Turkish economic crisis could boost Belt and Road Initiative

The economic crisis in Turkey is forcing embattled President Recep Tayyip Erdogan to reach out for financial support, leaving the door open for China

Economic crisis in Turkey is forcing the embattled President Recep Tayyip Erdogan to reach out for financial support, leaving the door open for China to grasp a not-to-be-missed opportunity to accelerate its Belt & Road ambitions in the region.

History is instructive. During a previous crisis, the Turkish lira crisis of 2001, Turkey was obliged to take a loan from the International Monetary Fund (IMF). However, Turkey appears to be learning the lessons from history, as this time Erdogan looks unlikely to approach the IMF, since such loans come with strings attached, including austerity measures.

Instead, Erdogan seeks bilateral deals. First Qatar was embraced, with a US$15 billion package announced on August 15, after Qatar's Emir Tamim bin Hamad Al Thani met with Erdogan in Ankara. Qatari state media said the money would go toward economic projects and investments.

But China is also likely to feature heavily in the Turkish government's recovery plans. Back in February, Turkey said that it was planning its debut Panda Bonds in China's domestic RMB market, and mandated Bank of China, ICBC and HSBC to prepare the way for an offering.

In mid-May, President Erdogan gave a speech at Chatham House in London, where he stressed Turkey's continued interest and cooperation with China, saying that Turkey would like to play a bigger role within the Belt & Road initiative. Indeed, China has established a whole raft of commercial links with Turkey.

Turkey is already integrated into Belt & Road via Chinese ownership of its third largest container port. In 2015, a consortium led by Cosco Pacific, and also featuring China Merchants Holdings (International) and CIC Capital, acquired a 65% stake in Kumport Container Terminal for US$940 million. The remaining 35% is owned by the Oman sovereign wealth fund State General Reserve Fund.

Kumport Container Terminal is strategically located on the European side of Istanbul, 22 miles west of the Istanbul Strait, on the coast of the Marmara Sea. It is capable of handling 18,000 TEU vessels, and has a maximum annual capacity of 1.84 million TEUs.

Giving its rationale for the deal at the time of the 2015 acquisition, Cosco Pacific highlighted Kumport's location as a gateway to the Black Sea and a strategic interchange between Europe and Asia, as well as potential business synergies between Kumport and the Piraeus Container Terminal in Greece.

Cosco Pacific added that the strategic location of Kumport ties in well with Belt & Road. Indeed, its strategic and political significance was abundantly clear when, in November 2016, the then Chinese Deputy Prime Minister Wang Yang visited the container terminal with a high-level delegation.

In 2012, in a move designed to encourage the use of national currencies in bilateral trade as a medium of exchange, the central banks of Turkey and China signed a currency swap agreement. This was later renewed in 2015, for three years.

The first withdrawal and use of cash in the provisions of the swap agreement took place in 2016. Financial cooperation extends to the operations of Chinese banks in Turkey, including Industrial and Commercial Bank of China (ICBC), which formally began operating in the country in May 2015. ICBC Turkey completed a 450 million Turkish lira transaction within the framework of the swap agreement in December 2016.

In June of this year, with the aim of expanding Turkish-Chinese cooperation in the logistics sector, Turkey's national flag carrier Turkish Airlines announced the formation of a logistics company based in Hong Kong, in partnership with China's ZTO Express and Hong Kong's PAL Air.

In the energy sector, Chinese companies are involved in developing the Emba Hunutlu Power Plant in Adana Province in the southeast of the country. The owner is Emba Electricity Production Co, a joint venture company owned by Shanghai Electric Power, Avic International Project Engineering Company, and two Turkish local investors. It is constructing an imported coal fired thermal power plant with two 660 MW turbines, with a total investment amount of US$1.7 billion.

In the telecoms sector, Huawei is working on 5G Internet with Turk Telecom. In a move which could boost sales of Huawei smartphones in the country, President Erdogan recently called for a boycott of rival Apple products, such as iPhones, a reflection of simmering tension between Turkey and the US administration.

Further to this spat with the US, this latest crisis is quite a turnaround in circumstances for Turkey, which five years ago was heavily favoured by Western bankers. For instance, around that time Turkish Airlines announced a vast fleet expansion, and positioned itself as a global airline with Istanbul's geographical position making it a natural hub - a model inspired by Emirates in Dubai.

Aviation bankers competed for business with Turkish Airlines, and the corporate sector amassed a huge volume of Dollar and Euro debt, which is now threatening to weaken some European banks.

However, for around two years now, many economic analysts have regarded Turkey as an accident waiting to happen. After his June 2018 re-election, Erdogan consolidated his power by appointing his son-in-law as Minister of Treasury and Finance, and such nepotism was viewed by foreign investors as yet another worrying sign that economic policy was heading in the wrong direction.

The markets responded to Turkey's July cabinet changes: Fitch downgraded Turkey, citing not only deteriorating economic conditions but also political pressure on the direction of monetary policy.

An analysis from NN Investment Partners says that at the core of the Turkish story is an almost classical emerging markets (EM) narrative, in which financial markets at a certain point lose their confidence in the willingness of the country's policymakers to do the right thing for the local economy.

Even under circumstances of longstanding economic imbalances and erratic policymaking, it is often hard to determine in advance when the point will be reached whereupon international investors lose their faith in the investment opportunity that an emerging country offers. But when faith is lost, the shift is often fast and furious, resulting in sharp corrections in asset prices. Moreover, once confidence is lost, the hurdle to regain market credibility ramps up several notches for the beleaguered policymakers.

Indeed, much tougher measures are often needed to get back on track than if policy had been steered in the right direction earlier on.

Now that the anticipated crisis has finally hit, any plans announced by China to strengthen its Belt & Road infrastructure in Turkey, linking up with the Black Sea, Piraeus Port in Greece, and rail and road links into Serbia and Montenegro, will cause irritation in Western Europe, according to the insights of some regional analysts.

But the European Union's (EU) own policies have a habit of alienating former allies. For decades Turkey talked about EU accession, and watched on the wayside as a long list of former Eastern Bloc countries join up, yet it was still excluded. Erdogan is now considered a pariah in Brussels, but the EU counts on his support to keep millions of refugees from the Middle East fleeing to Greece, then using land routes onto countries such as Austria and Germany, where the influx of refugees has become a hot political issue.

It is informative to note a crisis from history in a neighboring country. It was an economic crisis which speeded up China's access to Turkey's traditional rival, Greece. As a condition for new loans to be approved by the so-called Troika (IMF, European Central Bank and the European Commission) Greece was forced to sell off some state-owned assets in order to raise cash. One of these was Piraeus Port, whose ownership by Cosco has subsequently been viewed negatively in Brussels - in spite of its own role in forcing the Piraeus selloff.

Date

22 Aug 2018

Share this article