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Few people dare to follow as Spanish bank BBVA raises bet on Turkey

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While Carlos Torres Vila, director of BBVA, explained why the Spanish lender plans to take full ownership of the Turkish bank Garanti, it didn’t always sound like the sales pitch typically deployed for corporate transactions.

But then the 55-year-old BBVA chairman could hardly ignore the backdrop of years of erratic economic management transactions and turbulent politics under Turkish President Recep Tayyip Erdogan.

We have seen recurring crises, runaway inflation and currency depreciation, and we have suffered in our flesh and blood, through the devaluation of our invested amount, Torres said on Monday, as reported by BBVA. plans to pay 2.25 billion for the remaining 50% of Garanti, in which he has been a shareholder since 2011.

BBVA’s offer, which would be one of Turkey’s biggest foreign direct investments in recent years if shareholders and regulators approve, has supported the country’s stock market. But BBVA shares closed down 4%, with Citigroup analysts calling the deal risky.

Despite euphoria over the Istanbul deal, business leaders and analysts have warned that it is too early to say whether the move would herald more investment in a country with a strategic location and population of 83 million inhabitants have long held great promise for foreign companies.

Most Western investors consider political risk in Turkey to be too high right now, said Jonathan Friedman, analyst at Wallbrook, a global risk and ESG consultancy.

Instead, the deal with BBVA fits into a pattern familiar to foreign diplomats in Turkey: While new entrants remain deeply suspicious, some of these companies with a long-standing presence are poised to increase their engagement.

Torres hailed the opportunity to capture the remainder of Garanti as a good deal, in part because of the Turkish lender’s intimate knowledge of Spanish banks, which was already largely consolidated in BBVA’s accounts.

At these prices, risks are factored in, he told analysts. We know the asset well, we have been operating it for a decade, we have seen how it works in a crisis situation and generates returns in euros.

Over the past five years, Garanti has generated an average of 1.2 billion to 1.3 billion in net profits per year, he added, even though the Turkish lira has fallen more than 70% against the euro since early 2016.

The currency fell further on Thursday after the central bank cut interest rates, defying investor warnings that the move would fuel inflation further. The pound’s decline was strong enough to weigh on BBVA shares, which closed 5.5% lower.

Ahmet Burak Daglioglu, head of the Turkish government’s investment office, which is responsible for attracting foreign capital, insisted that the risk perception of those outside Turkey is higher than that of those inside Turkey.

This is a view shared by Cavit Habib, managing director of the Turkish division of Danish service provider ISS, who has been in the country for 16 years and this year acquired a local facilities management company. Being here and looking at things from the outside are two totally different things, Habib said.

BBVA is not the only foreign company ready to endure the macroeconomic crisis either. Ford Otosan, a partnership between the American automaker and Turkey’s largest conglomerate dating back nearly a century, in March announced plans to invest $ 2 billion over the next five years.

Huhtamaki, a Finnish sustainable packaging producer who first entered Turkey in 1997, acquired local company Elif Plastik for € 412 million in September. It’s not a new market for us. That makes it easier, said Katariina Hietaranta, an official at Huhtamaki, adding that the fact that the majority of her sales were exports helps a lot to mitigate currency risk.

However, international companies already present in Turkey are not blind to dangers, including a constant erosion of democratic freedoms and the rule of law. A foreign leader said he lives in fear of being hit by a horrific and politicized tax ruling that could result in a hefty fine. It’s not only that it’s dragging on in the courts, but that you will never be able to appeal successfully, he said.

Erdogan’s determination to prioritize growth at all costs, and relentless central bank interference, hammered the lira while leaving Turkey mired in a boom and bust cycle. Although the IMF predicts that the economy will grow by about 9 percent this year, that expansion has been accompanied by an inflation rate of 20 percent.

Notable companies have left Turkey in recent years, including Japanese automaker Honda and US appliance maker Whirlpool. UniCredit, Italy’s second-largest bank, joined them this month, announcing plans to sell its remaining 20% ​​stake in Turkish lender Yapi Kredi in 2022.

Andrea Orcel has set out to simplify UniCredits’ global footprint since taking office as CEO in April. The decision to sell its stake in Yapi Kredi was part of this strategy, UniCredit selling minority stakes in countries where it does not have a significant presence.

Foreign direct investment * bar chart in billions of dollars (2020) showing foreign investment in Turkey lagging behind many other emerging markets last year

But a person familiar with the banks ‘plans said the relative lack of liquidity in Turkish capital markets, combined with political uncertainty in Ankara, played a role in UniCredits’ decision.

Turkish officials say foreign direct investment figures for this year will improve from levels seen in 2019 and 2020, when they languished at their lowest level in 15 years, thanks to the growth of the country’s tech sector.

Tech start-ups, often based in Istanbul, have defied the dark trend as venture capitalists, private equity firms and sovereign wealth funds pour money into Getir, a delivery app, and Trendyol , an e-commerce site.

The Turkish bulls also underline the growing confidence of opposition parties that Erdogan could be ousted from power in the elections scheduled for 2023, but which could take place sooner.

The consensus is that all Turkey needs is a man to retire and the country to jump in the race, said Charles Robertson of Renaissance Capital, the market-driven investment bank. emerging.

Still, analysts like Friedman at Wallbrook have said that betting the worst is over remains a huge gamble. He added: Investing on the upside is always seen as less risky than trying to time the bottom.

Additional reporting by Owen Walker in London

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