Turkey – investing into the new convergence story

· The economic growth story remains firmly in place
· FDI and portfolio investments are rising to all-time highs
· Domestic markets to outperform CEE peers in 2006

The importance of Turkey as a strategic partner for the EU has again come to the limelight, following the issue of Russian gas exports to the EU through the Ukraine. Meanwhile, investors continue to show confidence in Turkey, where foreign investments have reached a new record level. The year 2005 was a very positive year for Turkish markets, with the ISE 100 index jumping by 80% (in EUR terms) and 12-month bond yields falling from 20% to 14% by year end.
“Turkey is the new convergence story. We have observed a growing confidence among international investors since the start of accession negotiations with the EU in October 2005. This very much highlights the success of the Turkish government’s reform programme” said Willi Hemetsberger, Member of the Board of Bank Austria Creditanstalt. Not only is the government seeking to further gain the confidence of the domestic population and international investors, it is also constantly listening to concerns potential investors have. This was clearly demonstrated in the decision to cut the corporate tax rate to 20% from 30% in 2006, a move that will help boost corporate earnings and subsequently the employment outlook.

The reform programme is to remain on track
The government has pledged to continue with its reform program in the coming years and to stick to its restrictive fiscal program, aiming again at a primary surplus of 6.5%/GNP, a level seen in hardly any other country. The Maastricht 3%/GDP budget deficit ratio (already in 2005) and 60%/GDP gross public sector debt ratio (by the end of 2007) will be reached earlier than our original already upbeat expectations, given the stronger than expected drop in interest rate costs and the better than expected economic performance.

“With presidential and parliamentary elections just around the corner in 2007, markets will also concentrate on the government’s political program. We expect domestic as well as non-resident investors to continue to show confidence in the government’s reform program, which is why we see domestic equities and bonds outperforming CEE peers in 2006”, said Simon Quijano-Evans, Turkey Analyst at BA-CA. This development will further be supported by strong economic growth (6% potential GDP growth in coming years), a further drop in inflation (to around 5.5% by end-2006), and an accompanying drop in interest rates.

In addition, FDI has increased considerably, on the back of the government’s successful privatisation program, which for the first time ever is moving strongly ahead. In 2005, net FDI came in at around USD 7bn, equivalent to total net FDI receipts between 1999 and 2004. Major international investors are looking to invest in projects ranging from production facilities, to real estate, also positioning themselves to take advantage of a young workforce, high growth rates and export potential into the region surrounding Turkey.

The Nabucco factor
The recent gas dispute between the Ukraine and Russia highlights the importance of Turkey as an alternative route for vital energy supplies to the EU. The planned Nabucco gas pipeline through Turkey will be of great importance in order to reduce the EU’s dependence on singular sources of supply.

Avian flu – a new risk, but not limited to Turkey
The avian flu represents a risk, given the possible effects on the tourism sector and the economy as a whole. In 2005, net tourism receipts amounted to USD 15bn compared to a current account deficit of around USD 22bn. A drop in tourism receipts could imply an increase in the current account deficit/GDP ratio to 8%-plus levels. Clearly the avian flu will not remain a concern of only Turkey, and in the event of a worsening of the situation, we would see the IMF stepping in to pledge substantial funds to prevent balance of payments problems from occurring.

Favourable outlook 2006
With a continued favourable outlook, based on a solid growth story, BA-CA expects Turkish markets to outperform other markets in Emerging Europe. Turkey remains attractive across all asset classes.

Enquiries: Bank Austria Creditanstalt International Press Relations
Veronika Fischer-Rief, Tel. +43 (0)5 05 05-82833;
E-Mail: veronika.fischer-rief@ba-ca.com