Turkish PM goes on ‘risky’ €72bn spending splurge

Turkey's Prime Minister Recep Tayyip Erdogan is riding high again, after his AK Party's success at recent polls.

The country's most successful leader in modern times, Erdogan is still popular despite shutting down access to Twitter and YouTube.

Part of that popularity is the economic success he has presided over, but the big-budget projects that helped turn Turkey’s once-ailing economy around may be backfiring.

Since coming to power in 2002, Turkey’s moderate-Islamist AK Party has built a stellar reputation by reversing the country’s once deeply dysfunctional economy, by embarking on the building of highways, malls and apartments.

Last October, the world's first transcontinental underwater rail line opened in Istanbul, connecting Europe and Asia for an estimated €5.8 billion bill.

In February, a high-tech €485 million bridge carrying a metro line was unveiled in the same city.

Work on a new bridge spanning the Bosphorus Strait, north of Istanbul, is well under way.

Across the country, other infrastructure projects have cut hours off commuting, increased land value for small and large holders and improved living standards for millions.

But even those projects are small change, as far as Erdogan is concerned.

A €21 billion airport for Istanbul that would accommodate 150 million passengers a year, and be the world’s biggest, is to open in 2019.

An estimated €8.6 billion canal west of the city which even Erdogan himself calls “crazy” is being planned. A series of new hospitals and two nuclear power plants are in the works.

All told, an estimated €72 billion will be spent in the next five years if all of those are built, according to a Turkish bank.

Much of the money comes from private-public partnerships and international investment agencies. The fact that the government sees no reason to slow down is a concern, say analysts.

Ratings agency Fitch said Turkish corporations are "the most exposed among EMEA emerging markets to a scenario of slowing growth, rising interest rates and a persistently weak local currency".

The Turkish lira has lost almost a third of its value against the Euro since last summer, forcing Turkey’s Central Bank to effectively double interest rates in January in an attempt to shore up the currency, but possibly hurting exports.

GDP growth this year is expected to fall to 3.5 per cent from 4.3 per cent in 2013, according to the World Bank, while statistics released this month show that one in five young people in Turkey are unemployed today.

Rising costs
The US Federal Reserve's tapering has led to investors leaving emerging economies such as Turkey. With them, some of the money that helped keep the AK Party strong at election time for the last 12 years is going away.

"It will make financing these projects cheaply that much more difficult. Many of these projects had doubtful economic fundamentals anyway in terms of IRR [internal rate of return]," said Timothy Ash, an analyst at Standard Bank in London.

With so much construction under way, many Turks are fearful of the environmental consequences.

Green issues
The ecological lungs for Istanbul's 14 million residents, the Belgrad Forest north of the city, is set to be ripped apart: The under-construction Bosphorus bridge will link a new highway that in turn will cause more than a million trees to be cut down, and the proposed airport and canal would compound the ecological damage.

Environmentalists say the projects could damage vital aquifers, in a city facing drought this summer.

"We've already seen the contamination of water around where the bridge construction has started," said Cigdem Cidamli, a founding member of the Northern Forest Defense Committee, an activist group.

“The bridge and other planned projects are in one of the most important water resource areas in Istanbul.”

Erdogan's projects aren't unpopular with all Turks.

Local view
Sitting at his father's tea house in Anadolu Feneri, a tiny village between the mouth of the Black Sea and the bridge in question, 33-year-old Erdal Kokkiran can't wait for it to be completed.

“It’s very quiet here now. All you see here are local families. With the new bridge, more people will come here; it means more money for us,” he says. “I’ll also have a great view from my bedroom when I wake up in the morning.”

Though he says he’s not a supporter of Prime Minister Erdogan, Kokkiran believes local land will become more valuable as a result of the opening of the bridge.

The government says it can continue to finance such projects. Not only that, last Tuesday it announced that it would guarantee up to 85 per cent of the cost of public works projects valued over €340 million. But that could potentially increase public debt, something Erdogan repeatedly said would not happen when out on the campaign trail.

“It would be one thing if the funding for these projects are secure, locked in place and very long-term,” said Boragan Aruoba of the University of Maryland.

“To the extent that the mega projects are financed by riskier borrowing (shorter term and/or at variable rates), they will certainly jeopardise the future economic stability.”

ESB International is currently working on a €30 million project to operate and maintain a power station outside Istanbul, while Kells Stainless last year forecasted €2 million of Turkey sales for 2014.

Niamh Milne of PM Group, an Irish company involved in several EU- and consultancy-related projects in Turkey, said: "We foresee ourselves to be there for the next three years; we've had a very good experience there."