Turkey Infrastructure Report Q1 2014 - New Market Report

Turkey's healthy construction pipeline, complete with numerous high-profile projects within both its infrastructure and residential/non-residential sectors, has seen projects both added and delayed over the last quarter. While we continue to see long-term strong construction industry growth, the delays, in addition to a glum economic outlook, have caused us to downgrade our forecasts for 2014. The short-term outlook has been dented by headwinds in the economy, which have caused BMI's Country Risk team to downgrade Turkey's economic growth forecast for 2013. Still, 5% average year-on-year real growth in the construction market over our forecast period far outstrips any developed market in the region, making Turkey an attractive investment destination.

There are downside risks to Turkey's healthy construction sector outlook, which come in the form of the European debt crisis, structural flaws in the domestic pension and banking sectors making project financing difficult, along with the increasingly high cost of credit. Together, these factors resulted in a tough year for the industry in 2012. However, as we pointed out at the time, activity in the equity markets did not indicate that major Turkish construction players are unduly concerned, and on the back of a strong project pipeline, we maintain a healthy growth outlook. This view is now playing out. Average real construction industry growth for the period 2014-2022 is forecast at 5%.

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We see sustained healthy growth in Turkey's construction sector over our 10-year forecast period; however, due to the country's history of high volatility and abrupt trends, in addition to the potentially far-reaching repercussions for the Turkish economy if there were to be a contraction in the construction sector, we are keeping a careful eye on any developments.

Key developments over the last quarter:
Transport:

* The rail sub-sector is already due for major investment, with the Turkish government planning to invest TRY20bn (US$11bn) in expanding Turkey's rail network over the next three years. In addition, the government has subsequently announced it will upgrade 70 percent of the railways to "double" lanes, a dramatic increase from the current proportion of only 4 percent of the country's network.
* Istanbul's third airport, which if fully realised will become the world's largest, was awarded in May to an all Turkish consortium headed by Limak Holdings. Construction is due to start in May 2014 and will sustain growth in the sub-sector over the medium-term. Financing is likely the greatest risk in this project, with the winning bid reaching US$22bn for the concession to build and operate the facility for 25 years.

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