Few dare to follow when Spanish bank BBVA increases bets on Turkey

As Carlos Torres Vila, head of BBVA, laid out why the Spanish lender intends to take full ownership of Turkish bank Garanti, It is not always the same as the sales pitch that is often deployed for corporate transactions.

But then, the 55-year-old president of BBVA can hardly ignore the background of the transaction – the years of erratic economic management and tumultuous politics under Turkish president Recep Tayyip Erdogan.

“We have seen repeated crises, rising inflation and depreciating currencies, and we have suffered it in our blood, through the devaluation of the first dollar. our investment,” Torres said Monday, as announced by BBVA. plans to pay €2.25 billion for the remaining 50% of Garanti, in which they have built a stake since 2011.

The BBVA bid, which would be one of Turkey’s largest foreign direct investments in recent years if shareholders and regulators approve it, has boosted the country’s stock market. But BBVA stock closed down 4%, with analysts at Citigroup describing the deal as “risky”.

Despite excitement about the Istanbul deal, business executives and analysts warn it is too early to say whether the move will herald more investment in a strategically located country. and a population of 83 million have long held great promise for foreign companies or not.

“Most Western investors see the political risk in Turkey right now as too high,” said Jonathan Friedman, an analyst at Wallbrook, an ESG and global risk consultancy.

Instead, the BBVA deal fits a pattern familiar to foreign diplomats in Turkey: while new entrants remain acutely wary, some have a strong presence. perennials are ready to increase their commitment.

Torres hailed Garanti’s chances of capturing the rest as great, in part due to the Spanish bank’s deep understanding of the Turkish lender, which has been largely integrated in BBVA’s accounts.

“At these prices, risk is already priced in,” he told analysts. “We know this asset well, we have been operating it for a decade, we have seen how it performs in crisis situations and generates profits in euros.”

Over the past five years, he added, Garanti has generated an average of 1.2 billion euros to 1.3 billion euros in net profit a year – even though the Turkish lira has fallen by more than 70% against the euro since then. since the beginning of 2016.

The currency fell further on Thursday after the central bank cut interest rates, despite warnings from investors that the move would further fuel inflation. The lira fell hard enough to drag BBVA stock, which closed 5.5% lower.

Column chart of FDI excluding real estate (USD billion) shows that Turkey's foreign direct investment will stabilize in 2021 after a long period of decline

Ahmet Burak Daglioglu, head of the Turkish government’s investment office, which is tasked with attracting foreign capital, stressed that “people’s perception of risk is higher than that of those outside of Turkey.” inside Turkey”.

That is a view echoed by Cavit Habib, managing director of the Turkish division of Danish service provider ISS, which has been in the country for 16 years and this year acquired a facilities management company. local substance. “Being here and seeing things from the outside are two completely different things,” Habib said.

BBVA is also not the only foreign company willing to suffer from macro uncertainties. Ford Otosan, a partnership between the U.S. automaker and Turkey’s largest conglomerate that dates back almost a century, announced in March plans to invest 2 billion euros over five years. next year.

Huhtamaki, a Finnish sustainable packaging producer that first entered Turkey in 1997, acquired local company Elif Plastik for €412 million in September. “It’s not a market. new to us. That makes it easier,” said Katariina Hietaranta, a Huhtamaki official, adding that the fact that most of their sales are for export “helps mitigate currency risk a lot”.

However, international companies already present in Turkey are not blind to dangers, including the steady erosion of democratic freedoms and the rule of law. One foreign executive said he is living in fear of being hit by some “terrible, politicized” tax rulings that could lead to a large fine. “It’s not just about dragging out in the courts, but you’re never going to have a successful appeal,” he said.

Erdogan’s determination to prioritize growth at all costs, and relentless intervention in the central bank, have impacted the lira while plunging Turkey into a cycle of booms and busts. Although the IMF forecasts the economy will grow around 9% this year, that expansion has been accompanied by an inflation rate of 20%.

Businesses leaving Turkey in recent years have been notable, including Japanese carmaker Honda and American home appliance maker Whirlpool. UniCredit, Italy’s second-largest bank, joined them this month, announcing plans to sell its remaining 20% ​​stake to Turkish lender Yapi Kredi by 2022.

Andrea Orcel has set a goal of simplifying UniCredit’s global footprint since joining as chief executive officer in April. The decision to dispose of her stake in Yapi Kredi is part of that strategy, with UniCredit’s sale of minority stakes in countries where it does not have a significant presence.

Bar chart of Foreign Direct Investment* in billions of USD (2020) showing Foreign Investment in Turkey lagging behind many other emerging markets last year

But a person familiar with the bank’s plans said the relative lack of liquidity in Turkey’s capital markets, combined with political instability in Ankara, played a role in UniCredit’s decision. .

Turkish officials say that this year’s foreign direct investment figures will improve from levels seen in 2019 and 2020, when they weakened to a 15-year low, with the support of the Turkish government. the country’s growing technology sector.

Tech startups, often based in Istanbul, have defied the doldrums as venture capitalists, private equity firms and sovereign wealth funds have poured money into these startups. names like Getir, a delivery app, and Trendyol, an e-commerce site.

The Turkish Bulls also pointed to growing belief among opposition parties that Erdogan could be forced out of power in the 2023 elections, but possibly sooner.

“The consensus view is that all Turkey needs is one man to retire and the country can get started,” said Charles Robertson of Renaissance Capital, an investment bank focused on emerging markets. race.

Still, analysts like Friedman at Wallbrook say betting that the worst is over is still a big gamble. “Investing in an uptrend has always been considered lower risk than trying to time a bottom,” he added.

Additional reporting by Owen Walker in London

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