Turkey Faces Tough Choices To Support Economic Growth
By Mark Willis Until recently a bastion of stability in a highly volatile region, Turkey is facing arguably its most difficult juncture in a generation, with a combination of domestic and geopolitical challenges weighing on the country’s immediate and medium-term economic prospects. Factors behind the deteriorating economic outlook include the influx of refugees from Syria’s seemingly intractable civil war, soured relations with important trading partners Russia and Israel, and fissures in a relationship with the neighboring European Union that has been a cornerstone of the country’s success over the last decade.
To compound matters, political and economic instability has been further elevated by an attempted military coup in July, which has since been used by Turkey President Recep Tayyip Erdo?an as a catalyst to crack down on political opponents in an attempt to bolster the head of state’s personal authority. The challenging status quo follows more than a decade of solid economic achievement when a combination of relative political stability, prudent fiscal management and economic reform have seen a solid expansion in employment, household wealth and disposable incomes. Strategically located at the crossroads between Europe and Asia, and a bulwark in the NATO alliance, the economy has also benefited substantially in recent decades from a substantial flow of European Union funding and foreign direct investment.
With greater infrastructure development needs in line with the country’s economic advances, Turkey has also become the largest recipient of finance provided by the European Bank for Reconstruction and Development, or EBRD. Notwithstanding the recent escalation in uncertainty, and possible further economic and political headwinds in the second half of 2016, a longer-term assessment of Turkey’s economic prospects point to a cautiously optimistic outlook, with billions of dollars in future government revenues earmarked for future infrastructure and construction projects creating continued opportunities for the international project cargo community. Economy Still Growing
While at slower growth rates than recorded during the previous decade, the Turkish economy is nevertheless projected to expand at a decent clip over the next several years, with the International Monetary Fund forecasting annual GDP expansion of about 3.5 percent during 2016-21.
Business investment should also continue to expand over the next several years, with public and privately funded infrastructure development essential to cement Turkey’s middle-income country status. Continuing the trend seen over the last decade, the principal opportunities for project cargo operators over the next few years look set to be found in the Turkish energy sector. According to Fatih Can, vice president for business development at Tekfen Construction, a major channel for public investment will target upgrading domestic power plants and further developing the country’s renewable energy capacity.
“Most of the infrastructure development in Turkey will focus around energy generation and distribution,” he said. As a strategic bridgehead connecting commodity-deficient Europe with resource-rich economies of central Asia and Russia, Turkey should also witness significant inflows of foreign investment required to improve energy sector linkages between these two regions, most notably regarding oil and gas pipeline infrastructure. Given Turkey’s comparative deficiency in oil and gas reserves — an important pillar of current and future energy sector policy — efforts to increase energy security and self-sufficiency aim to increase domestic renewable energy output, as laid out in the government’s National Renewable Energy Action Plan, or NREAP, which targets increasing its share of electricity production to 30 percent by 2023.
“The NREAP is a clear demonstration that Turkey wants to deploy renewables further in the next decade,” said Ga?l Hankus, senior research analyst at IHS Energy. Renewables Goals
As part of its ambitious renewable energy plan, the government is targeting expanding hydroelectric power capacity to 34 gigawatts, onshore wind energy to 20 gigawatts, solar to 5 gigawatts and geothermal energy to 1 gigawatt over the next eight years. However, Hankus believes the government will ultimately fail to meet the renewable energy production goals within the existing timeframe.
“Despite some great interest from foreign investors to develop and finance renewable projects, IHS does not believe that these targets will be met. We believe that grid bottlenecks will remain a key obstacle to tapping the country’s full wind potential, and that these targets will instead be met by the mid-2030s,” he said. While the government may struggle to meet its targets, analysts believe that Turkey will nevertheless witness a meaningful increase in its renewable energy infrastructure development over the next five years.
The government is placing a particular emphasis on wind power generation, according to Levent Topcu, member of EY Knowledge Research & Insights Team, EY Turkey. “Wind power is seemingly Turkey’s technology of choice, and an individual target for wind power has been set by the Ministry of Energy and Natural Resources’ 2015-2019 Strategic Plan, which stated that it aims to increase installed wind capacity to 10 gigawatts by 2019, with a wider goal in the Electricity Energy Supply Security Strategy Paper of 20 gigawatts by 2023,” he said. The outlook for increased renewable energy investment, with a particular focus on enhancing Turkey’s wind-powered energy, was confirmed by Bahadir Tonguc, managing director of Supramar Shipping, an Istanbul-based shipbroker and chartering agent focused on breakbulk shipments and industrial projects servicing clients in the oil and gas, construction and energy industries, including renewables.
“We are expecting more renewable energy investments in addition to the awarded ones, particularly in the wind energy segment,” Tonguc said. Many major renewable energy infrastructure projects scheduled to take place over the next several years will continue to be financed by the EBRD. These include the development of five new geothermal power plants, for which the EBRD has agreed to provide US£100 million to support new exploratory drilling and plant construction.
As part of its overall strategy towards increased energy security and indigenous sources of production, the government has also pledged to increase nuclear power development, with investment plans of US£22 billion, Topcu said. “Looking to diversify its sources of energy, Turkey plans to have three operational nuclear power plants by 2023. A French-Japanese consortium will build the country’s second nuclear power plant in Sinop on the Black Sea coast, while a third plant is in the planning stage,” he said.
Energy Still Important
Despite the relative lack of accessible domestic oil and gas reserves, energy sector infrastructure development over the next decade in Turkey will nevertheless be dominated by the petroleum industry, reflecting the country’s strategic location. In this regard, Turkey is well placed to benefit from the EU’s new energy strategy and foreign policy aimed at reducing the bloc’s reliance on Russian gas imports, which could see the country transformed into a major regional energy hub through a substantial overhaul of existing oil and gas pipeline infrastructure. Central to diversifying the EU’s energy mix is the creation of a new Southern Gas Corridor linking Europe to Central Asian natural gas exporting countries, such as Azerbaijan and Kazakhstan, and includes the construction of the Trans-Anatolian Natural Gas Pipeline, or TANAP, which commenced earlier this year.
“The government signed an agreement with Azerbaijan to build the TANAP, which will carry gas through Turkey, stopping at its border with Greece. Turkey will therefore become an increasingly important transit country, shipping 10 billion cubic meters of gas through its territory to Europe by 2019, with a view to increasing this volume,” said EY Turkey’s Topcu. Notwithstanding the recent increase in domestic political instability, the July 2016 failed coup is not expected to weigh significantly on oil and gas sector investments, according to Supramar Shipping’s Tonguc.
And while tensions between Moscow and Ankara resulted in a suspension of the new Turkish Stream pipeline linking Russia to Europe via the Black Sea and Turkey, a recent improvement in relations could also presage a resurrection in the halted project. Another promising recent development is the improvement in relations between Turkey and Israel. “Better relations with Israel represent a big opportunity for closer cooperation in the gas sector, with the construction of a pipeline to transport Israeli natural gas from the Leviathan field to Europe through Turkey,” Tonguc said. Mark Willis is a Dublin, Ireland-based freelance journalist specializing in politics and economics.
Main photo: Turkey has a number of large scale infrastructure projects in the offing.
Credit: Supramar Shipping