Turkey Power Report Q2 2014 - New Market Study Published

Despite sizeable economic and political headwinds that have the potential to sap some of Turkey's impressive economic momentum, the power sector continues to attract interest from a host of international companies, as the country moves to position itself as an energy hub in the south-east Mediterranean region. There is also considerable political backing behind the expansion of the power sector, as the government continues to strive for greater energy security and lessens its reliance on its import-heavy thermal electricity generation mix, which has already played a fundamental role in deepening Turkey's current account deficit. As such, with the vast majority of Europe's power markets registering tepid growth, we expect Turkey to emerge as a key regional player in the power sector.

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Yet, while the outlook is bright, the development of Turkey's power sector is complicated by the county's precarious economic and political position. With a slowdown of the GDP on the cart, we note that a large and widening current account deficit (in part due to the import of fuel for power generation), high inflation and elevated political risk have taken a toll on investor confidence and encouraged caution towards holding lira-denominated debt at a time when demand for emerging market assets is waning, as yields in developed states look set to improve.

Although Country Risk Team believe the CBRT's decision to increase its main policy rate by 550 basis points (bps) since May 2013 was sufficient to stem the lira's underperformance relative to emerging market peers for now, it has not fundamentally changed the country's vulnerability to rising US yields, capital outflows and further lira-denominated asset depreciation. In addition, we see a significant probability for further destabilisation of the political environment to weigh on investor confidence. As such, we do not believe the worst of the financial market adjustment is yet over, and expect the CBRT will be forced to tighten further over the course of 2014.This will curb fixed investment, credit growth and private consumption, which are the main drivers of economic growth in Turkey. In turn, any subsequent fall in demand will have a deleterious impact on electricity consumption and generation - underscoring our conservative power sector forecasts for generation growth of 5.6% in 2014 (matched by consumption) - considerably lower than in the preceding years.

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