As part of its drive to make the country more attractive to international investors and strengthen its economy, Turkey has kick-started a series of capital markets reforms by bringing its three exchanges under one roof, thus establishing the Borsa Istanbul.
On April 5, 2013, the Istanbul Stock Exchange (IMKB), the Istanbul Gold Exchange and the Derivatives Exchange of Turkey merged to become Borsa Istanbul (BIST), in what could be a historic move within the financial markets. According to Ali Babacan, Turkey's deputy prime minister, who is responsible for the economy, Borsa Istanbul's establishment is not only an important step for Turkey, but for the surrounding region, too. He is confident that in the next 10 years, the exchange will grow to compete with those in London and Frankfurt.
Editor's choice
“In a sense, we have given Istanbul the chance it deserves,” says Mr Babacan. He believes that Turkey's new exchange is in a good position, given Istanbul's strategic geopolitical location and its history of linking trade between the East and West.
Financial supermarket
A key aim of Borsa Istanbul is to contribute to the growth of the Turkish economy. Another is to ramp up the country's efforts to become a regional trading centre.
There are a number of targets in place for the borsa. One is to host more initial public offerings (IPOs) in order to raise the number of publicly traded companies in Turkey and diversify the markets. There are also plans to include commodities and electricity trading on the exchange. Currently, the exchange's capital amounts to Tl423.2m ($235m).
Ownership of the Borsa Istanbul is divided between the Turkish treasury, which owns 49%, IMKB’s members (4%), Istanbul Gold Exchange members (0.3%), the Association of Capital Market Intermediary Institutions of Turkey (1%) and Turkish Derivatives Exchange shareholders (5%). According to BIST, the remaining shares will be used by Borsa Istanbul for strategic partnerships with other global exchanges, technology providers and liquidity providers.
For Ibrahim Turhan, the CEO and chairman of the Borsa Istanbul, the exchange's opening marks the start of a new era. According to the BIST, the introduction of new markets and products will make the new exchange a financial supermarket, where equities, debt, warrants, futures and equity options, indices, precious metals, foreign currencies, interest rates, commodities and energy products will be traded.
Sukuk success
One of the key new instruments on the exchange will be Islamic bonds or sukuk, which it is hoped will help diversify the products that the exchange offers. Turkey issued its first sovereign sukuk on September 2012, raising a $1.5bn bond with a maturity of five and a half years. The Turkish treasury reported that the sukuk “attracted an order book of nearly five times of the actual issue size from 250 accounts”.
The majority of the lease certificates (58%) were sold to investors in the Middle East, another 13% were bought by investors in Europe, 12% by investors in Asia, 9% by Turkey and 8% by the US. The issue was in line with the treasury’s “strategy to broaden its investor base and diversify financing resources”. Such lease certificates will form part of the treasury’s annual financial programmes in the coming years.
This was followed in March 2013 by the first Turkish lira-denominated Islamic bond, which was issued by Bank Asya. “We issued the first private domestic Turkish lira-denominated sukuk for the amount of Tl125m. We also issued a subordinated Tier 2 structure internationally for the amount of $250m. The bond has a 10-year maturity, which is one of the longest in Turkey so far,” says Bank Asya’s CEO, Ahmet Beyaz. Following its success, the bank is pushing forward with more Islamic finance offerings.
“In line with the government’s initiatives, we built an Islamic pension fund last year. We are also building a portfolio management subsidiary, which should be ready this year,” says Mr Beyaz. Turkey’s Islamic banks are aiming for at least 10% market share by 2023, up from about 5% now.
Adapting to change
BIST believes that bringing future and spot products on to one exchange will enable different investment strategies that will improve risk management, thanks to a better transparency on price discovery. The launch of the futures and options market will also contribute to the efforts to establish Istanbul as a financial centre.
“Previously, the exchange was organised as a semi-public exchange that was run from [Turkey's capital] Ankara. That was not good. You need to be at the heart of the capital markets, have a flexible range of products, be able to update technologies quickly; you need the right human resources,” says Mustafa Baltaci, the executive vice-chairman of BIST.
The Istanbul Stock Exchange made very few significant updates since its launch in 1985, thus was unable to respond to the financial needs of companies in Turkey. This has been changing over the past four to five years, however, says Mr Baltaci, as more reforms have been taking place. “After January 1, 2012, when IMKB's new president came in, our tempo picked up as we received more support from the government. By then, we had the right window of opportunity. We had overcome the problems in the banking sector after spending about 10 years cleaning it up and making it stable. Now it was time for capital markets reform," says Mr Baltaci.
The reforms to the capital markets law are part of the efforts to provide stability and enhanced liquidity to the Turkish markets, thus creating the right conditions to attract foreign direct investment and enhance access to capital for Turkish companies.
“Until October 2012, there was no issuance in the international debt capital markets [DCM] by Turkish corporates,” says Paul de Kroon, the chief executive of RBS Turkey. This changed when Anadolu Efes debuted its bond issue, the first of a range of Turkish blue-chip companies that tapped international DCM liquidity. "This is a good development," says Mr de Kroon. "With funding diversification driven by the attractive funding costs as well as the pent-up demand from international investors to get exposure to the Turkish growth story directly.”
Locals drag their feet
Currently, there are 398 listed companies in the Turkish equity markets. This is not a bad starting point, says Mr Baltaci. “But only 12% of the top 1000 companies trade on the exchange," he adds. "So there is a gap... here that we need to close somehow."
There is a cultural problem, however. Most large Turkish companies are family owned and these families tend to shy away from the stock exchange, worried that they may lose control of their company. “We have to educate them on the benefits of the capital markets and stock exchange," says Mr Baltaci. " We visit such companies, we go on city tours to promote the capital markets.”
At the HSBC Global Connections Middle East and North Africa-Turkey Forum in 2012, Borsa Istanbul's Mr Turhan announced his aim to increase the number of listed companies on the exchange to 1000 "in the near future". He went on to explain that the aim would then be to bring market capitalisation to between 50% and 60% of gross domestic product (GDP).
Currently, Mr Baltaci says that the daily trading volume in Turkey's equity markets is about $2bn. “If you look at total free-float ownership, 65% belongs to foreign institutions, mostly institutional investors. The rest belongs to local investors, that keep the turnover going by buying and selling. So we do have liquidity. There is interest from both foreign and local investors. We look at the holding periods and these are all above a year,” he says. This proves that foreign investors have trust in the Turkish markets, he adds.
Low turnout
According to Bloomberg, Turkish equities were the second best performers worldwide in 2012, with the benchmark ISE National 100 Index surging more than 60% in dollar terms.
It is market capitalisation that lets Turkey down, however. For a country that comprises 1.5% of gross world product and 3.5% of the gross world trade volume, its 0.5% share of capital markets capitalisation is disappointing. To put it in context, Turkey’s $270bn market capitalisation is less than one-third of South Africa’s $895.5bn. And South Africa’s economy is little more than half the size of Turkey’s.
Turkey's capital markets performance is surprising given the stability of its banking sector. The total assets-to-GDP ratio in Turkish banking sector is 100%, while its capital adequacy is about 13%. According to BIST, capital markets assets account for just 11% of the financial sector. It is these statistics that prompted Turkey's Mr Babacan to label Turkey's capital markets “deficient” compared with the banking sector. He is confident, however, that a series of reforms will help close this deficiency.
One such reform is the advent of the commercial trade law, which came into effect in July 2012, updating a 55-year-old law. The new law complies with the stipulations for EU accession and, as Mr Baltaci highlights, is almost identical to the capital markets law.
This is very important, he says, because it effectively tells companies that whether they trade on the exchange or not, they have to adhere to the same business rules, such as auditing and accounting. This way, they will have less reason to shy away from trading on the exchange. Indeed, the law is already having a positive effect. In 2012, there were 28 IPOs, a significant increase from the 22 recorded the previous year.
