Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Western EuropeJanuary 2 2013

Can Turkey meet IFC target in next decade?

Turkey’s government wants to establish Istanbul as an international financial hub in time for the country’s 100th anniversary as a republic in 2023. The country's geographical location certainly works to its advantage, but it has much to achieve in just 10 years. Will it succeed?
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Can Turkey meet IFC target in next decade?

Turkey is taking a number of concrete steps towards making Istanbul attractive as a location for financial services investment. The government’s wide-reaching Strategy and Action Plan contains 71 ‘action items’, including changes to financial laws that will put the country on par with European standards, including an autonomous arbitration centre that can deal with legal disputes in the financial markets.

“We’re creating a court specifically for the finance sector,” a senior government official told The Banker. The plan also includes updates to regulation that governs financial products and services, such as sukuk bonds, and disclosure requirements to make markets more transparent. Additionally, the government is working on simplifying the country's tax system.

In December another major move was made when parliament approved a new law giving the government tighter control over the Capital Markets Board (SPK). Chairman Vedat Akgiray and all six board members lost their seats as a result, although it is unclear whether they will be reappointed. This law also allows for the reorganisation of Turkey's bourses with the merger expected of the stock exchange IMKB and the Istanbul Gold Exchange to form Borsa Istanbul. The new bourse will eventually be privatised, thus delivering another government ambition to make the city more competitive on an international scale. The law also includes new regulations to energy and housing markets.

But the new law that was expected to be approved by president Abdullah Gul in late December is not without controversy. Opposition politicians criticised the changes for meddling with the independence of the financial authorities and expressed concerns that this would create a body that acted according to the government's orders.

Investors and financial sector players generally welcomed the new developments. Erkan Kilimci, general manager of Erste Securities Istanbul, said that by adopting the new capital markets law Turkey will not only adhere to EU regulations, it will also lay the ground for a more competitive stock exchange.

Addressing governance issues is seen as crucially important if Turkey is to progress towards its goal of attracting international financial investment. The ruling AKP party is given credit for making some progress, but there is still much work to be done.

Calm in the storm

In power since 2002, the AKP has achieved some milestones at a time when many of its European neighbours have sunk deeper into economic recession and the social uprisings in the Middle East have continued. Turkey’s success is reflected in its low interest rate environment and sustained growth trajectory, says Mr Kilimci.

“From 2002 to 2007, Turkey’s gross domestic product [GDP] growth rate averaged an impressive 6.8%, while Turkey also became one of the fastest recovering countries after the Lehman crisis, with almost 9% average growth rate in 2010 and 2011," he says. "In 2012, policy-makers introduced measures aimed at achieving a soft landing and thus a more balanced composition in terms of domestic and external demand. Accordingly, 2012 was a milestone for Turkey as the country managed to lower its current account deficit without undergoing a contraction for the first time in its recent history.”

GDP growth for 2012 is expected to be 3%, but this figure is forecast to rise again to 4% in 2013. “We anticipate the inflation rate to [have declined] to 6.5% as of the end of 2012, a significant improvement versus the 30% inflation registered back in 2002," says Mr Kilimci. "Both the improvements in Turkey’s fundamentals and the benign inflation outlook have helped to lower bond yields, with the two-year benchmark bond yield now surfacing at a historical low of 5.8%, compared to the above 50% levels in 2003.” 

The Turkish government shifted the focus of its exports away from Europe and in doing so diversified its risk exposure. In 2002, Europe represented about 57% of Turkey's exports. In 2012, it was 38% as of September, says Fatma Melek, chief economist at Akbank. In this time, Turkey's exports to the Middle East and the Commonwealth of Independent States countries have grown. In 2007, these countries accounted for 19% of all exports. In 2012, this figure stood at 45%.

“The leverage ratio in Turkish households is 19% of GDP and the leverage in the corporate sector stands at 44% of GDP. The equivalent ratios for France, the UK, Spain and Italy is, on average, 77% of GDP and more than 140% of GDP,  respectively,” says Ms Melek.

Building up

In more physical terms, state-owned banks Ziraat, Halkbank and Vakifbank are in the process of moving the centre of their operations from capital city Ankara to Istanbul. Ultimately, financial institutions will move to Istanbul’s district of Atasehir, which occupies an area of 2.5 million square metres and is bigger than its equivalents in London or New York. There are also plans to tackle Istanbul’s frustratingly poor transport system, including the creation of more dual carriageways – 10,000 kilometres of highways will be built by 2023. Other developments in the planning stage include more high-speed rail links, a third bridge crossing the Bosphorus, tunnels under the river for both vehicles and trains, and a third airport.

Many of these developments are far from completed, however. In 2011, deputy prime minister Ali Babacan, who is also responsible for Turkey's economy, admitted only nine of the 71 action items from the Strategy and Action Plan had been achieved. However, during this time Istanbul’s ranking in the Global Financial Centres Index 2012 published by think tank Z/Yen Group has significantly improved, moving up from 61st in 2011 to 56th.

Capital markets move

Perhaps the most significant step towards transforming Istanbul into a major international financial hub is Turkey's new capital markets law.  Once on the statute book, the new laws will bring significant change.

Under the new capital markets law, at least one SPK board member must be a law graduate, another must have worked in private capital markets for a minimum of 10 years and another member must have worked at the SPK for at least 10 years.

This is quite different from the current law, which came into being after a military coup in 1980. The existing laws require that one-third of SPK members are elected once in every three years. The president himself is appointed for a six-year term by the cabinet, which considers nominations from the Ministry of Finance, the Ministry of Trade, the Banking Regulation and Supervision Agency, the Turkish Union of Chambers and Commodity Exchanges and the Turkish Association of Capital Market Intermediary Institutions.

These changes did spark a political dispute, not uncommon in Turkey, with opposition parties arguing that the government was attempting to tighten its grip on the country's independent financial bodies.

Corporate governance 

A stated aim of the reforms is to improve Turkey's corporate governance, which many critics say often falls short in international standards.

“With this new law, we are creating a stable framework around banking regulation and supervision,” says the senior government official. “The new law has clauses on management and the governance of firms which apply to the independent executive structure of publicly traded firms.”

In June, a new code of commerce was introduced, addressing “a lot of corporate government issues” including those affecting small and medium-sized enterprises (SMEs), says Tatiana Filippova, executive member of the board of directors at Sekerbank.

“This is intended to make businesses more transparent, which will help them get more financing from banks," she adds. "It’s a good regulation, but a lot of points aren’t clarified. The old commercial code did not address so many governance issues on an SME level. It now does. [Transparency] is not a custom here. It takes expertise and time for SMEs to get used to. It’s costly. There are some contradictions, even for banks. We are regulated by commercial codes, the supervision agency, the capital markets board. It will take time to adjust to everything.”

Sober outlook

However, despite an investment upgrade from Fitch in November, the outlook for Turkey appears to be one of moderate rather than rapid progress. “Europe’s economic turmoil has encouraged Turkey to diversify its strategy and exposure to other countries. But banks still depend on foreign funding. Syndicated loans, bonds and other instruments – they all come from the Western world. We are seeing momentum from the Middle East now, but it is not as diverse yet,” says Temel Güzeloglu, CEO of Finansbank.

Others agree. “The regulator has done an excellent job in introducing the right and appropriate measures at the right time,” says Dilek Mutus, executive vice-president and area head at Wells Fargo. “What is a challenge for the banking sector is the maturity mismatch, the funding that is available on the domestic markets is still short-term. Deposits are usually between three to six months. Medium-term funding options for Turkish banks are by far the most common solution local financial institution clients are looking for.”

This opportunity is also attracting private equity investors. Ahmet Faralyali’s Mediterra Capital is one such case. He was a principal with global investment firm KKR in London, responsible for investment activities in Turkey. Together with his business partner Murat Erkut, they created Mediterra Capital when the investment opportunities in Turkey’s SME sector became clear. “[SMEs] don’t have the same access to bank financing because they have not been institutionalised,” says Mr Faralyali.

Mediterra focuses on three key segments:

  • Sectors benefiting from growth in consumer spending, such as retail, leisure, healthcare and education. The company's first investment was in 3Pay, a mobile payments processing company.
  • The business-to-business services segment, which is growing particularly quickly and includes various outsourced services. The company's second investment was in this field in Mobiliz, a vehicle tracking service provider.
  • Industrial SMEs with export potential, such as those in the automotive and white goods sectors.

“Turkish companies need long-term capital and equity capital," says Mr Faralyali. "Turkish family-run businesses rely on their own capital resources to grow their business. Their capital isn’t sufficient to take full advantage of the growth potential. There are an estimated 3500 companies worth between €25m and €250m, according to our research. There are fewer companies worth more than €250m, but these have better access to long-term capital.”

Investment opportunities

For Erste’s Mr Kilimci, Turkey provides “excellent opportunities” for brokerage houses. Erste is looking to position itself as a gateway to merger and acquisition activities in the country. In late 2012, Erste introduced new turbo certificates to the Istanbul Stock Exchange. These leveraged structured products track the price development of an underlying asset, providing easy and cost-efficient access to foreign underlying assets such as the German Stock Index, gold and WTI crude oil, says Mr Kilimci.

Such foreign direct investment (FDI) will be key to Turkey’s transition. Between 2002 and 2011, 67% of FDI inflows went mostly to the services sector, says Ms Melek at Akbank, with 41% of this going to the financial sector. The energy sector and telecommunications sector each received 12%. Manufacturing, food and chemicals each received 4%, while real estate took a 2% share. Ms Melek says $25bn has been invested in the energy sector in Turkey over the past nine years. By 2023, this figure needs to rise to $120bn, she adds.

“Such investment needs significant private sector involvement. We will see more FDI in the energy sector in the forthcoming period, specifically in renewable energy. Turkey aims to raise the share of its renewable energy for electricity generation by 30%, of which nuclear energy will account for 20%,” she says.

For many, it is a case of when, and not if, Turkey will become an international financial hub. “Turkey, historically, used to be a financial hub. Now it is a case of reclaiming that status. It is in a prime geographic location, the culture is fitting, the government is working on infrastructural reforms, and financial and judicial regulation is being fine-tuned. Once this base is established, there is one last problem to solve: transportation and infrastructure, which is relatively poor in Istanbul. Projects are under way. This is not something that can be achieved quickly,” says Finansbank's Mr Güzeloglu.

Was this article helpful?

Thank you for your feedback!