IFR Turkey 2010
Turkey has weathered the financial crisis better than any had expected and it has emerged the other side with its reputation enhanced. In a neighbourhood where much has gone wrong, Turkey has seemingly done everything right.
Much of Turkey’s current success stems from how it rebuilt its financial system after the collapse of 2001. It eschewed foreign debt, tamed inflation, strengthened the local banking system and created strong, independent regulators. All these factors have allowed the country to escape the fate that so many other Eastern European and Central Asian states have suffered during this crisis.
Yet standing alone is only half the battle. Turkey has still to establish itself in the minds of international capital markets investors. Its problem is one of definition. For too long the country has been defined by what it is not: it is not European, nor Middle Eastern; it is not investment grade and yet its debt doesn’t trade like an emerging market; its companies are some of the biggest in Europe but they have very few international investors. So as Turkey stands out from the rest of the region, its task is to find a way that it can define itself for what it is, not what it is not.
Definitions matter, not least because they give something concrete to hang on to. Despite Turkey being a macro success, at a micro level it is very hard for international investors to access. On the equity side, large family companies dominate the landscape, and yet these companies have ample internal cash and low appetite for fresh capital.
On the debt side, international bond deals from Turkish companies are rare. Turkish issuers are dissuaded by the price that investors demand and the currency risk offshore issuance entails. On the bank side, annual syndications are yet to give way to longer-dated international bonds, not least because of pressure from regulators.
The lack of international activity in the capital markets is in inverse proportion to the appetite for Turkish exposure by international investors. These investors make up more than 70% of the volume of the Istanbul Stock Exchange. Bank deals and sovereign bonds deals are likewise snapped up by international fixed income investors. Demand outstrips supply of good Turkish exposure – again the emphasis is on what is missing rather than what is there.
The local markets are relatively sophisticated, but they are not developed. A clever, educated workforce is not matched by a deep and liquid local market: a financing culture is missing and the companies and individuals rely on the local bank market to the exclusion of the development of the local bond and equity markets. Until this changes, Turkey will not have what it takes to really become the international financial centre that it so wants to be. It will be in the development of these local capital markets that Turkey will find its capital markets identity.
Necessity is the mother of invention and Turkey needs money, especially to finance the government’s ambitious privatisation programme. This will see the creation of new companies that need to raise long-term local debt and equity, especially in the energy and real estate sectors. This process could create the beginnings of a local equity culture while also providing the basis for the development of long-term domestic debt markets. Ally this to the fast growing (but still tiny) domestic institutional investor base and you have the makings of an investment story that finally works at both a macro and micro level.
This process will take time – most bankers talk about four to five years at a minimum. In that time much can go wrong. But the opportunity has never been more propitious for the country to finally establish itself at the top table of international markets.