bgc partners istanbul

1BGC Partners Istanbul 1

This document is produced by BGC Partners Menkul Degerler A.S. (“BGC”). Although information contained herein has been obtained from sources believed to be reliable, BGC does not guarantee its accuracy, completeness or reliability. Opinions and estimates may be withdrawn without prior notice. Calculations and valuations contained herein are intended as a basis for discussion. You hereby agree to carry out your own independent appraisal of the relevance and suitability of recommended transactions to your own specific needs, especially with regard to legal, financial and tax matters. Our analysis shall not be construed as an offer or solicitation to subscribe, sell, or lend securities or any other financial instrument and it is not intended to be the basis of any investment decision. BGC or its affiliates may hold buy and sell positions on any of the securities or financial instruments referred to herein. BGC may perform other services (including acting as inter-dealer broker or adviser) in relation to any of the companies referred to herein. BGC makes no representation and gives no warranty as to the accuracy or completeness of the contents of this report. BGC, its officers, employees and affiliates shall not be liable to any person in any way whatsoever for any losses, costs or claims howsoever arising from any inaccuracies or omissions in the information contained in this report or any reliance upon this report. This report may not be distributed to or passed on to anyone who is not a client of BGC.

TURKISH EQUITIESEconomy & Strategy

Update

September 2012


Overview

• We expect Turkish economy to grow by 2.8% in 2012 after growing by 8.5% in 2011 and 9.2% in 2010. Our 2013 GDP growth forecast stands at 5.5%. New investment incentive scheme of the Government will certainly support growth in the medium-term.

• After the easing we expect CBT to remain (more or less) on hold and maintain its relatively cautious stance throughout 4Q12 to tackle inflation and currency.

• Ongoing foreign capital inflows on the back of positive global mood strengthened CBT’s hand. The Bank appears to be happy with the level of TL, but any global reversal is still problematic for Turkey, as FX reserves are still limited and the country runs large imbalances.

• Current account deficit worries alleviated in 2012 to some extent given the expected slowdown in economic activity, while inflation remains relatively high.

• Following a muted performance in 2011, we expect a 14% earnings growth in 2012. • Turkish equities currently trade at 8.8x on 12E and 7.8x 13E earnings - about 12%

discount to its 5-year historical average. • While global liquidity and stabilization in TL support the current momentum in

Turkish equities, Eurozone debt problems and rising oil price pose risks over the coming months. Our 12-month target for ISE-100 currently stands at 72k.


2013 growth catalysts

• Exports• Lower interest rates• Favorable base• Political agenda• New investment incentive scheme

2013 growth blockers

• C/A deficit• Household debt to disposable income• Loan to deposit ratio• Terrorism• New package for savings


EU break-up!!!


Recovery after Arab Spring


Thank you, Muslim brothers!


Lower interest rates


Favorable base


Possible shifts in election dates could change the whole macro outlook

Source: TURKSTAT, daily newspapers, BGC Partners

AKP's popular support vs. Unemployment Rate, %

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

Jun-

09Ju

l-09

Aug

-09

Sep-

09O

ct-0

9N

ov-0

9D

ec-0

9Ja

n-10

Feb-

10M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0Se

p-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep-

11O

ct-1

1N

ov-1

1D

ec-1

1Ja

n-12

Feb-

12M

ar-1

2A

pr-1

2

AKP popularity Unemployment rate

2002 General 2004 Local 2007 General 2009 Local 2011 General 2007 Referendum 2010 ReferendumAKP 34.4 41.7 46.6 38.8 49.9 69.0 58.0CHP 19.4 18.2 20.9 23.1 25.9MHP 10.5 14.3 16.1 12.9Source: TURKSTAT, newspapers, BGC Partners

Ruling AKP's election history, %


• Three pillars Regional Large Investments Strategic

• Investments will be supported via Reduction in corporate tax and VAT Social security and income tax subsidy Interest expense subsidy

• Sectors with priority Mining Railways, maritime Selective tourism Selective Defense, Pharmaceutical Iron ore, lignite coal Shipyard

• Strategic sector definition C/A supportive More than 50% is imported intermediate

goods Investment size is larger than TL50mn

Comprehensive Investment Incentive Package

Impact on listed companies

• Primary and potential beneficiaries include Koza Gold Bagfas Kardemir But also Tupras Park Elektrik TAV Ford Otosan Tofas Trakya Cam

• We estimate the overall impact to be at around 6% of pre-tax earnings


Improvement in the C/A could end by year-end


Financing of the deficit still relies on short-term capital


Household debt is rising


• Private Pension Funds 25% additional state support 15% after 3 years, 35% after 6 years, 60%

after 10 years Exit- tax will be based on return rather than

contributions We project pension funds to post a CAGR of

28%, reaching TL 135bn (US$75bn) in 2020

• Long term deposit Withholding tax will be reduced Longer maturity => lower withholding tax

• Revenue Sharing Certificates Legislation will include Islamic instruments to

attract a wider audience

• Portfolio Management Companies New Capital Markets Law

• Equity funds Withholding tax abolished

• Venture capital Individual andf corporate tax advantages

Savings Support Package


INFLATION

1- Food inflation declined, but structural problems in the sector prevail2- Deteriorated budget balances could trigger revenue-enhancing measures3- High level of energy and non-energy commodity prices4- Depreciated TL5- Floods and snow storms in the country6- Pending natural gas and electricity price increases


Annual CPI inflation is still at 9% as of end-August

Inflation Stock Inflation1994 125.501995 36.82 76.001996 27.42 79.801997 27.00 99.101998 36.14 69.701999 25.14 68.802000 28.12 39.002001 14.98 68.502002 25.51 29.702003 12.33 18.402004 4.12 9.352005 4.84 7.722006 4.40 9.652007 4.45 8.392008 4.10 10.062009 3.74 6.532010 4.01 6.402011 1.93 10.45

2012F 5.74


Some advantages on the inflation front


CBT actions


Macro Forecasts


Medium-term Economic Program & 2012 borrowing2011 (old) 2011 (new) 2012 2013 2014

GDP Growth (%) 4.5 7.5 4.0 5.0 5.0GDP (US$ bn) 781 766 822 888 952GDP (TL bn) 1,215 1,281 1,426 1,572 1,733Unemployment Rate (%) 12.0 10.5 10.4 10.2 9.9Current Account Balance (US$ bn) -42.2 -71.7 -65.4 -67.0 -67.1C/A balance (% of GDP) -5.4 -9.4 -8.0 -7.5 -7.0CPI Inflation (year-end, %) 5.3 7.8 5.2 5.0 5.0Average petroleum price 79.9 104.7 97.0 101.5 102.2Central Government Budget balance (TL bn) -33.5 -22.2 -21.1 -21.7 -18.1Central Government Primary balance (TL bn) 0.4 11.8 14.8 18.2 24.2Privatization Revenue (TL bn) 13.7 4.3 12.5 12.6 12.8CG Budget Balance (% of GDP) -2.8 -1.7 -1.5 -1.4 -1.0CG Primary Balance (% of GDP) 0.0 0.9 1.0 1.2 1.4EU-defined Public Debt Stock (% of GDP) 40.6 39.8 37.0 35.0 32.0Source: Official Gazette

Key macro targets in the Medium-term Economic Program

2003 2004 2005 2006 2007 2008 2009 2010 2011 P 2011F 2012 PTotal Debt Service 161.6 183.9 188.6 170.7 158.9 146.5 148.9 194.8 152.8 150.5 141.2 Principal 108.0 129.7 143.1 125.8 112.1 97.0 96.4 146.9 110.3 108.7 93.6 Interest 53.6 54.2 45.5 44.9 46.8 49.5 52.5 47.9 42.6 41.8 47.6 Domestic Debt Service 145.3 167.9 167.4 145.4 136.7 129.6 134.2 178.1 135.0 132.2 122.0 Principal 97.4 119.8 128.2 107.2 96.4 86.0 88.1 136.2 99.3 97.1 81.6 Interest 47.8 48.1 39.2 38.2 40.4 43.6 46.2 41.9 35.8 35.1 40.4 External Debt Service 16.4 16.0 21.1 25.3 22.1 16.9 14.6 16.7 17.8 18.3 19.1 Principal 10.6 9.9 14.9 18.6 15.7 11.0 8.3 10.7 11.0 11.6 12.0 Interest 5.8 6.1 6.3 6.7 6.4 5.9 6.4 6.0 6.8 6.7 7.2

Total Borrowing 145.2 159.5 162.0 126.0 119.3 107.2 150.2 173.9 131.6 123.2 111.4 External Borrowing 10.4 11.1 12.4 15.0 10.5 10.9 11.3 14.9 12.5 9.2 9.5 Domestic Borrowing 134.8 148.4 149.6 111.0 108.8 96.3 138.9 159.0 119.1 114.0 101.9 Other Financing* 16.4 24.4 26.7 44.7 39.6 39.3 -1.3 20.9 21.1 27.2 29.8

Domestic Debt Roll-over Ratio 92.8 88.4 89.4 76.3 79.5 74.3 103.5 89.3 88.2 86.2 83.5* Including primary balance, privatization revenues, transfers from Unemployment Insurance Fund, SDIF revenues, etc.

Source: Treasury, BGC Partners

Financing Program(TL bn)


Problems in the budget -1-


Solution to budget

1- GROWTH SHOULD ACCELERATE FOR HIGHER REVENUES: Budget revenues in Turkey are too dependent on economic growth. Whenever Turkey slows down, budget revenues are affected negatively. So, for 2013 growth has to accelerate for budget revenues to recover. 2- IMPACT OF ONE-OFF REVENUES IS ALMOST OVER/LIMITED: The Government introduced a restructuring of overdue tax payments (contributed a lot in 2011), paid military service (applications were slightly lower) and sale of previously forested land (contribute in late 2012 and 2013). These one-off revenues were either spent or will be spent for helping war veterans and funding urban transformation projects.3- PRIVATIZATION COULD ACCELERATE: Another one-off and efficient revenue generation tool for the Government is still privatization. We might see a more active Privatization Administration in the coming period.4- MAJORITY OF EXPENDITURES ARE ABOUT TO BECOME NON-DISCRETIONARY: The details of the expenditures hint that majority of expenditure items are almost compulsory or about to become compulsory. 5- A SCT INCREASE LOOKS MORE LIKELY: Rather than an austerity measure we believe that because of domestic politics and current nature of expenditures, the Government could introduce a revenue-enhancing measure in order to improve budget balances. Except the SCT we do not think that the Government will consider increasing other taxes. Among SCT options, we think a tobacco and liquor tax increase looks more likely. 6- THE TIMING OF A TAX ADJUSTMENT COULD BE OCTOBER: We know that the Government will aim to restore budget balances in 2013. However, a 2013-related budget action should be taken in 4Q12, in our view. October 2012 might be a good timing because of two reasons: a) In October, the Government will introduce the 2013 budget and revised Medium-term Economic Program, b) Last year in October we had several administrative price increases and because of that monthly CPI inflation was 3.3%. Consequently, a tax adjustment in October 2012, will not increase annual CPI inflation, but limit the decline.7- EVEN IF BUDGET DETERIORATES FURTHER, THIS WILL NOT BE THE END OF THE WORLD: We revised up our 2012 budget deficit to GDP forecast from 1.9% to 2.6% in parallel to the deterioration in the budget against the Government’s target of 1.5%. Compared to the fiscal situation in many European countries even this deterioration will not be the end of the world. We know that the Ministry of Finance is doing its best to broaden the tax base and increase tax revenues, but an additional measure could bolster fiscal discipline, in our view.

26BGC Partners Istanbul

Turkey vs EM peers

27BGC Partners Istanbul

Turkey vs EM peers

bgc partners istanbul

Documents

bgc partners istanbul

client of bgc

bgc partners menkul

earnings growth

turkish economy

growth catalysts exportslower

gdp growth forecast

investment decision