Turkey: ceasefire with PKK may bring economic gains

April 15, 2013

Turkey’s ceasefire last month with the Kurdish militant group PKK could boost its trade partnerships multilaterally, as increasing prospects for stability in the region bring economic opportunities in the Middle East and Africa.

The halt in the decades-long armed campaign came on March 21 after the leader of the Kurdistan Workers’ Party, Abdullah Ocalan, sent a letter with the announcement from the island prison cell where he has been held since 1999 when he was arrested for treason.

Although the main pro-Kurdish party has recently poured doubt on the veracity of Ocalan’s statement, the prospect of greater stability in the troubled border region with Iraq could pave the way for greater trade security and pay dividends for investors.

Now that the Turkish economy is pacing along, perhaps not with so much gusto asĀ  a few years ago, but with a young and increasingly tech-savvy population and inflation levels at relatively low levels, peace progressions with the PKK could also help the country’s prospects.

Part of Turkey’s trade is made bilaterally to the West, but increasingly it is made multilaterally with Africa, the Middle East and in particular Iraq, the second largest destination for Turkish exports in 2011, according to EU data.

HSBC analysts said in a note to clients:

We think the strength of the Turkish domestic demand story, plus the strides that the country has made in diversifying exports away from Western Europe towards the Middle East and Africa, both dilute the impact that new Cypriot-related euro zone stress will have on the country. If the Kurdish peace plan came to fruition, it would further embellish the story.

Fitch upgraded the country’s debt on 5 November 2012, citing declining government debt and a sound banking system, while a similar upgrade from Moody’s or Standard & Poor’s could provide the catalyst for more investment flows further into 2013.

Turkey has a large population of netizens (with more than 35 million Facebook users), and with around 50 percent of the population under 29, there is increasing interest the country’s prospects, according to Gokturk Isikpinar, Chief Investment Officer at AK Asset Management based in Istanbul. Turkish sovereign, corporate debt and investment in small and medium sized Enterprises (SME’s) are set to benefit as a result, he says. According to a Reuters poll, Turkey’s economy is set to grow 4 percent this year in line with the country’s government forecasts. Isikpinar says:

No one really knows where to put Turkey but everyone has a flavour of Turkey.

Isikpinar thinks a further credit rating upgrade, which could surface in Q3 this year, will be the catalyst to provide a surge of investment flows. Speaking at an investor meeting with frontier fund manager Silk Invest a few days ago, Isikpinar suggested one of the best ways to play the market is through SMEs.

Note a couple of caveats – there are some concerns the country could face ‘overheating’ and the budget deficit is still considerable at around 7 percent on an annual basis, compared with the government’s target of 2.2 percent of national output in 2013. Fitch cautioned in March the country would need a “durable” reduction in its structural deficit, lower inflation and more foreign direct investment (FDI) to warrant another upgrade.

Future IPOs such as Pegasus Airlines, set for mid-April, may also paint a promising investment picture. But the time to catch the investment wave could come before the upgrade and before more IPOs, certainly before any announcement on Istanbul’s bid to host the Olympic Games in 2020.

By Philip Baillie

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