Turkey privatizes, but depressed markets could weigh on sale prices

ISTANBUL – Turkey is stepping up a long-delayed privatization program, pleasing investors spooked by political and economic woes, but the credit crunch may undermine how much Ankara can raise by selling state assets. A bulging current account deficit, swelled by the price of oil, increases the need for foreign funds to finance the gap. As weak global markets are expected to slow foreign direct investment (FDI) into the private sector, European Union-applicant Turkey is stepping into the breach with one of the most ambitious privatization programs in the emerging market region. The prospect of weak markets reducing the amount Turkey can raise from privatizations would further threaten the financing of the current account gap, which investors watch closely as a major source of weakness for Turkish asset prices. Analysts have generally welcomed the launch of new sales and the move has gone some way to improve market sentiment which has been knocked by a court case aimed at closing down the ruling Justice and Development Party (AKP), and by slowing economic growth and rising inflation. But investors have already had a taste of how weak markets may affect valuations, with the heavily discounted pricing of a stock market listing for telecom operator Turk Telekom. «I think it would count as a qualified positive,» said Inan Demir, economist at Finansbank in Istanbul. «The overall commitment (to privatization) is positive but I think Turkey would have got better prices… in the absence of global turbulence.» Turk Telekom’s initial public offering, due to hit the market on May 15, is being priced at a deep discount to other stocks and will raise a maximum 2.8 billion lira ($2.3 billion), well below a figure of 3.9 billion lira which Ankara budgeted for. The government’s decision to press ahead with the offering contrasts with moves at several private Turkish companies to postpone listings until better markets promise higher prices. Other assets to come on sale this year are at least four electricity grids – the sale of which was postponed ahead of last year’s elections – a lottery company and toll roads. Bankers say strategic bidders will still be interested in buying into Turkey’s $700 billion economy, but financial bidders may be more scarce. «It may be the case that you get a less aggressive price on the table,» said one Istanbul banker, who declined to be named. FDI is expected to amount to $14-16 billion this year, according to Economy Minister Mehmet Simsek, below an initial target of $18.5 billion and last year’s $22 billion. Market forecasts put the current account gap at $43 billion. Brokerage Raymond James forecasts a financing shortfall of $13 billion, based on zero net portfolio investment. That should undermine the lira, which has already lost 7 percent this year. Another risk would be assets being sold to local investors and therefore not contributing to FDI figures, as has happened in a couple of large deals recently. Halkbank key A sale of a controlling stake of lender Halkbank – which has a market value of $7.4 billion – had been seen as a cornerstone of this year’s privatization program. But because of weak global markets and the fact banks globally have been hardest hit by the credit crunch, many bankers and analysts expect a secondary offering rather than a block sale, raising less money. A share offering would likely bring money in more quickly than a block sale, meaning it would be booked in time to affect this year’s numbers, whereas sales of controlling stakes are often held up by union-led legal challenges. «That’s one reason why I expect a Halkbank share offering. The other reason is that management do not want it to be sold,» said another banker in Istanbul. Deputy Prime Minister Nazim Ekren, who is in charge of the economy, said on Wednesday the sale strategy was still to be set out. Some analysts and bankers say there are benefits to privatization beyond raising money, including restoring investors’ confidence in the government’s commitment to structural reform – a major plank of which is privatization. While investors say it would have been more profitable to sell the assets earlier, as planned, there is no guarantee that waiting until global markets perk up will bring higher prices. And Turkey’s energy sector, which faces an output shortfall in a fast-growing economy, craves investment which the government needs private companies to make. «More important is efficiency, and the need for further investment… So that’s positive news beyond the price,» said Istanbul-based JP Morgan Chase economist Yarkin Cebeci.