Turkey Infrastructure Report Q3 2009

In the previous quarter we revisited our short-term outlook for Turkey and became more bearish in our outlook for the industry value and growth level for 2009. The full-year figure for 2008 came in worse than expected at YTL44.8bn; we were forecasting YTL46bn. The real growth rate according to the statistics institute was -7.6% in 2008 (probably due to the very high raw-material prices that eroded industry real value). In BMI's Q309 Turkey Infrastructure Report we maintain our forecast of industry value of YTL44.1bn for 2009; this represents a real growth decline of -9.4%. Our confidence about the viability of new investments in infrastructure, however, is evident from the anticipated robust recovery of the industry in 2010, when we forecast that the construction industry value will reach YTL48bn, or a real growth increase of 3.6%.

The main development this quarter in the transport sector was the tender for the Istanbul-Izmir highway.

The project has been in the making for at least 15 years, and this is the General Directorate of Highways' latest attempt to revive it. Two out of the seven consortia that had initially expressed an interest ultimately submitted a bid for the build, operate and transfer concession. Italy's Astaldi is the only foreign company that is participating.

Turning attention now to the privatisation process, the trends in Turkey's privatisation arena leave much to be desired. This state of affairs will perhaps be evidenced in the upcoming privatisation of three additional power distribution networks, the Osmangazi, Coruh and Yesilirmak networks. The worst case scenario for the privatisation authority, OIB, and the state-owned electricity distribution company, TEDAS, would be no bids being submitted, or bids being too low to be considered. Though this is not improbable, given the recent lottery privatisation failure, a more optimistic scenario that is more in line with our core view of the utilities sector being poised for growth is that of domestic and foreign energy companies trying to take advantage of global trends of asset revaluations by attempting to acquire the grid networks at a better price. Indeed, this is an option that the government will be likely to accept. The key factor here in support of this view rests with positive long-term energy fundamentals (namely demographic increase and economic expansion) that will sustain growth in Turkey's overall electricity demand. Moreover, the government has over the past year has taken steps to assuage private sector concerns over the low electricity tariffs by passing several price increases.

In BMI's Project Finance rating Turkey's score is 37.8, which places it in last place in the Middle East region and third from last place in Europe. Notwithstanding a low position on both tables, mainly due to significant currency volatility risks, the presence of several international majors in the country's transport and utilities sector coupled with the government's willingness to create an environment conducive for the privatisation of transport and utilities assets are factors that are significantly in favour of the viability for project finance to develop in the country.

On the back of record low capacity utilisation in December, we now believe that Turkey will experience a full-year economic contraction in 2009. We have revised down this year's real GDP growth forecast to -3.3%, with a marked contraction in fixed capital investments and private consumption weighing on headline growth. As was the case with Turkey's other recessions over the past two decades, we expect a recovery to positive growth in subsequent years. That said, we caution that with the external climate likely to remain weak, the recovery will be limited, with growth of 1.7% in 2010 and an average of 5.0% between 2011 and 2013.