Turkish Economyin 2016 and its Future Prospects



Turkish Economy in 2016 and its Future Prospects 



For the Turkish economy, the year 2016 had been a bumpy road. There was a combination of local and global events that had resulted in weakening of Turkish Lira against EUR or USD. With downgrade after downgrade, Turkey’s Moody’s credit grade is Ba1, which is the upper￾most limit of “junk bond” category. Some of the remarkable events and their economic relevancies are presented below. In the light of these events, our projection of Turkish economy in the future does not look very bright. However, according to IMF Concluding Statement of the 2017 Article IV Mission chapter, the current moderate fiscal loosening policy of Turkey is appropriate, and if accompanied by a medium-term consolidation plans with extension of minimum wage with a reduction, as well as high return public investments, it could help the country strengthen its economy. If the country manages to rebuild business confidence, maintain and uphold public institutions and better integrate the Syrian refugees into the market, the Turkish economy can reclaim strength in 2017. If this is reinforced by labour market reforms that aim at boosting productivity and participation, substantial long term improvements may start occurring.

Conflict with Russia 

In November 2015, Turkish Military shot down a Russian fighter jet with the claim that it was trespassing Turkish airspace. This had resulted in a crisis with Russian Federation that would last for the next seven months. This had been economically relevant because of two things: the first one is the void created by the lack of Russian tourists –who did not come in 2016 due to both the crisis as well as terrorism– had critically impacted the coastal regions and the tourism sector in general. According to the news of the online newspaper T24.com, substantial amount businesses in the accommodation subfield of tourism sector had reported less than 15% occupancy rate, many did not open. The stats the sector representatives share indicate that the amount of tourists visiting Antalya has dropped by 42%. Not only the hotels, also the taxi companies report 80% drop in revenues, as well as medium size shops, some of which report 75% drop in their revenues. The Culture and Tourism Minister Nabi Avcı had remarked that because of the regional circumstances there had been a contraction in tourism sector, but Turkey will come out of it stronger than before. Tourism income constituted 6.2% of Turkish GDP, and 21.9% of all exports. 500,000 people were unemployed because of the tourism crisis and the drop in tourists had denied Turkey 7.5 billion dollars of foreign currency, which it needs right now. Another aspect of this crisis was the food exports of Turkey. Two countries’ trade is balancing their productive capacities in various fields. While Turkey purchases energy from Russia, it benefits from Russian market as a means to sell in textile, construction, tourism and food industries. As the sanctions were enacted, the trade of food between the countries had stopped. While this created an inflationary reflex in Russia, it acted other way around in Turkey. Inflation had dropped while it was still well above the targeted 5%, which created an interesting case as inflation and the currency power were dropping simultaneously.

Terrorism 

2016 was a year of unfortunate events. Alongside the sanctions and war in Syria, there had been many terrorist attacks as well. Terrorism affects Turkish economy in both long and short run. In short run, it creates political instability, which reduces the credit ratings of the country, making it harder for the country to finance its expenditures. In the long run, it creates regions deprived of education and polarization among social groups which in turn impact the process of value creation and the political stability over the long run, respectively. Also, the regional instability in petrol-rich areas burden the country with opportunity cost.

Coup Attempt 

In July 2016, there was a failed coup attempt, allegedly (alleged by Turkish State) orchestrated by FETO organization which has reportedly infiltrated the positions of power. While the conflicts between the governing party and the organization had been ongoing for quite some time, according to the government sources FETO tried to end the conflict with the harsh treatment. Following the attempted coup, the stock market fell about 7% in the first day. While in time it recovered, there was substantial amount of capital flight from Turkey. Following the coup attempt, there was a “purge” of FETO members from government and business life, this had resulted in trustees being appointed to many affiliated firms, closing down many including Bank Asya, a Turkish bank with asset size of 17.9 billion TL, and a net contribution to Turkish economy of 22.8 billion TL.

Overview of Retail Sector 

According to the report of Euromonitor International, grocery retailers registered an average of 10% current value growth in 2016. The market is spearheaded by BIM Birleşik Mağazacılık. Retailers with a position of “discounter” have achieved 32% current value growth in 2016. That being true, the customer basis of retail sector is one where smartphone usage is getting more and more prevalent. The leading online retailer Migros had widened its online channels in 2016, developing online order systems and mobile apps to allow the customers to place orders through them. While traditional retailers still have 52% of all current value, the competition especially in urban areas is getting fiercer and fiercer. The shaking boat enables the players who are more flexible to survive with relative ease. As a result of this, the traditional retailers had lost three percentage points to modern ones in 2016. However, the lower levels existence of modern retailers in smaller cities enable traditional retailers to keep their hold in such places. According to the article of Fung Global Retail Tech, the headwinds of the Turkish retailing sector are solid GDP growth, young and growing population, strong retail growth and opportunities to consolidate markets, while the tailwinds are domestic turmoil, political uncertainty, doubts over closer EU ties and the impact of 2016 in 2017 economic growth.

Case: Migros 

While end year 2016 information about Migros hasn’t been public, we can draw our analysis out of September 2016 q3 report and 2015 end year reports. From January 2016 to September 2016, the total of Migros sales were 8.16 billion TL, while the amount for same time period in 2015 was 7.01 billion. The increase comes from the increase in domestic sales, in spite of the dropping sales abroad. When we take a look in the comparative financials of Migros, we see a slight rise in gross profit percentage, from 26.8% to 27%. In 2016, we see a Migros less heavily burdened by the cash flows to financing activities. For an increased level of sales, the expenditure for financing activities had been half the 2015 values. In both years, we see a negative net income. However, in 2016, this is much closer to break-even point with a sum of 56.8 million Liras, as opposed to 2015 sum of 455.5 million Liras. The EBITDA percentages over revenue look stable with slight favour towards 2015, with 6.5% in September 2015 and 6.4% in September 2016. The remarkable change between years 2015 and 2016 had been in the D/E ratio, with December 2015 having 10.16, and September 2016 having 12.28. From this, given the fact that there has been no registered corporate stock repurchases, it is evident that Migros had increased its debt in order to increase their asset size. Should the management choose to invest to open smaller branches of Migros in smaller towns to compete against traditional retailers, they would likely benefit from the trend of modern retailing over traditional version of doing so. It looks likely that Migros would pursue such a strategy, as they had signed an agreement with Tesco Overseas Investments Limited for purchasing 95.5% share of the Kipa shops in Turkey. Kipa shops are generally smaller retail shops with relatively remote places of urban or rural places alike. For being able to project 2017 sales, we compiled activity reports from years 2011-2015. As each data point represents one year, we concluded that extrapolating two more years (note that 2016 reports are not yet made public) could result in too much deviation if we resorted to third degree polynomial forecast function. Because of that, even though the sum of squared errors were the least in 3rd degree polynomial function, we thought that for year ending 2017, the sales amount projected by exponential forecasting were the most likely scenario. In our projections, we came up with 2017 sales of 11.73 billion Liras with an EBITDA of 751.7 million TL. Below is the method of calculation:

Migros is a highly leveraged company with a D/A ratio of 12.28. 92.47% of all firm’s assets are financed by debt while 7.53% is financed by shareholders’ equity. The firm currently has 2.593 million TL worth of financial debt. 88.92% of all this debt was issued in EUR terms, and weighted average cost of debt for Migros is 10.42%. The cost of equity can be calculated in following way: risk free rate+beta*market risk premium. For that, we researched about Turkish market risk free rate. It turned out to be 10 year government bond rate, which is 11.5%. Then, we found on bigpara.com the market risk premium, which is 9.6%. Then, we found beta of Migros shares to be 1.01, from investing.com. With this calculation, the cost of equity turns out to be 21.2%, and weighted average cost of capital for Migros is 7.34%. Below is the calculation:

The firm has its EBITDA amounts rising at an average of 10.9% in the period 2011-2015. The calculations yield that in the upcoming years the growth rate average will converge to 12.5%. Under the assumption that the rise rate will not change, the estimated 2017 EBITDA is 740.72 million Liras, where our exponential growth assumption would adjust that EBITDA into 751.7 million level. Likely, the actual WACC is greater than our findings, as a substantial part of Migros’ debts is in the EUR currency. However, our current knowledge does not allow us to incorporate foreign currency rates in our calculation with high accuracy. Zanders Treasury and Finance Solutions website indicates that in such a case we should add the inflation difference between currencies. The difference is between TRY inflation of 8.53% and EUR inflation of 0.4%. When the difference is added to EUR debt interest rates, the adjusted WACC becomes 14.27%. With this new WACC, the stock price we calculate is calculated with mentioned WACC and a projected growth rate of 12.5%. The enterprise value – total debts is 464 million liras. (464 million liras/1780 million shares outstanding)/(14.27%-12.5%) yields 14.71 Lira of fundamental value for Migros shares.

Works Cited 

1) IMF. Turkey: Concluding Statement of the 2017 Article IV Mission. Internet source: http://www.imf.org/en/News/Articles/2016/11/04/MS110416-Turkey￾Concluding-Statement-of-the-2017-Article-IV-Mission
2) T24. “8 maddede turizm krizi: Kıyılarda doluluk oranı nasıl, otellerde durum ne, esnaf ve çalışanlar ne diyor?” Internet source: http://t24.com.tr/haber/8-maddede-turizm￾krizi-kiyilarda-doluluk-orani-nasil-otellerde-durum-ne-esnaf-ve-calisanlar-ne￾diyor,346468
3) Association of Turkish Travel Agencies, “Turizmin Ekonomideki Yeri” Internet source: http://www.tursab.org.tr/tr/turizm-verileri/istatistikler/turizmin-ekonomideki￾yeri/gsmh-icindeki-payi-1963-_79.html
4) Ministry of Culture and Tourism, “Year 2016 November Border Stats” Internet source: http://yigm.kulturturizm.gov.tr/TR,161150/29122016---giris---cikis-yapan￾ziyaretci-yabanci-ve-vat-.html
5) Kılıçkan, Z., August 2016. “The Inflationary Effects of Politic Crisis with Russia and Turkey” Internet source: http://london2016.econworld.org/papers/Kilickan_Inflationary.pdf
6) Fung Global Retail Tech, Turkey Retail Overview. Internet source: https://fungglobalretailtech.com/research/turkey-retail-overview-characteristics￾developments-prospects/
7) Euromonitor: Grocery Retailers in Turkey. Retrieved 10.01.2016.
8) Migros Faaliyet Raporları. Internet source: http://www.migroskurumsal.com/Icerik.aspx?IcerikID=162

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