Construction Sector Keeps Momentum Going

BMI View: A slew of ongoing projects, most notably the plans for a new 150mn passenger airport, the US$35bn Sino-Turkish high-speed rail venture, the North Marmara Highway project, the Trans-Anatolian gas pipeline and various major power plant projects around the country, are all contributing to our strong outlook for the Turkish construction sector. Hence, despite a considerable current account deficit, high cost of credit and structural flaws in the domestic banking and pension sectors posing significant downward risks, we remain optimistic about the industry's growth potential.

Turkey's political, economic and structural challenges continue to loom large in the horizon. However, though high on our watch-list (see downside risks below), we maintain that the Turkish construction sector will continue to outperform, and represent an attractive outlet for crisis-deprived European players. The Turkish market, with its strategic geographic location, is also continuously attracting both Chinese and Middle Eastern heavyweights.

Keeping It Going
Construction Industry Value (USSbn), Real Growth (%)

Our bullish outlook of 7.0% year-on-year (y-o-y) real growth in 2013 for Turkey's construction sector is furthermore underpinned by a healthy pipeline of projects:

  • Planning For The World's Biggest Airport: The Turkish government has announced the location of its third Istanbul airport. Eventually being able to handle 150mn passengers, manoeuvring 6 runways, and costing EUR7bn. The bidding deadline being May 3 2013. We expect domestic heavyweights such as the Alarko Group and TAV to be top picks in the run-up for the flagship project. In fact, TAV has already won the contract to build a new domestic terminal at the airport in Turkey's third largest city Izmir.

  • Road Privatisation Ending On A High: The long delayed (since August 2011) road privatisation package encompassing 2,000km of roads together with Istanbul's two suspension bridges have reached a financial close. With a US$5.7bn bid from a Turkish-Malaysian consortium ( Koc Holding, UEM Group, Gozde Girisim) it makes it Turkey's second largest privatisation (it follows the 2005 sale of a 55% stake in Turk Telekom for US$6.6bn). Also, of a smaller magnitude, yet still significant, is the financial close (after three and a half years on the market) reached for the US$1.2bn Istanbul Strait Road Crossing Project (a road and undersea tunnel linking Istanbul's European and Asian sides).

  • Building Bridges: The re-launched tender for the North Marmara Highway project (including a third bridge across the Borporous) has preliminarily been awarded to Italian developer Astaldi, together with Turkish construction firm Ictas Insaat Sanayi Ticaret. In a statement Ictas's chairman said that they expect to complete financing for the project in early 2013.

  • New Silk Railway: China and Turkey are in discussions to build a new high-speed railway link across Turkey (Edirne-Kars) at a cost of US$35bn. If completed, it would be the country's largest railway project. At the same time the final phase of the Ankara to Istanbul high-speed railway (currently running between Ankara and Eskisehir) is expected to be completed by 2013.

  • Big Power Agenda: New investments into the power sector are seen as a priority for the government, and we have seen progress in the privatisation and liberalisation processes. We pin-point Turkey as one of the most attractive renewables markets in Europe, and as discussed further below, its strategic geographic position at the pivot of Europe's energy axis enables Turkey to leverage the global gas market. Yet at the moment, the government seems to push for coal, and recently signed a Memorandum of Understanding with the UAE concerning an 8GW lignite power plant (at an approximate cost of US$12bn).

  • Residential / Non-Residential Potential: For 2013, and in the medium term (until 2017) infrastructure will remain the dominant sector. However, we are seeing a growing resurgence within the residential / non-residential sector. A case in point being the EUR940mn Etlik Hospital complex in Ankara that looks set to become the first project in Turkey's multi-billion healthcare programme to reach a financial close; expected in 2013.

To this slew of ongoing projects - underpinning an annual average real growth of 6.1% between 2013 and 2017, and annual average growth of 4.7% between 2017 and the end of our forecast period in 2022 - there are, however, significant both upside and downside risks:

Upside Risks:

  • A vision of establishing Istanbul as a major regional financial centre brings a renewed focus on enhancing the physical infrastructure. However, we remain cautious of these plans, given the potential competition from other regional markets.

  • The prospect of the construction of two nuclear power plants poses upside risk for the country's power infrastructure forecasts. Russia has been entrusted with one nuclear project, and Turkey is now setting up the competition for a second plant between Chinese, Canadian, Japanese and South Korean groups. However, these plans have not yet been fully priced into our forecasts, as both projects remain (at the time of writing) in a state of flux, and we anticipate significant delays.

  • Turkey's strategic position in-between some of the world's largest gas deposits and one of the world's biggest gas markets, the European Union (EU), is paying off. Despite its limited domestic resources, Turkey has become a crucial part of the international energy infrastructure. In June 2012, the agreement for the Trans-Anatolian Pipeline (TANAP) was finally signed between Turkey and Azerbaijan. At the same time, Turkey and the Kurdish regional government of Northern Iraq are in the final talks on Turkish investments into its oil and gas sector; which could significantly transform the region with pipelines going directly to the Turkish border. Lastly, but not least, Turkey is also in discussions with Qatar over the possible construction of a liquefied natural gas terminal on its Agean cost.

Downside Risks:

  • One major risk stems from the limitations of Turkey's project finance market - specifically, the mismatch between the need for long-term capital to finance projects and the domestic banking sector's inability to provide longer-term financing.

  • The latter have also had a negative effect on Turkey's planned privatisation scheme, and in July 2012, Turkey's energy minister Taner Yildiz acknowledged that the ambitious plans had fallen considerably behind schedule. Nevertheless, he reiterated the country's determination to continue with the process.

  • However, this process necessitates the involvement of foreign banks under club loan arrangements. Although Turkey is a prime emerging market destination, especially for the European banking sector, a better-equipped domestic sector would certainly facilitate and accelerate infrastructure financing.

This article is tagged to:
Sector: Infrastructure
Geography: Turkey

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