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Middle East

Turkey transfers billions of dollars worth of assets to state wealth fund

Turkey has transfered government stakes worth billions to a new sovereign wealth fund. The fund could be used to finance mega projects to revive the economy, but would lead to greater political control of companies.

Turkey has transferred government stakes worth billions of dollars in its flag carrier Turkish Airlines, the country's largest bank by assets Ziraat Bank and fixed-line operator Turk Telekom to a sovereign wealth fund (SWF).

Some analysts told DW that ahead of the planned presidential referendum, which would allow President Recep Tayyip Erdogan to consolidate his power, this move would lead to greater political control of the companies, but without the necessary oversight.

Analysts also said that the newly transferred assets could be used as collateral to secure funding for major infrastructure projects.

Political control

"The move is likely to increase political control over the companies now owned by the SWF," said Wolfango Piccoli, director of research at advisory firm Teneo Intelligence. "The transfer of state assets to the SWF comeses at a time of increasing political involvement in the economy," he said.

Piccoli said that over the last 18 months, more than 600 privately-owned companies have been seized by the government on suspicion of links with the exiled Islamic preacher Fethullah Gulen, who Erdogan blames for orchestrating the failed July 15 coup attempt last year.

Halkbank Zentrale in Ankara Türkei (Reuters)

More than 600 privately-owned companies have been seized by the government over the last 18 months

In the third quarter, the economy shrank for the first time in almost seven years while investors worry that the structural reform agenda would stall due to Erdogan's ambition to boost the economy ahead of the presidential referendum.

"The creation of the wealth fund will, in all probability, allow Erdogan and his team to exercise greater control over companies in which the state already owns large stakes, but without the level of transparency demanded by members of Turkey's political opposition (especially the CHP)," Anthony Skinner, director of the Middle East and North Africa practice at Verisk Maplecroft, told DW.

Mega Projects

The Erdogan government in 2013 announced 200 billion dollars worth of infrastructure investments as part of its 2023 goals. Building a waterway and the world's largest airport in Istanbul were among these goals, as Erdogan has been relying on large scale projects to bolster the construction industry and boost domestic demand. The economy has slowed following the coup attempt and analysts said that President Erdogan aims to revive the stalling economy with mega projects.

"The creation of the fund confirms the government's goal to drive large infrastructure projects forward to boost economic growth over the coming years. Infrastructure mega-projects and the government's diplomatic offensive to expand exports are intended to help offset the impact of reduced domestic consumption and demand in 2017," Verisk Maplecroft's Skinner said.

In recent months, Erdogan has applied intense pressure to commercial banks to increase loans to the private sector in an attempt to boost flagging economic growth. Erdogan has also been pressuring the central bank for some time to lower interest rates to support economic growth.

The country has been hit by rising regional tensions, political uncertainties amid widening concern about the crackdown following the failed coup, which also battered its currency.

"The government is currently struggling to finance a series of high-profile infrastructure projects. Erdogan hopes these will boost his domestic prestige and enable him to consolidate his grip on power through the introduction of an executive presidential system with almost no checks or balances," said Piccoli.

Türkei Istanbul Eröffnung der dritten Bosporusbrücke - Yavuz-Sultan-Selim-Brücke (Getty Images/AFP/O. Kose)

The Yavuz Sultam Selim bridge, which spans the banks of the Bosphorus, was opened in August 2016

Fiscal discipline?

Some are concerned about the motive of the decision, despite the claims by the government that the fund will not compromise fiscal discipline.

"I think there are several reasons for concern. One is that it suggests that Turkey is unlikely to privatize key companies in which the state has an interest (providing further evidence that the reform agenda is unlikely to restart). Another reason is that it could provide scope for a significant loosening of fiscal policy," Capital Economics economist William Jackson told DW.

The fund, approved by parliament in August, is headed by Mehmet Bostan, a former banker and head of the privatization administration last year. Appointments to the board included Erdogan's advisers and aides.

Sovereign wealth funds are often associated with oil producing countries, such as Norway or Gulf states, who set aside money from energy exports for investment. Norway's $890-billion (832 billion euros) sovereign wealth fund is the world's largest.

"One final point I would make is that we tend to think of wealth funds (such as those in the Gulf) having significant foreign currency assets; ultimately, those can be sold to improve the balance of payments position. But, Turkey's wealth fund would hold lira assets, so it couldn't be used in the event of another balance of payments shock," Jackson said.

Opposition politicians expressed concerned about the move.

Opposition party CHP lawmaker and former treasury undersecretary Faik Oztrak told a press conference that "this government set up a wealth fund to pledge the assets left by our ancestors to borrow and cover up the volatility in the economy until the referendum."

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