Turmoil in Turkey

In the face of heightened political risk, not every infrastructure asset is equal. As the dust settles following Turkey’s failed coup, we try and draw some preliminary lessons.

When the UK voted on 23 June to exit the EU, many investors took it as a clue that political risk had ceased to be the preserve of developing countries. The chaotic events that ensued didn’t give them any reasons for feeling reassured.

But a few weeks later we got a reminder that emerging markets also remain vulnerable to political turmoil – even those perceived to be more mature than most. Last Friday, for a few hours, it seemed as if factions of the army had managed to take power in Turkey, after blocking access to Istanbul’s main bridges and seizing television stations. Their grip proved short-lived, mostly because neither the rest of the military nor the population came out in support of the rebellion. Bar some residual skirmishes across the country, the bloody episode had reached a conclusion within less than 24 hours.

The uncertainty it has created, however, is likely to last. Jane Louise Kandur, a board member of the Istanbul branch of the ruling AKP party we interviewed, reckons the coup was a rushed version of a sturdier attempt scheduled for later, triggered ahead of a reshuffle that would have removed many of its alleged organisers. Security experts told us the possibility of another coup this year was not to be underestimated. Meanwhile president Erdogan is leading a crackdown that has already seen thousands detained, and a three-month state of emergency was declared on Wednesday. Insiders expect early elections and a new constitution.

What such a fluid political climate means for infrastructure investors is too early to say. But a few things seem already clear. While Turkey is likely to remain an economic outperformer in its region, tourism will tumble. That means lower revenues for the government – so potentially less funding available for big projects – as well as less traffic for infrastructure assets reliant on seasonal visitors. Delays to decision-making could also occur as a result of reorganisations within the administration. For foreign firms, currency moves could cloud the picture further.

While most sectors seem exposed to the resulting uncertainty, infrastructure will probably remain relatively insulated. Experts reckon infrastructure investments will continue to be a key priority for the government, with mega-projects such as Istanbul’s third international airport or the privatisation of the city’s gas network still due to go ahead. Private involvement is very much thought after for what the state has grouped in a programme called the “2023 Mega Projects”.

Whether all of these deserve to receive private capital remains to be seen. As an investor familiar with the market told us, whether every mega-project responds to an essential need remains unclear, raising doubts on the economic rationale behind them. The state’s capacity to fund such initiatives through availability schemes – or the public’s ability to pay for it through fees – can’t be fully ascertained.

But elsewhere more assured optimism is warranted. With strong input from Meridiam and Renaissance, the French firm’s local partner, Turkey’s healthcare sector has recently seen a robust framework take shape. The country’s multi-billion hospital PPP programme has the backing of numerous international development and commercial lenders, underlying the projects’ strong return and transparency credentials. Observers say the Health Ministry hasn’t changed its views since last week, with the funding model it pioneered likely to be exported to sectors like transport and energy. Neither do they think a new administration would try and renege on such commitments.

In infrastructure as elsewhere, unsettled environments require ever more exacting due diligence. But political confusion in Turkey – or in the UK, for that matter – is not enough to discount one of the region’s key economies as a no-go destination.

Write to the author at matthieu.f@peimedia.com