Debt Guarantee: Implications For Infrastructure

BMI View: The Turkish government's guarantee of private contractors debt will be a catalyst for the construction industry. Though the projects pipeline in Turkey is large, we reiterate that project implementation has stalled due to project financing challenges, and most recently, the corruption allegations against domestic construction players.

From 19 April, the Turkish government will be guaranteeing the finances for public projects with a value of TRY1bn (USD469mn) or more; the guarantee will also be extended to healthcare and education public-private partnerships (PPPs) with a values from TRY500mn upwards.

The aim is to address the major risk to growth in the construction industry, which is a lack of willing capital ( see 'Headwinds Cause Downgrade, But Should Not Blow Infrastructure Growth Off Course', 24 October 2013 and 'Market In Flux, But Growth To Be Maintained', 27 January 2014). A combination of tightening global liquidity, a major sell off in the lira and a corruption probe heavily focussed on the construction industry has left the infrastructure financing space heavily squeezed over the past year.

Projects Waiting To Move Forwards
Key Qualifying Turkish Infrastructure Projects Value By Status, USDbn

BMI View: The Turkish government's guarantee of private contractors debt will be a catalyst for the construction industry. Though the projects pipeline in Turkey is large, we reiterate that project implementation has stalled due to project financing challenges, and most recently, the corruption allegations against domestic construction players.

From 19 April, the Turkish government will be guaranteeing the finances for public projects with a value of TRY1bn (USD469mn) or more; the guarantee will also be extended to healthcare and education public-private partnerships (PPPs) with a values from TRY500mn upwards.

The aim is to address the major risk to growth in the construction industry, which is a lack of willing capital ( see 'Headwinds Cause Downgrade, But Should Not Blow Infrastructure Growth Off Course', 24 October 2013 and 'Market In Flux, But Growth To Be Maintained', 27 January 2014). A combination of tightening global liquidity, a major sell off in the lira and a corruption probe heavily focussed on the construction industry has left the infrastructure financing space heavily squeezed over the past year.

These headwinds are key in this decision by the government to introduce the new measures aimed at pushing some of the country's major infrastructure projects along the pipeline - a pipeline which amounts to at least USD189bn worth of infrastructure projects in BMI's Infrastructure Key Projects Database. The Turkish government has been attempting to increase the participation of the private sector in the development of Turkish infrastructure across most sectors through PPPs. While Turkey presents an attractive market to investors thanks to promising long-term economic and demographic trends, the increased risks to a project's realisation have put off investors and progress on the development of the private sector's involvement has been slow.

Projects Waiting To Move Forwards
Key Qualifying Turkish Infrastructure Projects Value By Status, USDbn

With debt guaranteed, one of the major risks to a project's realisation has been removed and as such we should see projects move along the project lifecycle. This could instigate a mini boom in construction sector activity; according our Infrastructure Key Projects Database, there is USD85bn worth of projects in Turkey that would qualify for state backing, waiting to receive project financing. In comparison, only USD2bn have secured project financing and are set to enter construction. Should investors look to these projects and see that risks are now markedly lower and provide financing, there could effectively be a doubling of the value of projects currently under construction in Turkey. As such, there is major upside to our short-term construction industry forecasts, which currently see real growth of 5.4% and 5.8% in 2014 and 2015 respectively.

Power Sector To Be Key Beneficiary
Key Qualifying Turkish Infrastructure Project's Value By Sector, %

Of the projects which would qualify for the state guarantees, power plants and transmissions grids are likely to be a key source of growth for the construction industry. With projects such as Akkuyu Nuclear Power Plant and other nuclear projects in the pipeline, in addition to conventional thermal projects such as Amasra and Sirnak power plants, there should be a number of projects which will now secure the financing needed to enter construction.

They other key area which will benefit from the state backing is transportation. Turkey's much debated third Istanbul airport will qualify - removing our major concern for the project's realisation, considering the USD8bn construction costs the winning consortium will have to raise ( see 'Despite Business Case, Airport Delays Expected', 16 April 2014). Railways and Roads and Bridges are the other main beneficiaries of the new guarantees - two major bridge projects and numerous high-speed rail lines will qualify.

Investors Playing Wait And See Strategy
Major Turkish Construction Companies Share Prices - 100 = 1 January 2014

Longer Term Concerns

While over the short-term we see the government's efforts as positive for the infrastructure sector, we highlight the longer-term risks the move will create. Over recent years Turkey's debt position has been improving and with it the country's sovereign profile. Risking taking on the amount of debt which could result in one of the mega-projects falling through - which is not unrealistic given their size and intense public opposition in some cases - would seriously jeopardise Turkey's macro-economic progress. This year's budget says total debt amount assumed by the Treasury cannot exceed USD3bn, however, the government can double that amount without the parliament's approval, according to the new guarantee law. BMI's Country Risk team echo our longer-term concerns with the view that government's debt guarantee is a net negative for all lira-denominated assets, as it will begin to erode investors' perception of sound macroeconomic management by the government ( see 'Debt Guarantee Hurts Sovereign Profile', 22 April 2014). Investors too seem cautious - there were no notable gains made in the share prices of key Turkish infrastructure companies, a sign that the sector still faces challenges in allaying fears.

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This article is tagged to:
Related sectors of this article: Infrastructure, Transport Infrastructure, Utilities - Infrastructure, Construction, Companies - Infrastructure, Project Finance, Roads and Bridges, Power Plants and T&D, Finance - Infrastructure
Geography: Turkey
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