Turkey Infrastructure Report Q1 2009

The rapid unfolding of events since this report was last updated has made us revisit our short term outlook for Turkey and are now much more bearish than we expressed in Q408, when we said in late August that Turkey's infrastructure sector begins the fourth quarter of 2008 with renewed confidence.

We have seen limited activity this past quarter, in spite of statements by the industry that they are optimistic about 2009. In BMI's Q109 Turkey Infrastructure Report, we have significantly revised our data downwards. First of all, we have incorporated in our model new historical data, indicating industry value of YTL40.9bn for 2007 instead of YTL42bn we have had in our dataseries. This has brought real growth rate for 2007 to 5.3% from the previous 8%. Secondly, new data for the first nine months to 2008 also gave us a better indication of what to expect and we have revised down our industry value from YTL49bn to YTL46bn. This therefore reduces our overall growth forecast to 3.7% for 2008 from our previous forecast of 6.5%. For 2009 and 2010 we forecast industry value of YTL49.6bn and YTL52bn respectively, accounting for real industry value growth of -0.5% and 1.9% respectively, down from the previous 5.13% and 6.9%. Average real industry value growth to the end of the forecast period in 2013 stands at 3.4%.

We had set Turkey's nuclear power tender as a global bellwether when the financial crisis deteriorated in mid-September, through which we gauged investor appetite for involvement in long term commitments in emerging markets infrastructure sectors. We became pessimistic as the crisis unfolded in its early days, raising concerns about the viability of project finance and we were proven right. In spite of the intense international interest that Turkey's nuclear tender had received in throughout the first three quarters of 2008, all but one consortium -led by Russia's Atomstroyexport- dropped out of the tender at the last moment, citing the uncertain environment at the markets. This allowed us to make our early assessment about the general trend that is now playing out in the infrastructure sectors in emerging markets, that is, a much more circumspect approach on the part of equity investors and financiers. Turkey's chief of the Privitisation Administration (OIB) said that he anticipates the pace of divestment of state owned assets to decelerate in 2009, as both investors and the government take a more cautious approach towards the process.

We have also introduced BMI's new Project Finance Ratings in an effort to provide a globallycomparative, numerically based assessment of the breadth and depth of risks facing major infrastructure projects, which will in turn affect the source, availability and cost of finance. Turkey's score is 46.6, which places it in last place in the Middle East region and penultimate place in Europe.

On the back of record low capacity utilisation in December, BMI forecasts real GDP growth forecast at - 3.3% for 2009, with a marked contraction in fixed capital investments and private consumption weighing on headline growth. A new IMF standby arrangement will seek to limit expansionary fiscal policy, but given the worsening macroeconomic outlook, an IMF deal may not totally preclude such a course of action and we stress that a large stimulus package, including new spending may be inevitable.