A ‘concrete’ remedy for the current account gap

It has become the consensus view among all observers that the current account deficit, which currently runs at close to a staggering 10 percent of gross domestic product, is the “soft underbelly” of the Turkish economy. Even a small spike in the exchange rate invokes fears that the “great rebalancing” in the exchange rate might have begun: Developments over the past few weeks and the Turkish Central Bank’s net tightening of monetary policy earlier this week are a testimony to that. 

No “magic cure” seems to be in sight, but when Aziz Ünan, a successful portfolio manager at Renaissance Asset Managers, suggests building highways from concrete instead of asphalt, one is compelled to lend an ear. 

Visiting Istanbul last week, Ünan told me over dinner that the “concrete path” provides a good remedy, as around 85 percent of the input would be domestically-produced, as opposed to foreign resource-dependent asphalt. “We could decrease the current account deficit by $4-5 billion per annum through this,” Ünan says.

Another suggestion regards the government’s stated target to turn Istanbul into a global finance center. “With the current regulatory framework, Istanbul cannot be a finance center,” Ünan says. He gives the example of London, where $16.3 trillion of international funds are being managed, as of 2010 figures.

What Ünan seeks is to lure fund managers to Istanbul, and have them manage their portfolios from here. However, as he sees it, the current taxation system discourages funds from coming. If the funds accept having Istanbul as a “base” and so give 20 percent corporate tax over their profits from managing the funds of customers, Ünan foresees a steady annual inflow of capital that could reach $2 billion. He reminds that Türk Telekom’s 55 percent was sold to Oger Telecom for a little over $6.5 billion in 2005, adding that the funds would bring in a steady inflow, as opposed to one-offs from such privatizations. 

Ünan runs the Renaissance Ottoman Fund, which manages around $55 million of client money. The fund sees Turkey as “over-brokered but under-researched,” thus putting great emphasis on equity research. “I know of no grievance due to long-term investing in equities,” he says. According to Renaissance documents, the fund has been outperforming both the MSCI Turkey and the MSCI Eastern Europe indexes since mid-2008. Considering the level of volatility in the market since then, this looks like an impressive feat.