No appetite for Turkey

As the financial time bomb ticks away in Turkey, the focus is now on countries that have significant exposure to the country and its currency, the lira (TRY).

To recap, President Donald Trump is attacking Turkey. He has authorised a doubling of tariffs on steel (50%) and aluminum (20%). The result: the Turkish lira slumped 20%. In Jan. this year USD1 bought TRY3.7; on Aug. 10, USD1 bought nearly TRY7, meaning the Turkish currency has lost about 44% of its value versus the greenback this year. The TRY has experienced 12 straight days of decline.

How much is Turkey a risk to the markets?

The fear of a financial contagion is real. Many European banks are exposed to Turkey and that will have an impact on the EUR. Meanwhile, the yield on 10-year Turkish debt has soared 20%. That means Turkey will have to pay a lot more to borrow money.

Another risk is a further downgrade of the country; Standard & Poor’s has already cut Turkey’s sovereign rating to BB- (from BB) on May 1. That’s junk bond territory.

Where and how does Malaysia fit into all this Turkish turmoil?

According to this Turkish government site the foreign direct investment of Malaysia in Turkey as of 2015 was around USD2.5 billion (MYR10.2 billion).

Trade relations between Malaysia and Turkey are so good that a Malaysia-Turkey business club was formed in 2016, with the aim of fostering even closer networking between companies from both countries.

In the same year Malaysia’s exports to Turkey were worth almost MYR4 billion while imports were worth MYR1.9 billion. Malaysia’s exports were mostly palm oil and palm-based products, chemicals and chemical products, metal and rubber products.

Khazanah loves Turkey

Malaysian sovereign wealth fund Khazanah is a big believer in Turkey, having spent USD1.4 billion since 2008. Read what Khazanah had to say about its investments in Turkey here.

Khazanah exposure in Turkey

The Malaysian GLCs under Khazanah that invested in Turkey are Malaysia Airports Holding Berhad (MAHB), IHH Healthcare Berhad and Tenaga. Khazanah opened its regional Turkish office in Istanbul on Oct. 31, 2013.

MAHB owns 80% of Istanbul Sabiha Gökçen International Airport (ISGIA), Turkey’s second largest airport. IHH acquired a 75% stake in Turkey’s largest private healthcare provider Acibadem and utility company Tenaga owns 30% of Gama Enerji, Turkey’s power company.

Khazanah isn’t the only big believer in Turkey’s future. Former Malaysian premier Najib Razak in April 2014 gave a speech in Ankara in which he argued why Malaysia must forge stronger links with Turkey.

Lately, however, both MAHB and Tenaga have shown interest in flogging their stakes in Turkey.

Tenaga is reportedly exploring parting with its 30% stake in Gama Enerji, while MAHB is reportedly looking to sell its stake in ISGIA to Turkish Airlines.

Why is MAHB selling ISGIA?

MAHB was a 20% technical partner in ISGIA from 2009 to 2013 and raised its stake to 40% by end-2013. The following year it bought another 40% of the Turkish company. In total MAHB paid some EUR500 million for the 80% shareholding. A Reuters report said the price for ISGIA is USD1.2 billion.

That means MAHB’s initial EUR500 million investment has doubled within five years and that’s probably why the Khazanah-owned company feels it should cash out.

People familiar with ISGIA say the airport is profitable, with an expected 34 million passengers this year. The best part is, by concession 80% of the airport’s revenue is in euros. And it manages to achieve all this with just one 3.5km long runway.

So if ISGIA is doing very well, what’s behind MAHB’s decision to offload it? Why kill the goose that lays the golden egg? MAHB has already sold off strategic stakes in other international airports, including Delhi (10%) and Hyderabad (11%). It has exited from its 23% share in Maldives.

The word is that MAHB wants to spend proceeds from ISGIA to expand Terminal 1 (T1) at KLIA as well as upgrade Penang Airport. But what’s the urgency in expanding T1 when Terminal 2 is barely at half its capacity?

There seems more to it than meets the eye…

It appears unrealistic all that cosmetic refurbishing would cost MYR5 billion (the proceeds from ISGIA sale). Especially amidst all these talk of AirAsia wanting to build low-cost carrier terminals (LCCTs) in Kuala Lumpur, Penang and Kota Kinabalu.

Could there possibly be a link between the two?

MAHB’s shares soared spectacularly this past week on talks of the ISGIA sale.

That said, MAHB’s financial standing is nothing to shout about. As of Mar. 31 it had debts of MYR5.53 billion. Revenue in 1QFY18 was MYR1.22 billion. Based on these figures alone, and with the turbulence in Turkey, it’s hard to see the current share price staying at its current level.

Sentiment in Turkey is going to get worse before it improves. President Tayyip Erdogan, in imploring Turks to prop up their currency by exchanging their gold and dollars into lira and blaming an “interest rate lobby”, has further spooked investors and the markets.

Any deals involving any Turkish assets are going to be put under extreme scrutiny. Potential investors that were looking at funding ISGIA or any other big-ticket transactions are unlikely to touch anything Turkish anytime soon.

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