foreign investment, Turkey has shifted its shares in flagship state companies to a sovereign wealth fund in an effort to access new lines of credit and try to revive the flagging economy with infrastructure mega-projects.
Lack of oversight of the new fund, however, has led to concerns at a time when the president is seeking sweeping new powers.
Sovereign wealth funds are typically set up in countries with a large budget surplus, such as Saudi Arabia, Qatar, China and Norway, to invest and save against future needs. Turkey, however, is struggling with a big budget deficit and public debt, currently at about 30% of its gross domestic product (GDP). International credit ratings agencies have downgraded Turkey’s sovereign debt to “junk”.
Turkey transferred its shares in Turkish Airlines, the Turkish state oil company TPAO, phone operator Turk Telekom, two of the country’s biggest banks, the post office, the state pipeline company and national lottery to the sovereign wealth fund in early February.
Set up last August with a modest $13 million, the fund was transformed overnight into a holding worth billions of dollars.
Rather than using the fund as a vehicle for saving and investment, Turkey said it hoped to use it as collateral to secure loans for large infrastructure projects.
Turkish President Recep Tayyip Erdogan oversaw an economic boom while prime minister between 2003-14 with a series of large construction projects built in public-private partnership deals often awarded to companies known to be close to his ruling Justice and Development Party (AKP). Much of it was financed by debt.
But with the Turkish lira falling 17% against the US dollar in 2016 and a slowing economy, those companies are saddled with high levels of foreign debt. There are currently $38 billion in public-private partnership projects under way and the state has guaranteed $12 billion of those.
The mega-projects Erdogan envisions to revive the economy can only attract foreign financial backing if they are carried out by international construction companies, Atilla Yesilada, an analyst at Global Source Partners, wrote in a note.
Erdogan’s “favourite domestic construction companies are too risky to be granted more long-term loans, while Turkish banks lack the balance sheet muscle to back these projects up,” Yesilada said.
The move comes at a time when Erdogan is seeking to consolidate power with constitutional changes that would enable the president to issue decrees, appoint and dismiss ministers, and declare a state of emergency. The power of parliament to scrutinise ministers and hold the president to account would be reduced. The changes are to be voted on in a referendum on April 16th.
The moves towards greater authoritarian control, the threat of terrorism from Kurdish and Islamic State militants and the widespread crackdown on opponents following last July’s failed coup have all helped keep investors away.
“Political and security developments have undermined economic performance and institutional independence,” said Fitch in January as it dropped its Turkey ratings to its lowest investment grade.
“While the political environment may stabilise, significant security challenges are set to remain. A constitutional reform process is progressing, which, if approved… would entrench a system in which checks and balances have been eroded,” Fitch said.
The transfer of assets to the sovereign wealth fund is expected to mean a $267 million loss of budget revenue, Turkish Finance Minister Naci Agbal said.
Many analysts doubt the sovereign wealth fund will help turn Turkey’s finances around.
“It is difficult to imagine how [the fund] is more than an accounting trick,” Yesilada said. “It doesn’t generate wealth but reshuffles it.
“Turkey’s problem is that its credit cycle has peaked without enhancing productivity or creating sufficient export capacity to pay off the loans. Inventing new gimmicks just delays the day of reckoning, but doesn’t change our fate.”
The sovereign wealth fund is to be supervised by a five-member board, all Erdogan loyalists, and is to be independently audited rather than checked through the High Court of Auditors.
“Presumably, it will be audited by an independent firm and its accounts and activities will be made public each year. Nevertheless, the idea of such a huge magnitude of public assets being managed outside the traditional budget channel is disturbing,” wrote Yesilada.
Other analysts voiced similar concerns.
“The move is likely to increase political control over the companies,” Wolfango Piccoli, co-president at Teneo Intelligence, was quoted by Bloomberg News as saying.
“The government is currently struggling to finance a series of high-profile infrastructure projects; Erdogan hopes these will boost his domestic prestige and enable him to consolidate his grip on power through the introduction of an executive presidential system with almost no checks or balances,” he said.
James Sawyer, Turkey analyst at Eurasia Group, said the fund was likely to be used “to ensure funding for infrastructure mega-projects continues at any cost”.
“This move will further centralise economic policy-making in Erdogan’s hands without any oversight,” Agence France-Presse quoted him as saying.