Turkey’s Wealth Fund Is Ready to Spend After Year of M&A

(Bloomberg) -- Turkey's sovereign wealth fund plans to invest $15 billion in industries including energy, petrochemicals and gold mining as part of a program designed to reduce the economy's vulnerabilities.

The investor is focusing on those areas where Turkey constantly runs a deficit in foreign trade, according to Chief Executive Officer Zafer Sonmez. The fund, known as TWF, is now beginning with the projects that will span over the next five years, he said.

“2020 was a year of mergers and acquisitions for us,” Sonmez said in an interview on Wednesday. “This year is when the wealth fund starts direct investments.”

The sovereign investor's priorities highlight its role as the linchpin of the country's post-pandemic economic order following a succession of crises and currency collapses that gave way to rapid increases in activity. Last year, it agreed to take control of the nation's largest mobile-phone network operator and merged state-owned insurance companies.

Modeled after Asian asset-backed development funds like Singapore's Temasek or Malaysia's Khazanah Nasional, the TWF has emerged as an essential tool for policy makers and now controls companies from finance to energy and real estate. Sonmez's plans to focus on domestic investment echo a shift in countries such as Saudi Arabia, whose sovereign investment vehicle has committed to spend $40 billion at home.

Since taking office two years ago, Sonmez charted a strategy that marked a departure from the thinking that's dominated Turkey's policy agenda under President Recep Tayyip Erdogan.

In the nearly two decades since Erdogan rose to power, consecutive governments have sold more state assets than at any time since modern Turkey was established a century ago. While Turkey's various economy ministers have touted the benefits of setting up a national fund to pool together public assets for much of the past decade, the implementation only became possible after a failed coup against Erdogan in 2016.

Reporting directly to Erdogan, Sonmez is now pushing for a more “entrepreneurial state,” an idea borrowed from Italian-born economist Mariana Mazzucato, who argues that governments have often been the force behind transformative innovation.

Mending Problems

By focusing on strategic industries where the private sector can't take the lead, the TWF expects to help gradually reduce the deficit in Turkey's current account, making the economy less susceptible to external shocks and rapid reversals in capital flows. Since Turkey's 2018 currency shock, capital investment has dropped on an annual basis in seven of nine quarters.

The wealth fund's often cited $33 billion size refers to its book value and a more up-to-date figure on its market capitalization will be announced annually from this year, Sonmez said.

A 1 billion-euro ($1.2 billion) syndicated loan the fund secured in 2019 put the TWF's debt-to-portfolio ratio at under 5% in 2019, compared with a range of 2% to 30% seen among peers, according to Sonmez. That gives the fund enough room to finance some of its future spending with borrowings, he said.

Below is a summary of the fund's capital investment plans for this year as outlined by its chief:

• The TWF will announce construction tenders for a coal-fired power plant in Afsin in southeastern Turkey. Seven Chinese companies are in the “data room” to study the project and the winning party will finance capital spending
• It will choose “a strategic foreign partner” for its petrochemicals project in Iskenderun, where early engineering work is underway. It will produce items that Turkey currently imports
• The fund will ramp up exploration for gold in 20 license areas it got from the government. Its long-term target is to increase domestic gold production to as much as 150 tons per year from 42 tons now

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