Turkey’s new SWF raises wealth of worries among international investors
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Turkey’s new SWF raises wealth of worries among international investors

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Turkey’s decision to use key state-owned assets to finance a new sovereign wealth fund has raised concerns among foreign investors that it will weaken management of those entities and be used as a political rather than financial tool.

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Copyright - Reuters

Turkey’s decision to set up a new sovereign wealth fund adds to mounting concerns about a weakening of the checks and balances that constrain government policymaking, according to senior asset managers. The fund, established in August 2016, now owns many key public assets, which it plans to use to grow and stabilise the Turkish economy. Those assets, including a 100% stake in Ziraat Bank, and a 51.1% stake in Halkbank, may now be used as collateral for Turkey’s major infrastructure projects.

According to Oliver Weeks, chief economist at Emso Asset, establishing an SWF made no sense for a country running fiscal and current account deficits. “It is unclear what the role of this fund is,” he said. “It makes their stance on fiscal policy a lot less clear, and how state-owned enterprises will be managed going forward.”

The fund has an initial target of $200bn. It will maintain the legal status of the banks and be governed under the Santiago Principles which are the accepted principles and practices of members of the International Forum of Sovereign Wealth Funds.

Following the constitutional referendum that will increase Turkey’s president Recep Tayyip Erdogan’s executive powers by 2019, some see this as part of a worrying trend.

Tim Ash, EM strategist at BlueBay Asset Management, said he was “not very enthusiastic” about the fund. “It doesn’t change the ownership [of the entities] but will we see cannibalisation of management? It probably weakens them.”

POLITICAL TOOL?

Following the government’s victory in the recent constitutional referendum, some analysts argue that Erdogan will turn his attention to addressing Turkey’s deteriorating economy. But to others, the extension of Erdogan’s powers will weaken checks and balances and allow him to tighten his grip on Turkey’s institutions, and the SWF is evidence of this.

“The cynical explanation is that the fund will not be subject to the usual audits by the court of accounts,” said one EM economist. “They have said they plan to have a role in stabilising the FX, bond and equity markets, which is worrying.”

Many in the market were concerned the fund would be used predominantly as a political tool, rather than one that promoted growth.

Viktor Szabo, senior investment manager at Aberdeen Asset Management agreed. “It is a surprising beast, given that SWFs are created to invest assets from commodities for example,” he said. “Will there be transparency? No, given the way Turkey operates nowadays I don’t think that will be the case. It seems to be a fund with multiple objectives and murky funding.”

While the fund’s stated aim is to invest in infrastructure projects — funding for which is much needed — investors are sceptical of the structure. “Probably better to call it a sovereign leverage fund, than a sovereign wealth fund,” said Carmen Altenkirch, sovereign analyst at Axa Investment Managers in London.

“We will watch very carefully just how much debt this new fund accumulates and how economically viable the projects are it chooses to invest in. The risk is that projects are chosen for political rather than economic reasons.”

The EBRD is supportive, however. “We have lots of positive experience working with sovereign wealth funds,” says EBRD managing director for Turkey, Jean-Patrick Marquet. “With the newly established Turkish Asset Fund, we also see scope for constructive co-operation in several areas.”

A DCM banker at a European investment bank said the fund fitted into the broader trend of SWF and development bank creation. “They are being expanded across the EM world. It is what Saudi is doing, and what Poland is doing with the PFR development bank.”

But Aberdeen’s Szabo disagreed. “It is a totally different story,” he said. “I don’t know why they aren’t using a traditional development bank model in that case.”

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