Policy Unlikely To Boost Investment
On June 18, Turkish Economy Minister Zafer Caglayan announced details of incentives aimed at bolstering the domestic auto manufacturing sector, as the country seeks to reduce vehicle imports and rein in its current account deficit. Most cars produced in Turkey are exported to Europe, where consumer demand is weak and is expected to remain so; BMI believes that this policy will have little effect in boosting investment in the country as investor sentiment remains subdued.
Under the new plan, investors planning to manufacture a minimum of 100,000 cars a year in the country, or planning to undertake a capacity increase of a similar amount, would be entitled to import goods free of customs tax for 15% of capacity. Further, if the investment includes engine production, manufacturers will receive an additional allowance to import goods free of custom tax for a further 15% of capacity. Prime Minister Tayyip Erdogan unveiled plans in April to encourage investment in Turkey's aerospace, defence and automotive sectors in a bid to reduce reliance on imports.
In May, Hyundai announced that it will invest US$607mn to double annual production capacity in Turkey from 100,000 vehicles to 200,000. Following the investment, the Hyundai factory will procure some 67% of its input domestically, exporting much of its products to Europe. Hyundai is gaining popularity in Europe (see our online service, June 18, ' Hyundai Boosts Investment On Strong Regional Sales'); in the first quarter of 2012, the manufacturer's European sales grew 12.4% year-on-year (y-o-y) from Q111.
Many other auto manufacturers, however, face significantly declining sales in the region. Fiat, the Italian auto manufacturer, is cutting investments in Europe by EUR500mn (US$632mn) for 2012 on expectations of a continuation of the downturn in the regional market (see our online service, June 15, ' Fiat Cuts European Investment'). General Motors European subsidiary Opel-Vauxhall lost US$747mn in 2011 and US$256mn in the first quarter of 2012.
BMI forecasts vehicle sales in Western Europe to decline 3.3% in 2012. We believe that Turkey could act as a regional production hub for international auto manufacturers' European operations because of its geographical position; due to this ongoing weak regional demand, however, we believe that investor sentiment will be subdued and this policy will have little meaningful effect. BMI forecasts vehicle production in Turkey to grow 6.43% in 2012, to 1,277,261 units, compared to 9.64% growth in 2011 and 25.87% growth in 2010.
We believe that, over the longer-term, Turkey may also act as an international production hub for manufacturers operating in the Middle East. Currently, the regional market is relatively small compared with Europe and won't attract considerable investment, although it is growing and may become more attractive in the future. In 2011, Hyundai witnessed a 9% increase in sales in the region over 2010 figures, selling 283,953 vehicles.
|No Spur For Investment|
|Vehicle Production and Export Figures, CBUs|
Current Account Deficit Reduction
Amid ongoing regional economic turmoil, Turkey seeks to reduce its current account deficit by encouraging more domestic manufacturing. Indeed, the economy remains highly susceptible to external shocks given the still-large current account deficit, a lack of long-term foreign direct investment into the country, and a reliance on foreign energy imports (see our online service, June 6, ' External Risks Receding But Still Early Days').
While Turkey's external positioning is stronger compared with six months ago as a result of improved global liquidity and tighter domestic monetary policy, we highlight that risks to our medium-term growth forecasts for Turkey lie firmly to the downside, given mounting financial stresses in the global economy.