TURKEY: An Introduction to Banking & Finance
Banking & Finance trends and developments
Turkey continues to be a pioneer in its region and is achieving significant milestones in both project development and policies to bring to completion landmark transportation, energy, healthcare and infrastructure projects, with particularly large-scale deals in the motorways, railways, integrated health centres and airports fields.
Against the backdrop of ongoing economic uncertainties stemming from the emergence of new COVID-19 variants, the fluctuations of the Turkish lira and the inflationary environment, 2021 saw an upward momentum with a high number of large-scale refinancing and restructuring transactions, as well as many local and international investors seeking to explore new liability management techniques and ways to bring liquidity to their projects from relatively less tested methods in the market.
The Turkish government pursued an impressive political and economic agenda to intensify its efforts to encourage investments by taking promising steps towards realising long-awaited mega PPP projects in 2021, such as the Canal Istanbul Project and other similar high-profile sovereign-backed projects, such as the Aydın-Denizli Motorway project and the Ankara-İzmir and Mersin-Adana-Gaziantep railway projects.
Current economic conditions and common hurdles on the road ahead
Alongside the financial consequences of the emergence of new COVID-19 variants, Turkey’s economy remained susceptible to risks associated with its geopolitical position and the downfall in its hard currency reserves. The Turkish lira has depreciated rapidly and hit an all-time low in 2021, in parallel with back-to-back decreases in the policy rates by the Central Bank. Right after reaching its all-time low level, various government schemes such as the new FX-indexed deposit scheme were introduced in a bid to ensure recovery in value for the Turkish lira.
Accordingly, the currency volatility risk (and if applicable, the accompanying hedging strategy) has been one of the key considerations for investors in respect of their new and ongoing investments in Turkey in 2021. Although some sectors offer attractive investment models that structurally minimise the local currency and consumer demand risk (by way of, for instance, minimum demand guarantees coupled with foreign currency exchange rate adjustment under motorway PPPs, availability payments in healthcare PPPs, or minimum tariffs for energy projects), the sharp decline of the Turkish currency caused a debt and borrowing costs build-up for a notable number of projects that do not directly benefit from government guaranteed cash flow (such as standard residential real estate development projects), which visibly had an adverse effect on the bankability of those investments. In parallel with these developments, the prices of hedging with credit default swaps (CDS – an instrument to hedge the risk of default) against a default by a Turkish issuer, continue to reach record highs according to recent market data, which leads most market players to explore liability management methods, to various extents.
However, as is the case in other emerging markets, whilst it may take a while to recover from and remove social distancing measures and international travel bans, it is deemed unlikely to impact the positive effect on investor confidence of significantly lower mortality and hospitalisation figures of the end of 2021. Although there are non-negligible risks to the positive perspective such as new variants or vaccine distribution bottlenecks, these do not appear to be likely to change the overall positive outlook for Turkish and other EM assets for 2021 and onwards.
Highlights from legislative developments
Setting aside the pandemic-specific legislation which was adopted in a bid to mitigate the risks associated with the adverse impact of COVID-19 in various sectors, 2021 saw a number of interesting legislative developments, with a particular focus on the banking and finance practice.
First of all, the new renewable energy resources support mechanism (Yenilenebilir Enerji Kaynakları Destekleme Mekanizması, commonly referred to as "YEKDEM") entered into force on 30 January 2021, and introduced the highly-anticipated feed-in tariff scheme that will apply to renewable energy power plants becoming operational between 1 July 2021 and 31 December 2025 (inclusive). The new YEKDEM scheme shifts the currency of previously US dollar (USD)-denominated feed-in tariff and domestic components incentive premium payments to Turkish lira (TRY), whilst still capping the price based on USD.
Moreover, the Turkish government continued to showcase its commitment to support the development of large-scale capital-intensive projects in diverse fields. In terms of new legislation, a significant amendment was introduced on 20 March 2021 to the Law on the Realisation of Certain Investments and Services within the Framework of the Build Operate-Transfer Model. The amendment allows the Ministry of Transportation and Infrastructure and its affiliated entities to become additional parties to debt assumption agreements for certain eligible projects.
Scaling up Green Finance in Turkey
In line with global trends, green and sustainable finance have also been hot topics in Turkey in 2021. The market saw many first-of-its-kind green and sustainable deals, as both investors and financial institutions placed ESG assessments at the forefront of their decision making procedures.
On 3 November 2021, the Capital Markets Board of Turkey published the Draft Guidelines on Green Debt Instruments and Green Lease Certificates, which are based on the internationally acknowledged Green Bond Principles released by the ICMA. The draft guidelines show Turkey's willingness to increase issuance of green lease certificates and green debt instruments by focusing on transparency and accountability, and to conform with international regulations.
The Ministry of Treasury and Finance of the Republic of Turkey published on 12 November 2021 a comprehensive report, the Sustainable Finance Framework. The Sustainable Finance Framework sets out the standards for sustainable financing instruments (eg all green, social or sustainability-linked bonds, sukuks, loans and other debt instruments) and the eligibility criteria for eligible green and/or eligible social projects. The Sustainable Finance Framework was prepared in line with the ICMA and LMA principles with the assistance of ING and Standard Chartered Bank.
Banking and Finance overview 2021
Turkey's medium-term economic and investment programmes include many plans to continue investments in large-scale infrastructure projects including motorway, railway and airport projects expected to be carried out in partnership with local and foreign private investors under a range of PPP, privatisation or concession models. Although the current political calendars do not foresee new tenders for healthcare PPP projects in the short-term, active projects continue to attract attention from equity and debt investors around the world.
Due to COVID-19 and global macroeconomic uncertainties, the project financing market in Turkey was primarily busy with debt restructuring and refinancing transactions in recent years, and some tenders for large scale projects had to be postponed. Turkey's dynamic PPP market conditions also led to an increase in secondary debt trading and securitisation transactions of PPP loan portfolios by banks and other debt investors. Social infrastructure projects (such as waste disposal PPPs) and innovative green energy projects are expected to continue to attract attention from investors in the short-term in line with the global trend of incentivising sustainable finance solutions, and along with many other mega projects like Canal Istanbul, reflecting the country's ambitious PPP targets.
In 2021, the Turkish loan market saw a trend of funding methods diversification, increased appetite for liability management techniques and new debt restructuring tools, all aiming to bring a certain level of relief to Turkish corporates impacted by the uncertainty in the local and global markets.
As the Turkish economy continues to combat with historical and structural issues such as low savings rates and current account deficit, Turkey remains heavily reliant on external funding. As a result, foreign investor demand and IFI’s sustainability concerns have encouraged Turkey’s corporates and financial institutions to explore ways of being more sustainable, as displayed by a voluntary expansion of disclosures. The ongoing developments in sustainable finance in the global market may therefore serve as a springboard for Turkey's sustainability endeavours and for putting in place a forward-looking regulatory environment driven by ESG principles to increase the use of sustainable finance in the upcoming years.