Key View: We have significantly revised down Turkey's Utilities Network score in light of recent developments both locally and regionally that have greatly increased the risks of disruptions to the supply and increased costs of utilities in the country. Rising political tensions in Europe since the outbreak of the Russia-Ukraine conflict mean that financing for key projects in Turkey may not be forthcoming. The widespread economic impacts of the conflict are also likely to cause Turkey and other markets in the region to reduce their focus on utilities provision and put planned projects on the backburner in favour of bracing themselves against macroeconomic headwinds and mitigating potential crises in food supply. The risks of disruptions in the supply of utilities to Turkey have ramped up as a result of the conflict, particularly regarding electricity and fuel supply; we highlight that Russia provides around 45% of Turkey's natural gas, 40% of its gasoline and 17% of its oil. The collapse in the Turkish lira and rocketing inflation are increasing the cost of electricity and fuel imports, on which Turkey remains heavily reliant, leading to higher end prices for domestic consumers. The same factors have led to the major broadband provider in the country increasing its prices by 67%. Compounding these risks are more long-term issues such as the frequent outbreaks of violence in Turkey, especially along the border with Syria, which pose a downside risk to energy supply as key infrastructure is targeted during clashes. Water shortages are also likely to become a major issue over the long term, restricting agricultural production and growth in key industries. On a more positive note, we highlight that Turkey has a sophisticated telecommunications market, substantial local gas reserves and a significant pipeline of utilities projects, particularly in the electricity space. As these projects come online over the long term, they will increase the local supply of utilities, reduce Turkey's import reliance and lower operating costs for businesses in the country. Turkey is now ranked in seventh place out of 12 markets regionally and 71st out of 201 global markets for Utilities Network, with a score of 56.5 out of 100.
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In April 2022, Turkey's Information Technologies and Communication Authority announced that Türk Telekom would raise its wholesale broadband tariff prices by 67%, citing inflationary pressures and currency devaluation as the main causes of the increase.
In March, Turkey Wealth Fund, the Turkish state’s investment arm, acquired a 55% stake in Türk Telekom. Upon regulatory approval, the sovereign fund's stake in the operator will increase to 61.6%, which would provide the government with significant control over Türk Telekom. In 2020, Turkey Wealth Fund also acquired a majority stake in mobile operator Turkcell. As a result, two of the three largest operators in Turkey are now majority-owned by government-linked shareholders, leaving Vodafone as the only independent, foreign-owned telecoms provider in the market. There is potential for this to reduce levels of competition, leading to price increases and a slowdown in innovation, which would be negative for businesses operating in Turkey.
In December 2021, SOCAR Turkey announced that it will increase the crude oil processing capacity of the STAR Refinery in Izmir Aliaga from 11mtpa to 13mtpa, adding around 200,000b/d of capacity once fully operational. It will use crude oil feedstock from Azerbaijan. This should drive an increase in local refined fuel production over the coming years. Nevertheless, reliance on imported feedstock means that price hikes will remain a major concern for businesses.
- Six wind power plants are currently under construction in Turkey, along with one thermal, one nuclear and one solar power plant. There are around another 25 power projects in the pipeline, including Turkey's first battery energy storage project. We expect that businesses in the country will enjoy a more stable and affordable supply of electricity over the medium-to-long term as these plants are connected to the national grid and Turkey's import reliance declines.
Turkey has globally competitive broadband tariffs, reducing operating costs for businesses and widening the potential of the e-commerce market. In addition, the country's strategy of diversifying the power mix to curb expensive gas imports continues to gain momentum, and this will lower electricity prices in the long term. Although a reliance on fuel and gas imports as feedstock for electricity generation exposes energy-intensive operations to potentially higher tariffs, the cost of electricity and fuel are currently low by regional standards. The risk is that the ongoing recovery in global crude oil prices will increase the cost of both electricity and fuel for Turkish businesses, as there are no government subsidies to shield consumers and businesses. Overall, Turkey has a score of 67.3 out of 100 for Cost of Utilities, ranking first out of 12 markets in South East Europe and 30th out of 201 global markets.
Turkey lacks significant hydrocarbon resources available for exploitation to supply its large, energy-intensive domestic market, making it one of the world's largest net energy importers. Although electricity grid coverage is good, there is a risk of disruption to energy imports due to instability in neighbouring states and source markets, including Ukraine and Iraq. Turkey's attempt to position itself as a regional energy transit hub may mitigate these risks over the long term, but the threat of shortages will remain a concern. Businesses face similar risks with regard to the water supply, as several economies in the region rely on the same sources. In addition, over-extraction and climate change have resulted in water shortages and droughts that have had a severe impact on agriculture and other water-intensive industries. Although Turkey offers widespread access to internet services for both businesses and consumers, boosting the potential for e-commerce, download speeds remain sluggish on a regional comparison, which will deter investment in high-tech industries. These factors underpin Turkey's moderate score of 45.6 out of 100 for Availability of Utilities, ranking it ninth regionally out of 12 markets and 111th globally out of 201 markets.
The electricity generation sector in Turkey is exposed to a number of risks, including declining water resources, terrorist attacks on infrastructure and dependence on potentially unreliable gas imports. Shortages have led to blackouts in recent years, which disrupt business activity. The collapse in the Turkish lira significantly increased the cost of importing natural gas, which is gradually being passed on to consumers in the form of higher electricity prices. More stable supplies of fuel for electricity generation are expected to be secured over the medium term, as Turkey bids to become a major energy hub, which should mitigate the risk of power shortages to some extent. In particular, the first phase of the Trans Anatolian Natural Gas Pipeline Project was opened in June 2018, connecting Azerbaijan with Turkey via Georgia. Phase two will be used to distribute gas to the European market. The 1,850km, USD8bn pipeline will have the capacity to supply 10% of Turkey’s gas imports, in addition to making the country a hub for natural gas distribution.
Turkey will remain a small producer of both oil and gas, with dependence on imported natural gas and crude oil expected to increase through to 2031. A lack of domestic oil reserves means that Turkey's fuel supply is exposed to similar risks to electricity generation, due to dependence on imported feedstock. The sharp depreciation of the lira has increased the country's energy bill significantly. This has raised refined fuel prices in the country and will act as a severe headwind to demand growth in the short term. Although the defeat of IS in much of Iraq has reduced security risks to supply from its southern neighbour, the country remains unstable, and Turkey will have to ensure that its imports remain well diversified in order to mitigate the risk of disruption. We expect tensions to continue to rise as Turkey presses on with proposed exploration in the Cypriot Exclusive Economic Zones and the eastern Mediterranean in general.