Turkey’s privatization stalling poses dual risk

ANKARA/ISTANBUL – Turkey’s backtracking on several privatizations ahead of elections this year risks tainting its image among potential investors while also making it more reliant on hot money to fund its external deficit. Ambitious IMF-backed privatization plans for 2007 have lost momentum as Ankara has postponed the sale of three electricity grids and tobacco firm Tekel while changing a planned block sale of Halkbank into a 25 percent IPO. Despite government pledges to avoid populist spending policies and push ahead with economic reforms, analysts see the cancellations as a way to avoid losing votes through the job cuts and energy price hikes likely to accompany privatization. Turkey’s Justice and Development Party (AKP)-dominated parliament chooses a president in May, and then faces a general election in November. A survey of voters published yesterday showed the AKP was likely to win enough support in the election to remain the largest party in parliament. But if it fails to win an outright majority, it would have to form a coalition, possibly with one of Turkey’s nationalist parties – a move sure to further complicate Ankara’s already troubled relations with the EU. «Both (Tekel and Halkbank) decisions are motivated by election-related concerns. Halkbank extends loans mostly to small and medium-sized enterprises, which comprise a significant portion of the AKP’s constituency,» said JP Morgan’s Yarkin Cebeci. But putting off the sales makes the financing of Turkey’s large current account more vulnerable to the whims of foreign portfolio investors. And election period tensions, if coupled with shrinking global liquidity, could reduce the flow of cash into Turkey. «We have lowered our FDI expectations by nearly $5 billion. This money now has to come from somewhere else to finance the current account deficit,» said Garanti Investment’s Gizem Oztok. «If foreign investors start thinking that some assets are overvalued, then they will notice negative news flow here.» Portfolio investments amount to around $70 billion, according to central bank data, and while they far outweigh even the government’s $20 billion foreign direct investment forecast, unlike FDI they can leave as quickly as they come in. «If the preferences in global investments change, then the possibility of turbulence in markets cannot be ignored… nobody will be surprised if the lira falls to 1.5-1.6 against the dollar,» said Cengiz Kilic, portfolio manager in Demir Life Insurance. That would be a 7 to 13 percent fall from current levels. Disappointment Analysts said a number of foreign buyers had been waiting in the wings with attractive bids for Halkbank. Bankers had said interested buyers included BBVA, National Bank of Kuwait and Fortis. In the case of the electric grids, several European giants such as Germany’s E.ON had got as far as applying for prequalification and some had forged local partnerships. One banker, who declined to be named, said the postponement risked irking foreign investors who had spent months looking at a possible bid, potentially reducing bidding prices when privatization plans are revived. «Changing decisions after you’ve had people working on them for a year… that annoys people and (the Turkish authorities) lose credibility,» he said. «You’re losing a portion of the valuation of the assets you’re trying to sell because some people won’t even bid next time around,» he added. Small businessmen who benefit from Halkbank’s soft loans had lobbied against a block sale while its large work force risked being cut by the buyer of a controlling stake. Tekel meanwhile is a 145-year-old loss-making company with more than 17,000 workers and analysts say Ankara is reluctant to sell it for less than the $1.15 billion it rejected in 2003, since when the firm has lost market share. Markets have so far shown resilience to news of the postponements and most expect the AKP, whose pro-business government overcame opposition to sell large state companies like Turk Telekom and Erdemir, to relaunch sales after the election. On Thursday the government launched the full privatization of petrochemical producer Petkim, in a move likely to reassure investors. «Delaying privatization is a forgivable decision in an election year. We don’t believe that the government is losing its determination on privatization,» said Hakan Avci from Raymond James Turkey Asset Management. He also said it would be far easier to make progress with sales once the AKP-led parliament picks a new president to replace incumbent Ahmet Necdet Sezer, who has a record of vetoing key laws and official appointments.