Turkey’s Wealth Fund Targets Chemicals and Aviation for a Boost

(Bloomberg) --

Turkey’s economic order is due for the biggest makeover in generations led by the influential head of the country’s wealth fund.

As Turkey’s coronavirus outbreak subsides, the $33 billion entity will spearhead large investments in strategic sectors where private companies can’t provide leadership, according to Turkey Wealth Fund Chief Executive Officer Zafer Sonmez, who reports directly to President Recep Tayyip Erdogan. It plans to target sectors from petrochemicals to aviation.

“The idea that began in the 1980s and weakened the state role in the economy through privatizations has run its course,” Sonmez said in an interview. “We will play the lead role in making investments where the private sector’s size won’t suffice, attracting foreign investment, expanding scale and transforming markets.”

It’s a radical departure from the thinking that has so far dominated Turkey’s policy agenda under Erdogan. In the nearly two decades since he rose to power, consecutive governments have sold more state assets than at any time since modern Turkey was established a century ago, a campaign that ranged from alcohol and tobacco production to major industrial plants and telecommunication companies.

The first years of Erdogan’s rule saw private companies and individuals take over debt that was once almost exclusively on government books. Although that helped lift economic growth and stabilize the lira, the government eventually channeled capital toward mostly unproductive investments in construction and came to rely on domestic demand that left Turkey vulnerable.

Soul Searching

Known as TWF, the wealth fund wants to help recapture the momentum the economy had at the start of the year, when it clocked one of the fastest growth rates across emerging markets before Covid-19 forced lockdowns. Sonmez invoked the idea of the “entrepreneurial state,” borrowed from Italian-born economist Mariana Mazzucato, who argues that governments have often been the force behind transformative innovation.

The remarks show how the nation’s policy makers are trying to navigate a moment of reckoning after recent years of zigzagging growth when Turkey lurched from crisis to crisis as regional conflicts and tussles with the U.S. led to currency collapses and a brief recession in an economy.

Erdogan’s critics have long argued that a consumption-driven growth model can’t last forever since it runs up a current-account deficit, leaving the country vulnerable to capital outflows.

At the same time, the private sector has lagged behind in investments for much of the past decade, creating a drag on gross domestic product. More than once, that’s forced Erdogan to try and revive growth using short-term credit boosts -- with the help of a central bank criticized by investors for prioritizing economic activity over inflation.

State Driven

Sonmez, who held executive positions at Malaysia’s sovereign fund Khazanah before taking up his current job in 2018, pointed to Singapore and Malaysia as success stories of the state-driven model. The pandemic has also prompted governments from the U.S. to the U.K. to deploy programs of state intervention designed to support vulnerable households and businesses.

The TWF’s plans to focus on domestic investments contrast with the approach of rainy-day funds of oil-exporting countries in the region that stow away windfall energy earnings for future generations and tend to spend more on assets abroad while playing a limited role in local economies.

“The thinking that advocates privatizations and reduces the size of government is unable to solve today’s problems,” Sonmez said, citing Turkish public banks’ role during the pandemic as an example of how state intervention can sometimes be needed.

The lenders, owned by the TWF, used cheaper loans last month to set off a credit boom, helping the $750 billion economy escape the worst effects of the coronavirus outbreak.

While various economy ministers have touted the benefits of setting up a national fund to pool together public assets for much of the past decade, the implementation only became possible after a failed coup against Erdogan in 2016. The TWF now controls companies across the economy from finance and energy to technology and real estate.

Since then, the Turkish fund came under attack from the political opposition for acting as a parallel Treasury that can borrow huge amounts against the public assets it took over.

By 2023, the TWF aims to get to $10 billion in annual investments in energy, petrochemicals, mining and aviation. It’s allocated around $6 billion for projects so far this year.

Below are other highlights of Sonmez’s remarks on investment and potential priority areas:

• The fund is conducting a feasibility study for a $10 billion petrochemical plant in the Mediterranean port city of Adana.
• The TWF is talking to six Chinese companies for construction of a coal-fired power plant in Afsin-Elbistan. In the case of a deal, the winning foreign investor would pay for the project’s capital investment, estimated to be in the range of a few billion dollars.
• Following the pandemic, the aviation industry will go through a period of “consolidation” which the Turkish Airlines will be a part of.
• The TWF is investing $960 million to pool together publicly owned insurance companies to consolidate a sector currently split among too many small players.

©2020 Bloomberg L.P.