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What fading oil fortunes means for Turkey's businesses

Turkish businesspeople are losing sleep over oil-producing states' deferrals of payments to international contractors and the possible loss of mega projects.
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Are the resplendent days of the Gulf emirates coming to an end? According to international credit rating agencies and investment banks, the answer is yes. Standard & Poor’s has lowered Saudi Arabia’s credit rating twice in the last five months, and credit ratings for Bahrain and Oman are not any better. In November, Christine Lagarde, managing director of the International Monetary Fund, estimated that Gulf Cooperation Council (GCC) states' export revenues for 2015 would be $275 billion less than for the preceding year due to low oil prices.

The Gulf emirates, which spent lavishly to appease their populations after the start of the Arab Spring, have been badly shaken by the decline in oil prices from $110 a barrel to $30 a barrel in the last year and a half. Gulf leaders first dipped into their central bank reserves to cover budget deficits resulting from their extravagant social assistance expenditures. When that wasn’t enough, they began selling off assets held by their national asset funds. According to the Kuwait Financial Center, the Gulf states ended 2015 with a deficit of $160 billion. This year’s deficit is forecast to be $159 billion.

Conventional wisdom holds that if oil prices continue their downward trend, in five years Gulf countries won’t be able to cover their budget deficits. In other words, they would all be on the edge of a financial cliff.

These daunting developments have compelled the Gulf emirates to begin acting more prudently, that is, to restrict public spending and raise taxes. They also began deferring payments to contractors involved in ongoing mega projects.

Turkish contractors working in the Gulf have been affected more than Western companies by the current crisis. The Gulf had come to be seen as a safe harbor for Turkish companies that lost billions of dollars because of tensions between Ankara and Moscow. This is why major economic troubles in the Gulf are causing Turkish businesspeople to lose as much sleep as people in the Gulf.

According to the Statistical Agency of Turkey, last year Turkish exports totaled $144 billion. The six GCC states — Saudi Arabia, the United Arab Emirates, Kuwait, Bahrain, Qatar and Oman — spent $6 billion on Turkish goods, about 6.6% of all Turkish exports. A careful look at these figures reveals that in 2015, while Turkish exports shrank by 8.6% overall, exports to Gulf countries grew by 5.5%. In short, petrodollar-rich Arab countries contributed significantly to reducing Turkey's economic losses under Justice and Development Party (AKP) rule.

Initial signs in 2016 suggest the continued loss of blood. According to figures released by the Turkish Exporters Assembly, an organization of Turkish businesses, in January 2016 overall exports declined 14.4% compared with the same period in 2015. While there were sharp falls in Turkey’s exports to the UAE, Kuwait, Qatar and Bahrain, exports to Saudi Arabia and Oman increased.

According to Finans Yatirim, a leading investment bank in Turkey, Turkish exports will fall to $137 billion by the end of this year. Further reductions in Turkish exports to Gulf countries could bring about an even higher decline in overall exports.

Turkish contractors, which are annually awarded some $25 billion in projects, not only contribute significantly to Turkey’s foreign exchange earnings, but also to employment. Contractors won tenders totaling $27 billion in 2014, but saw that amount fall to $19.4 billion in 2015. One of the major winners was Limak Holding, which won the tender for a new terminal at Kuwait international Airport that will cost $4.3 billion. It is the biggest single project a Turkish company has won alone. If Limak had not obtained the contract, the sector’s performance last year would have been its worst of the decade.

Mithat Yenigun, president of the Turkish Contractors Union, told Al-Monitor, “Developments in Russia, which leads the list of countries where we have projects, worry us.” Yenigun further said that in terms of companies operating in Russia, Our Ministry of Economy and Russian employers are saying that the projects in progress will continue, but some projects awaiting approval will be suspended, and there is no likelihood of new projects in the near term.”

Yenigun expanded on his sector’s worries, stating, “The trend of low oil prices in oil-exporting countries like Algeria and Saudi Arabia also delay investments and cause difficulties in timely payments for projects.” Yenigun noted that there have been some delays in payments by oil-exporting countries and that some projects have been suspended.

Libya and Iraq are the main countries from which Turkish companies are experiencing problems receiving compensation, and there were fears that the situation would spill over to the Gulf countries. Sani Sener, CEO of TAV Holding, which last month won a $1.1 billion tender for an Omani airport, said their fears were justified. “This is the first time we have faced delays in payments for work done. That naturally affects us adversely,” he said.

Most relevant quarters feel that the burden of President Recep Tayyip Erdogan’s foreign policy is increasingly weighing on Turkish business by the day. Tensions with Russia and Iraq have significantly affected exports and tourism. Gulf countries once seen as an alternative market no longer look promising. Turkish businesspeople who closely follow developments in the Gulf economies can do little more than gloomily ponder.

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