AN INTRODUCTION TO OUR EMERGING MARKETS SERIES

As you may know, there are different key characteristics that countries must have to be considered an emerging market. Two examples of those characteristics are having a lower-to-middle per capita income or having some sort of regulatory body as well as a market exchange for investment and common currency. The Morgan Stanley Capital International Emerging Market Index (MSCI Index) is the governing power that categorizes and reports out on new emerging markets.

The term “emerging markets” is exciting for businesses, as it insinuates higher growth rates and higher opportunity in comparison to developed countries. That being said, emerging markets all see an increased climate for sociopolitical instability and volatility. Every emerging market is plagued by one or more of the following: military unease, social upheaval, natural disasters, price shocks, and other causes that create high volatility.

Now that we have laid out the “science,” we are thrilled to introduce you to our “Emerging Market” blog series! We will use this series to educate on the strengths, weaknesses, opportunities, and threats of the present-day emerging markets. We will dive into the year so far, the political climate, risks, and rewards and finally - the biggest areas of opportunity.

In our previous emerging markets blog, we discussed the business opportunities arising in Greece. In the newest installment of our series, we are staying in the middle east! We will be traveling through Turkey’s key characteristics that allow them to be on the MSCI Emerging Markets Index. Throughout the article, you will find us discussing foreign relations, Turkey’s most opportune areas, and which industries make the most sense for expansion.

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AN (ALMOST) YEAR IN REVIEW

Considered an emerging market for the past several decades, Turkey has poised itself to become an emerging power. A growing economy, rising military influence, active diplomacy, and a strengthened national identity has contributed greatly to this new, exciting change. Turkey has further increased its outreach and influence on a global scale, in return furthering its growth as both an emerging power and country.

As 2019 progressed, the Turkish economy made significant improvements to infrastructure and business/industry. February 2019, it was announced that Turkey and the EU signed a multi-million euro grant to finance the modernization of the Halkali (Istanbul)-Kapikule (Edrine) line. This agreement signifies improvement to a substantial part of the trans-European railway network. In March of that same year, operating permits were received for the multi-million dollar Kirazli project, helping Alamos Gold to produce an estimated 104koz of gold/annum.

Additional updates that year also occurred in the gold industry, including new data on the Gediktepe project. That April, additional changes befall the country that could negatively affect the economy regarding oil. The United States made a decision to not renew any waivers for existing importers of Iranian oil--and will not grant any Significant Reduction Exceptions (waivers).

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GOVERNMENT

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MILITARY

Closing out on two years in a state of emergency, the July 2018 elections brought a new wave of order: President Recep Tayyip Erdoğan re-elected as president and the ruling Justice and Development Party (AKP) retain control of parliament through a coalition. This could play negatively into the economy for Turkey, who was thrust into chaos following an attempted coup of the leader. Time will eventually tell what will happen, but the legislation is already widening powers to restrict assemblies and movements, dismiss public officials by administrative decision, and increase police powers.

Up until recently, the Turkish market was relatively small and vulnerable, making it easily exposed to any looming threats. Military operations were heavily reliant on support from other foreign allies in executing on terroristic threats. Now, the tides have changed. Turkey has made strides in its defense industry, helping to better perform military action on numerous fronts.

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SYRIAN CRISIS

As the crisis continues, Turkey maintains a host of the largest number of refugees, around 3.5 million, from Syria. Additionally, asylum seekers from Afghanistan, Iraq, and other countries are making a home in the country. This is likely due to a migration deal with the EU that offers aid in exchange for preventing onward migration to the EU. Since 2017, 10 provinces have suspended the registration of Syrians who managed to reach Turkish cities. The border has been effectively closed to new asylum seekers, with border guards intercepting and deporting arriving Syrians -- sometimes even having to use force to prevent those from crossing.

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JAILED JOURNALISTS

One threat that continues to plague Turkey is the issue of media, and jailing of journalists. The country remains a world leader in jailing journalists, with an estimated 175 in jail-- and hundreds on trial. Overall media in the country lack independence and instead promote the government’s political agenda. The blocking of online websites also factors further into this, with the removal of content frequent and thousands on trial for social media posts. This could relate to apprehension to media, as well as the worry of government officials for protests/terrorist propaganda.

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WEIGHING RISKS AND REWARDS

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TRADE POLICIES OFFER AN ADVANTAGE FOR WESTERN COUNTRIES

In the last two decades, it has become increasingly easier to engage in the import business. Individuals are now able to freely register and engage in this commerce. Tariffs for trade are based on the Harmonised System (HS) for commodity coding, with an average rate of 2.8%.

The country has also been more open to the flow of trade since the removal of certain barriers and lowering of tariffs, as well as being a member of the Free Trade Agreements (FTAs). Other organizations the country since joined include the World Trade Organization (WTO) and the World Customs Organization (WCO). Additionally, Turkey signed a ‘Customer Union Agreement’ with the EU in January of 1996, helping to amend customs codes and legislation.

Turkey has also increased its ties the past few years, with new integrations and memberships with western countries. These include the Council of Europe, the North Atlantic Treaty Organization (NATO), the Organization for Economic Co-operation and Development (OECD), the Organization for Security and Co-operation in Europe (OSCE), and the G-20 major economies. In 2005, Turkey began full membership negotiations with the EU, spanning back to histories of previous economic partnerships.

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THE TURKISH LIRA

Uniquely enough, the Turkish lira -- the country’s currency, has gone one way while other emerging market currencies have gone another. The Lira has lost more than 11% this year alone, due to a currency crisis that caused the value to drop by 30% the previous year. In July, the central bank, in an attempt to boost recovery, halved policy rates to 12%, hoping to impact the recession. Given international issues and pressures, the Lira’s rates have been volatile, weakening as tougher measures pass through the US Senate.  Annual inflation measured at 10.6% in November of this year, compared to the actual rate of roughly 1.4%. The actual rate was impacted further by U.S. Federal Reserve decisions that put the lira and EM currencies at risk.

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NEGATIVE GROWTH RISK IN 2019

The Turkish economy faced the threat of negative growth in 2019 due to falling domestic demand amid high inflation, growing unemployment, and a feeble currency. On the other hand, the economy still ranked among the top 20 globally (in purchasing power), reaffirming the idea there could be potential for long term growth.

Fear has spurred thoughts that the country could be moving towards another economic crisis. Currency weakness is an evident concern--especially due to a recent Lira crisis that left the economy in a shock state.

Another thing that potentially impacts growth is the risk of Syrian influence in the country. The external environment remains highly unknown. With an increase in terrorist attacks, the influx of refugees in the country, and heightened issues with international powers--Turkey remains tense. This drags over into the macroeconomic environment, where deficits and reliance on imported fuels come into play.

POSSIBLE GROWTH OPPORTUNITIES

Interestingly enough, by 2020, it is thought the economy will recover despite the previous perils. The need for the country to reduce dependence on foreign capital, diminish any deficits, as well as save more on a domestic perspective will contribute to gradual trend growth.

Overall, Turkey offers substantial potential for investment. Its geographic location puts it at a strategic advantage, in addition to the other advantages it has in labor, open trade, and demographic structure. Because of this, foreign direct investment inflows have blossomed. Real-estate is one industry that has provided tremendous growth.

It will be intriguing to see how the economic footprint of Turkey develops, and how it will impact other industries and economies. Although there are threats that impact growth for the country, such as relations with Syria and its own domestic community, promise for the country prevails due to its geographic location and open trade relations. Only time will tell how this now 'emerging power’ will grow.

We will be highlighting a new emerging market every month and we challenge you to think big for your business. If you’re interested in expanding globally or learning more about potential opportunities, please reach out to us via our contact page or email us at hello@castusglobal.com.