Turkey debate: Turkey looks towards global financial centre status

Turkey debate: Participants

Elliot Wilson, Euromoney In the light of the creation of a single securities exchange in April, the Borsa Istanbul, is Turkey destined to become a regional or global financial hub?

MY, Borsa Istanbul Istanbul is destined over the long term to become a global financial centre, thanks to the many steps we have taken to improve our financial markets. A lot of hard work has been done over the past decade and more, stretching back to our financial crisis in 2001, when we started restructuring our financial sector, creating a resilient banking system as good as any in the region or across the emerging countries. The main challenge for us still, though, is that the financial sector remains dominated by banking. In other countries the financial industry is far more diverse, encompassing capital markets, insurance companies and so on. Look at London or New York, where the capital markets played a vital role in turning those cities into global financial players. That’s why we passed a new law enhancing and expanding our capital markets and, in April, we brought all exchanges together under one roof at the Borsa Istanbul, including the Istanbul Gold Exchange and the Turkish Derivatives Exchange. We now want to turn the bourse into a global financial player. When you compare global financial exchanges by their sheer size, you can see how fast the Borsa Istanbul is growing. Also, to improve our performance, we have been listening and talking to the global best in class, including Nasdaq OMX, NYSE Euronext, London Stock Exchange, Deutsche Börse and the Chicago Mercantile Exchange. We opted to enter a strategic partnership agreement with Nasdaq OMX, and are actively engaged in bringing in investment from new shareholders, including sovereign wealth funds. This proves how much trust there is in Turkey and in Turkey’s financial sector. Just to prove it, I should say that according to the Global Financial Center Index, Istanbul was ranked as 57th in March, but was 44th in September. This shows our progress.

Euromoney Lets turn to the Istanbul Financial Centre Initiative (IFC-I), the long-term plan to boost Turkey’s financial competitiveness. How is that project going?

KR, Akbank The government’s strategic action plan on the IFC-I was published in October 2009, so the project has been under way for four years and has progressed a lot. Borsa Istanbul officials and related ministries are working in harmony to improve the financial system’s legal and administrative infrastructure, working alongside public-sector and private-sector players as well as academics and NGOs. The next key stage on our roadmap is to improve the state of our judicial infrastructure. Also, our financial system is mostly dominated by banks, which is common for an emerging market nation, but we need to enhance and expand the financial sector further, creating and attracting insurance firms, leasing companies and pension funds in order to deepen and broaden our capital markets. The tax system is also central to our future: we need to further simplify our tax structure. Our physical infrastructure is of course a must. We’ve got great telecoms connectivity, and a highly educated and literate workforce, but we need to improve our transport system. And we need to continue to promote Istanbul as an international financial centre. A lot of progress has already been made, notably with our new commercial code, enforced in July 2012, which is revolutionizing how business is done here. Bilateral tax and trade treaties have been signed with many countries; a new capital market law has been introduced; the futures and options market is developing; the pension system is becoming increasingly diversified; and the Borsa Istanbul is increasing the depth and attractiveness of Turkey as a regional financial market. We are also starting to see the increased prevalence of sukuk as Islamic finance starts to take off. All of this is underpinned by a reliable and simplified tax code: our corporate tax rate is now akin to that of most European peers at 20%.

Euromoney Mr Kocabalkan, how are you looking to educate foreign investors about the Borsa Istanbul and about the benefits of becoming important players in Turkey’s financial sector?

AK, Istanbul Financial Centre Initiative To ensure that Istanbul becomes a global financial centre we must boost the city’s competitiveness. And that means attracting international players to the city. We’re seeing major multilaterals setting up here, notably the European Bank for Reconstruction and Development and the International Finance Corporation, whose Istanbul offices are second only in terms of personnel and size to Washington, DC. The IFC’s parent, the World Bank, has also opted to locate its global Islamic finance research centre in Istanbul. But there’s another facet to our story: if we really want to create a truly globally competitive business centre right here in Turkey’s largest city, we need every stakeholder to be a keen and eager part of the story. Politicians, bureaucrats, non-governmental organizations, even the media; they all need to buy into our golden financial future. There is much still to be done. We need to reduce macroeconomic volatility while maintaining strong economic growth, which will help us secure rising inward foreign investment capital. And that will be key in securing greater capital flow into public-private partnerships. The consensus is that Turkey needs to secure $80 billion in future funding for PPP projects. And the IFC-I is trying to provide visibility to this idea. We are not sending a rocket to the moon here: we are merely selling the concept of Istanbul as a fabulous investment story; and to that end we need investors, particularly on the private sector side, we need projects, and we need capital.

Euromoney Jim, from an outsider’s perspective, how well is Turkey doing in pushing its financial sector to diversify, expand and move forward?

JT, EBRD They are doing almost everything right from the point of view of their set-up. There is very strong government commitment. There is also a capital markets master plan in place, a real strategy; and it’s great to have a defined strategy to stick to. Turkey has great natural advantages. It is the regional hub for our banking operations: from here we cover the Balkans, southeastern Europe, all the way up to central Asia. Istanbul’s excellent aviation hub will help further support the city’s capital markets. It’s no secret that large institutions locate themselves in countries because of the ease of access: I can get here from Ankara in two hours.

Euromoney How healthy is Turkey’s economy overall, Sahin?

SZ, Akbank Turkey has been transformed over the past decade. Inflation has tumbled from 30% to around 6% and exports have more than quadrupled to $150 billion. Debt as a proportion of GDP has fallen to 36% from 74%, leaving Turkey in a far healthier position economically and financially than most EU countries. How did this happen? There are a few key factors at play: strong fiscal and monetary frameworks; a strong financial system, put in place after the 2001 crisis; greater social inclusion; and a heightened role for the private sector. However you view the country, you can see that Istanbul’s financial sector is in great shape.

Euromoney What is needed to take the city, and the Borsa Istanbul, to the next step?

MY, Borsa Istanbul Many of the initial steps have already been taken for making Istanbul as an international financial centre: of the 71 processes identified by the minister of development, 31 have been completed. But we need to go further, seeking more private-sector participation. The City of London Initiative comprises players across the financial sector, working together to draw activity and profit to the UK capital. We need to create that sort of initiative – to show the world that we are truly dedicated to turning Istanbul into a financial centre designed to benefit all stakeholders. In 2012, when we held discussions with potential strategic partners about drawing more investment into the Borsa Istanbul, they laughed at us. But when we undertook remedial actions: drawing up a new capital markets law, bringing all instruments together under one roof at the bourse, investors saw we were serious. We also needed to show foreign investors that they can both invest and hedge here. In the future, we need to improve our clearing and settlement systems while improving financial inclusion. We need also to educate Turkish investors, helping them understand financial instruments better. We need to keep our tax base stable, while cutting the fat out of stamp duty. Another key tangible ambition is the need to set up a court of arbitration: if conflicts arise between third parties here, they need to secure access to an independent court able to satisfy a dispute to everyone’s legal satisfaction. Finally, we need to deepen our corporate bond sector, and deepen securities trading across the Borsa Istanbul. Annual trading volumes across the exchange currently run at around $2.5 trillion; we want to quadruple that figure over the next decade.

JT, EBRD There is quite a lot that still needs to be done. We have taken small chunks in recent corporate bonds in Turkey, in some cases acting as anchor investors, particularly when a specific deal takes the market forward, by extending the yield curve, having a positive capital market impact or providing a different pricing reference rate. One continuing source of mystery to me is the Bit tax [the banking and insurance transaction tax], which appears to be an impediment to every part of the financial sector. There has been a big push from financial players to have this tax expunged; I believe this is critical to moving the market forward.

AK, Istanbul Financial Centre Initiative Fourteen criteria are required to be a true international financial centre, including transportation, language skills and talented personnel. You need to create a city where people want to both live and do business: to that end, we need to create incentives for people to spend more time in Istanbul. Look at this as one would a beauty contest: we need to create reasons for people to be here, rather than in Dubai, London, or New York. The message here is that you can do business with the Nasdaq bourse via the Borsa Istanbul; that Istanbul is a regional hub, through which you can reach any other financial hub. I believe Russians, for example, don’t go to Dubai for social reasons. They love coming to the Bosporus, spending time here. Turkey is a far more culturally attractive destination for them.

JT, EBRD And you have to remember that capital market development never ends – it’s more like a decision tree than it is, say, like building a dam. And Turkey, very impressively, is treating the development of its capital markets with this sort of intellectual fluidity. If something works they’ll move on to the next challenge; if it doesn’t, they’ll try a new approach. Don’t forget, though, that local investors are the key to everything: they are always here, they’ll never run away, as the IMF and the Bank for International Settlements have both noted. You can’t buy a thriving local investor base; you have to develop that internally. Look at Turkey’s far-sighted strategy of creating a thriving local pension fund base at a time when many countries are being short-sighted over such developments.

Euromoney How important have these pension fund developments been to the transformation of Turkey’s stock markets and financial sector?

KR, Akbank The local investor base is very important: you can’t adequately build a healthy financial sector without one. Borsa Istanbul chairman Ibrahim Turhan talks of the four Cs: capacity, capital, connection, and competition. Well, I would add a fifth: courage. Turkey’s government has a lot of that, particularly in reference to the strides made in developing a deep financial sector.

Euromoney Let me turn this question around and ask it from the other perspective: is there any reason to believe that Turkey might struggle to continue to build a globally relevant financial sector in Istanbul?

MY, Borsa Istanbul Turkey has all the resources necessary to become a global financial centre. But sometimes politics can play an unexpected role in preventing you achieving your goal. As we have seen in recent months, events such as social unrest can interrupt stability and delay long-term economic and financial plans. But look at our softer side as well: Istanbul is fast becoming a global centre for tourism, thanks to the portrayal of the city through TV shows. Go to malls here and you’ll find tourists from the Middle East, the Balkans, Russia: they see Turkish soap operas and want to be part of the lifestyle. Well, that’s great, but we also need to ensure that theory and the reality are in line: if people like what they see, they will come back.

JT, EBRD Turkey has made some unbelievable improvements in recent years, but there is still some way to go. One major focus is volatility. We have moved away from exponential growth rates overall, but the banking sector still grew by a quarter last year, an astronomical rate of expansion, and investors need convincing that when that process swings back there will be a soft landing. Equally crucial is consistency in the levying of the rule of law. I can’t begin to overstate how important that is, although overall Turkey stands out as having a rigorous rule of law.

SZ, Akbank The authorities have brought in recent measures to curb the growth of loans, particularly in the consumer segment. So the government is aware of the risks and is taking steps to ensure that those risks are mitigated.

AK, Istanbul Financial Centre Initiative Remember that we are up against stiff competition for the title of premier regional financial hub: it’s a beauty contest and there are other viable candidates out there. We need people to want to live and work here, to be attracted to come here, to spend and invest their money here. That goes to the heart of the IFC-I initiative and to the great changes taking place within the Borsa Istanbul. Fiscal stability and discipline is at the heart of the process: that is how Turkey will drive and finance its economy. Additionally I have to define IFC-I and our goal. We are a cluster initiative, aimed at boosting the international competitiveness of our financial and professional services industries, and in turning Istanbul into a global financial centre. We are bringing together various stakeholders, from the public sector to NGOs, to collect and collate their opinions about the IFC-I. We’re also organizing panel discussions and using the tools of printed media, television and social media to raise awareness about IFC-I. Our main goal is to put Istanbul at the heart of the country’s and the region’s infrastructure and energy sectors, while strengthening the competitive power of leading domestic corporates and building out the city’s financial base.

MY, Borsa Istanbul The social perspective is also vital. We don’t have many foreign workers in the financial sector: we need to ease legislation allowing corporates to employ foreign workers in Turkey. At Borsa Istanbul, we want to become a global exchange, but we are aware that leading global exchanges employ people from all over the world, and that helps create industrial synergy. We need to create the sort of conditions that ensure that financial-sector workers and their families feel comfortable here. If they don’t find the right sort of education or health coverage or living conditions here, they can easily go elsewhere. We are working hard on that every day and it goes without saying that Istanbul is one of the world’s leading cities, and a great and rewarding place to live and work.

Euromoney What financial instruments should be fostered and developed in Istanbul. Do we need deeper debt markets? More initial public offerings?

MY, Borsa Istanbul Let’s start with Islamic finance, which is now over a $1 trillion global industry and growing fast. In Turkey, this industry is in its early stages, although I believe that products such as sukuk and takaful will come to play a more vital role in the city’s financial development. That’s why now we permit trading in sovereign sukuk issued by the Turkish treasury, with corporate sukuk traded on the Borsa Istanbul’s secondary market. We need to ensure that Islamic finance instruments appeal to all investors: local investors and global investors alike. This is a long-term programme: in five years’ time we aim to have created a vibrant, thriving market for Islamic banking and finance. We also want to ensure that we attract both Turkish and regional companies to list here. And finally, while we have already offered index futures and options, we should also introduce commodity and energy futures and options, helping foreign companies hedge their risks. We are a growing energy hub, and foreign investors want to invest in the sector, but we need to provide the right mechanism to allow trading in the spot market as well as the derivatives market. Finally, we are creating a trading platform where non-public companies can match their ideas with capital provided by private equity and angel investors. In Turkey most companies are family owned and many of these do not want to go public, so this mechanism is critical in creating new pools of tradable capital.

KR, Akbank Turkey still lacks a viable working securitization market. If we can build this market, ensuring that bank assets are recycled back into the securitization market, it would give our lenders far more leverage.

 

Euromoney There is enough capital to meet the largest Turkish IPOs on a regular basis, yet we see relatively few large-scale local listings. How can both liquidity and listing activity be increased?

JT, EBRD An investor doesn’t look at an IPO as a long-term investment. And in Turkey in particular, there is historically a lot of resistance to buying longer-dated paper or assets. We need to develop products that the investor community regards as favourable and that can be packaged for retail consumption. Securitization has a bad name sometimes for obvious reasons, but it will develop in time. Covered bonds in the long run will be very important for pension and banking industry development. But the big issue here is the glaring need for infrastructure investment. You only need to fly over Turkey to see that there is a lot of work that’s going to have to be done over a period of time. And while there will be some dollar- and euro-based funds available for infrastructure spending and investment, we will need to push for the creation of Turkish lira currency bonds. Ultimately, it’s all about getting investors to start thinking about and trusting in long-term assets and instruments.

MY, Borsa Istanbul We are committed to convincing companies to go public on the Borsa Istanbul. Last year we visited 300 companies at their headquarters, all medium-sized to large-scale enterprises. Every company was keen to talk and quick to seek answers. We helped to show them how they can, for example, raise capital without going public, how they can issue sukuk or real estate investment trusts, how they can issue corporate or convertible bonds. And we shouldn’t forget that 99% of all Turkish companies are small and medium-sized enterprise: companies that in the long term should also be looking to list on the Borsa Istanbul.

Euromoney What was the feedback from the companies you met?

MY, Borsa Istanbul Around a quarter of them were looking to plan for a listing in 2015 or 2016. Around a quarter were reluctant to go public for one or more reasons. Some believed that if they went public they would pay more taxes, and would thus lose their competitive edge. Our main argument was a simple one: companies in Turkey that don’t go public usually fail to last far beyond the third or even the second generation. It’s notable that only 10 or 15 major firms in Turkey are more than 70 years old, in stark contrast to many countries.

Euromoney How important is it to convince Turkey’s largest family-run firms to spin off and list subsidiaries? Is this happening as a new generation of leaders takes control of family groups?

KR, Akbank More education is vital too. When there is ample global liquidity, it’s very easy to access cheap funds. In those times most of the owners are reluctant to launch IPOs. I believe we will see more interest in IPOs in future.

JT, EBRD We hear a lot of talk about the need for securing more listings, but we might forget that it’s just as important to generate free float. If you end up with 5,000 companies listed on the Borsa Istanbul but no liquidity – well, having a glittering shopfront that doesn’t sell anything is no use at all. We need Borsa Istanbul to be seen as a genuine centre for capital raising. The big challenge is convincing Turkey’s biggest corporates to list on the main board, as many fear the loss of control associated with an IPO. The belief is that a listing forces you to cede corporate control, to raise corporate governance levels, to be held to higher financial-reporting standards. A lot of people who run the biggest companies here might say: "Well, that seems like a lot of work, why would I do that?"

MY, Borsa Istanbul Second-generation business leaders think more about going public. A lot of our second-generation managing directors ask us how to convince their fathers or grandfathers to take companies or groups public. We hear arguments where the owner of a company fears going public because he fears mismanaging a company and hurting new shareholders. We are then in the position of convincing him that these shareholders are only interested in investing in his company because they trust him. There’s a lot of trust involved here, and we can only overturn such misconception through full, frank and face-to-face discussions, and that is what we are doing.

JT, EBRD One privately owned Turkish firm asked me why they would want to bring in more investors when they had so many troubles with their own family. Other companies go public here just to solve lingering family disputes. So there is a lot to play for here.

MY, Borsa Istanbul We shouldn’t forget that during the financial crisis, the over-the-counter market collapsed, not the exchanges. Key exchanges such as the Borsa Istanbul will continue.

JT, EBRD But you can’t use the old traditional model of an exchange. If you take the old model to heart, you’ll come last as things are changing so quickly. Central clearing counterparties will in theory strengthen exchanges, but they will also centralize financial stability risks at the clearing counterparties, and there is a lot of discussion globally as to whether that is a good thing.

SZ, Akbank Many of us in Turkey still carry in our heads and on our shoulders the burden of the high-inflation 1990s. Many first-generation corporate leaders don’t want to go public; it’s because they see themselves as survivors who remained afloat and alive during the really tough times. They think they are the right people to run these companies. This bleeds through into the fear of investing in, or issuing, long-term bonds or equities. The only way to change that mode of thinking is to ensure truly long-term macroeconomic stability.

Euromoney Don’t we have that stability now in Turkey?

JT, EBRD We can’t claim to have economic stability when we still have exponential growth rates that we can’t control. It’s fantastic to see inflation figures falling, and to see commercial volumes rising so fast. But Turkey won’t get the internal legitimacy it craves until people start trusting themselves to invest in IPOs, or to invest in three-year or four-year non-government Turkish bonds.

Euromoney Returning to Islamic finance: isn’t that an area where Turkey can truly and quickly become a regional or world leader?

MY, Borsa Istanbul Turkey might well become a regional hub for Islamic finance, but we need to boost the number of Islamic finance services and products we provide to investors. We need more sukuk issuance, more Shariah-compliant instruments. In such financial centres as London and Paris, conventional banks are allowed to offer some Islamic products; well, there’s no reason why we should not look to do the same thing, in our own way. We need to be flexible and imaginative in terms of developing this business. Look at Malaysia, which is an international hub for Islamic finance, and where you can find conventional and Islamic financial instruments on display – conventional corporate bonds and sukuk; conventional and Shariah-compliant exchange-traded funds, side by side, all being traded within the same financial system. By offering such instruments in this way, we can turn Istanbul into a leading Islamic financial hub. Last but not least, the World Bank’s Global Centre for Islamic Finance, the first and only one of its kind anywhere in the world, opened in October. We believe this new centre will help propagate the development of the Islamic finance industry in the region, bringing Istanbul closer to being an international financial centre.

JT, EBRD Istanbul can definitely become a regional Islamic finance hub. Look at Malaysia with its sukuk sector, which feeds investment demand emanating from the most populous Islamic nation, Indonesia. Malaysia also has a slightly less strict view of Islamic standards than the Gulf region, which has a more prescriptive view of the industry. I can see a role for Turkey here as emulating Malaysia and offering a burgeoning Islamic finance sector out of a politically and structurally secular state. Key to the industry will be a growing Islamic financial and banking sector in Africa: Turkey could benefit hugely from that, given its position on the map. But you will need this to be underpinned by strong government policy: Turkey isn’t going to magically create an Islamic finance sector out of thin air.

KR, Akbank Creating an Islamic financial hub overnight will be hard: it will be easier for existing commercial players to grow into that area. In Istanbul we are currently permitted to buy and sell sukuk but not to issue it. But Istanbul sits atop a pivotal position on the map, a linchpin between Europe, Asia and Africa, so there is no reason why the city cannot become a key Islamic finance hub, as well as a key regional and even global financial hub. Within Borsa Istanbul, within the Turkish government and its ministries, and with the nation’s leading banks and institutional investors, we clearly have the capability to achieve these aims.