Turkey’s Wealth Fund: What’s next?

The government has transferred the public stakes in a number of major public companies to a recently established sovereign wealth fund, stating that the aim was to secure credit at lower rates for big projects by using the shares in these valuable companies as collateral.

The total publicly held shares of the companies are worth over 31 billion Turkish Liras ($8 billion) and include companies like Turkish Airlines, the national grid BOTAŞ, Turkey’s largest state-run bank Ziraat, and national post services company PTT.

The companies were included in the fund on Feb. 5-6, shortly after the names of the five-member board were announced. President Recep Tayyip Erdoğan’s chief economy advisor, Yiğit Bulut, and the head of the Istanbul stock exchange, Himmet Karadağ, are both on the board.

According to the government decree, the board will report to the prime minister. But the government-supported constitutional changes aiming to shift Turkey to an executive presidential system foresees the abolition of the prime minister’s post. So if the changes, which are expected to be voted on in a referendum in around two months, are approved in a popular vote, Prime Minister Binali Yıldırım will do this job only until control of the fund is handed over to President Erdoğan.

Sovereign wealth funds are financial mechanisms used to direct states’ surpluses into investments aimed at increasing future wealth. In the Turkish example, however, the fund will collect the existing wealth of the state only in order to take on more debt for the future, hoping to secure loans with lower interest rates.
The main opposition Republican People’s Party (CHP) has slammed the move, likening it to the “Düyun-u Umumiye,” or the Public Debt Administration, in the last decades of the Ottoman Empire. In order to become re-integrated into the world economy, the Republic of Turkey had to pay foreign creditors the debts of the Ottoman dynasty for decades after the founding of the republic in 1923, despite the country’s poor economy devastated by war.

The companies whose shares will be presented as guarantees for more debt could be considered as being among the most valuable ones in Turkey. Indeed, it would not be wrong to describe them as the country’s family jewelry.

The move shows how important it is for the government to woo foreign investors, who have recently been more reluctant due to political uncertainty. This is particularly true due to the ongoing state of emergency declared after the foiled military coup attempt of July 2016, as well as the shadow cast over the investment environment by the situation of the courts. The Turkish Lira has depreciated against the U.S. dollar and the euro, while the government has revised down its growth estimate and the Central Bank has revised up its inflation estimate for 2017 just a month after the original estimates.

The establishment of the wealth fund in Turkey and the way it is to be funded raise serious questions about what might be the next steps to pumping in fresh resources to keep the economy going.