Sector by sector
Threats and opportunities, advantages and disadvantages: Here is a general outlook for 10 selected sectors by Is Bankasi economists.
Is Bankasi economists assess 10 key sectors in Turkey’s economy and prospects for 2018
Domestic sales are expected to decline due to the removal of the Special Consumption Tax incentive and an expected slowdown in domestic demand in 2018. However, with the continuing recovery in the European economy, some residual effects should help Turkish carmakers limit their losses. Steel prices, the most important production input in 2017, and the rise in USD/TRY have increased the costs for the sector. It is thought that the tariff measures taken by the U.S. for steel imports in 2018 could somewhat mitigate the pressure on raw material prices.
Growth in the textile sector is expected to accelerate in 2018 and new investments will increase, in line with the utilization ratio, which now exceeds 80 percent. By the end fo 2017, the rate had reached its highest level in more than three years. The recovery in the Russian and Middle Eastern markets, and crucially in Europe, is expected to continue to have a positive impact on exports in 2018. In addition, investment in Africa is expected to accelerate as Turkish firms look to new markets.
Exports are expected to increase in 2018, boosted by favorable outlooks globally in industrial production and external demand as well as an improved investment environment. Any increase in steel prices, however, will exert cost pressures in the sector. Companies, particularly those involved in the production of machine tools, will be following the movements in steel prices closely.
Because energy comes with high capital investments, long-term financing is a necessity in this sector, leading to a dependency on loans in foreign currency. The financial leverage ratio in the sector, where cash flow is slow, approached 70 percent in 2016. In Turkey, energy players that sell in TRY against their foreign currency debt are exposed to high exchange rate risk. But because the majority of loans are long-term, some of the risk is mitigated.
5 Real estate
Turkey’s economy is expected to grow 4.1 percent in 2018. The construction and real estate sectors should follow that growth in domestic economic activity. However, due to low demand affecting costs, downward price pressures may adversely affect the profit margins and investment appetites of companies. Moreover, domestic inflation, high interest and exchange rates and political risks are expected to limit both investment and consumption for the time being.
In 2017, both the domestic and external demand conditions positively affected the steel industry, which experienced its best year since 2011. Crude steel production increased by 13.1 percent year-on-year, peaking at 37.5 million tonnes. The Turkish iron and steel industry, among the world’s major producers with a production capacity of over 50 million tonnes, is currently operating at low capacity. New tariffs on still imports in the U.S., which accounts for 9 percent of Turkey’s exports, will be closely followed in 2018. Rebar leads those exports while the U.S. is Turkey’s biggest source for scrap metals. The protectionist measures are thus likely to prompt Turkish producers to look for new countries for supplying raw materials.
Both exports and imports fared well in 2017. Exports increased by 15.1 percent and imports by 5.2 percent compared to 2016. While a significant deterioration in external demand conditions is not expected in 2018, a relative loss of momentum is expected in domestic demand, parallel to the overall course of the production industry. High import dependency on raw materials leads to a high sensitivity to exchange rate fluctuations, as well as petroleum product prices, which is the main input in the sector.
The mining sector aims to increase its exports from $3.5 billion in 2017 to $6 billion in 2018 and $15 billion in 2023. Commodity prices generally shape exports in metals but domestic electric car production is expected to boost nickel and cobalt mining. It is also expected that regulations such as the electricity purchase guarantee and the capacity mechanism for domestic coal-fired power plants will support the production of lignite through investments in thermal power plants.
The production process for cement, which largely supplies the domestic construction industry, requires a high level of energy usage. Therefore, the expected increase in energy prices in 2018 will exert upward pressures on costs. Nonetheless, despite the slowdown in the housing market, overall growth in the construction sector will continue in 2018, spurred by urban transformation and infrastructure projects. Thus, demand for construction materials will continue to support the cement industry.
Strategic incentives targeting investments in biotech R&D and production through private sector-university cooperation suggest growth in the sector may be sustainable. With a growing population, shifting demographics toward the elderly, increasing average life expectancy, rising prosperity and the awareness of healthy lifestyles, the pharmaceutical industry is expected to continue to grow in the medium term, driven by the increase in medicinal consumption.