Turkey: The Gateway to Eastern Trade
Turkey’s recent resurgence as a trading nation, driven on by the ambitions of its forward-looking government, the resilience of its financial system and its strategic position geographically, has not gone unnoticed. Corporates are paying close attention to the growth of internal trade opportunities as the country grows, and external opportunities as it becomes a hub that could potentially rival Dubai in the United Arab Emirates (UAE) as a launchpad for treasuries and businesses looking to expand into the Middle-East and North Africa (MENA) region. Western European corporates in particular are seeking opportunities in Turkey and beyond to counteract dwindling demand in their domestic markets.
Consumer goods is one area where bilateral trade with Turkey is expected to increase over the next few years. Yet given that Turkey’s position as a key research and manufacturing centre has long been established – and trading relationships already cemented – growing sectors such as infrastructure and renewable energy may hold even more appeal. Indeed, the Turkish government has recently revealed impressive plans for new highways, airports, high-speed rail and urban transformations to aid its fast economic development; all of which requires significant foreign expertise, investment and goods. As Turkey grows so does its business and treasury sector, as the amount of interaction the country has with international trade flows and the fast-expanding central Asian and MENA region continues to expand.
Fast Expansion Eastwards and Potential Risks
Turkey is establishing itself as a hub for corporates and their treasuries seeking to expand into the MENA and central Asian markets. In many sectors, there are signs that Turkey is moving away from its domestic demand-driven expansion of recent years, excepting infrastructure investment, towards a strategy instead focused on growth via exports to these emerging neighbouring markets, as well as into sub-Saharan Africa, where Turkish interest has grown of late.
Of course interest in Turkey, and the trading corridors it is rapidly establishing, is somewhat tempered by the region’s reputation as a political melting pot. Turkey itself faces some political concerns over recent social protests in Istanbul and its proximity to the Syrian war on its eastern border. Given the complexity of the political and social situations in the Middle East – and the significant impact that these can have on trading contracts and investment – local expertise is, however, an added attraction for Turkey. Given that these growing markets cannot be ignored, it is therefore more important than ever for corporates keen on the available opportunities, but unfamiliar with the lie of the land, to access local treasury, banking and financial expertise.
The problem of sourcing such expertise may be best solved by a network that some have written off as old-fashioned: correspondent banking. Combined with many multinational corporations (MNCs) own enhanced focus on risk, the marriage of a global bank’s strategic and processing capabilities with a local bank’s on-the-ground expertise may be the best way forward for corporates with expansion plans in the region.
With Fitch awarding Turkey its first investment grade credit rating for nearly two decades last November, and Standard & Poor’s (S&P) recently raising Turkey to within a whisker of investment grade, optimism for Turkish trade in the next decade could not be higher.
The country is growing as an important research and manufacturing hub, with vast commodity requirements; notably machinery, chemicals, semi-finished goods, fuels and transport equipment. Western corporates are also starting to eye Turkey’s growing energy sector, which needs at least US$100 billion of new investment over the next 10 years to meet the expected rise in power demand, according to the Turkish government’s own investment support and promotion agency. Renewable energy projects, power generation privatisations and nuclear projects present huge investment opportunities for foreign companies with relevant experience, as well as those that can supply the necessary equipment and raw materials.
What is more, Turkey is continuing to carve out new trade routes in the Middle East, central Asia, Africa and beyond. A recent International Monetary Fund (IMF) report, for instance, stated that exports to MENA countries have increased by around 10% since 2008, rising to 31% of total exports. Moreover in 2012, the governor of Turkey’s central bank suggested that Iraq could overtake both Italy and Germany to become Turkey’s biggest export market in 2013.
The rapid expansion of its trade corridors with surrounding nations is making Turkey increasingly appealing as a base for MENA expansion. Some of the names already running their regional treasury and finance operations out of Turkey hint at Istanbul’s potential to rival Dubai in the UAE as the region’s main trading hub: Microsoft, Coca Cola and Unilever – to name but a few – all have headquarters in the city or in the Turkish capital of Ankara. Corporates are looking to capitalise on the favourable business environment in Turkey and its ever-increasing talent pool. The country also remains keen on integrating itself into western European markets, although not perhaps as keen as it once was on joining the European Union (EU). Commerzbank, for instance, has had a representative office in the Turkish capital of Ankara for the past 25 years, taking advantage of its geographically important location as a nexus on the road between east and west, Europe and Asia. The bank also has a credit volume of EUR3.5 billion in project finance undertakings in Turkey at the moment, reflecting its support for the country’s infrastructure upgrade.
Other treasuries and corporations in the consumer goods arena are likely to join Unilever, Coca-Cola and Microsoft in Turkey as the country expands. For instance, according to the ‘Al Arabiya’ news site, the Comite Colbert – an association of 75 French luxury brands including Cartier, Christian Dior and Hermes – have seen their Turkish turnover grow by an annual average of 30% over the past five years, and are consequently involved in many more trade and finance operations; blazing the trial for other businesses that are likely to follow.
Turkish Trade and Mitigating Risks
Of course, trading with Turkey and leveraging its strengthening ties with emerging market neighbours, is not without its risks. While the government has made significant strides towards brokering a truce with the separatist Kurdistan Workers’ Party, the spread of violence and instability from Syria and Libya and the heightened risk of social unrest driving regime change leaves many corporates fearful of investing in the country.
But such risks can be mitigated. Corporate treasuries are increasingly used to handling risk and choosing their banking partners based on their cash management, foreign trade finance or payments processing credentials. Physical and supply chain partners are also increasingly assessed for their risk profiles. Yet trading with the emerging markets requires another consideration: local presence and expertise, which is why I emphasised the importance of correspondent banking earlier, combining the trade finance infrastructure of a leading international bank with the knowledge of local regulation, culture and governmental policy that community banks can provide.
Of course the strength of the chain is only as resilient as its constituent parts, which is why it is pleasing to see the main Turkish commercial banks so well capitalised. Turkish banks last year, for example, had on average a capital-to-risk-assets ratio of 17% – more than double the required 8% – and continue to lend to corporates. What is more, Turkish banks are expanding across the region. Recent examples include ??bank opening a branch in Arbil in northern Iraq and Hakbank opening a subsidiary in Skopje, Macedonia in the Balkans, which also works to open up new trade routes for corporates looking to grasp the endless opportunities. The support networks necessary to support the growing Turkish trade corridor is being put in place, and corporates seeking growth would be well advised to explore the opportunities in this area.