Talking to bankers and analysts about Turkey in late February and early March was an odd experience. On almost every front there had been progress over the past 12 months and Turkish assets were in demand, from sovereign bonds to second-tier banks. But there was also a sense that investors were ignoring the full picture and accepting a simplistic view of what is a far more complex situation.
Certainly the Turkish economy continues to satisfy most economists’ wish-lists, with high growth, falling inflation and a primary fiscal surplus. But there are also issues – such as the failure to agree a new IMF programme – that should ring alarm bells.
In the banking sector, domestic banks have benefited from the country’s economic success in the last couple of years, and increased their lending by focusing on consumers. But the prospect of EU convergence is already attracting foreign banks to the market, with the threat of greater competition.
The fact that Turkey is not a one-way bet has been illustrated by recent events in the international bond market. After months of spread tightening and a string of positive news items, the wheels came off Turkish bonds in mid March following a reverse in the US Treasury market. With over half its 2005 international funding already in the bag, the sovereign isn’t worried, but this development seems to hit hopes of non-sovereign issuance firmly on the head for the moment.
Staying with bonds, one exciting change has been the creation of an international Turkish lira bond market following the rebasing of the currency in January. Volumes have far surpassed expectations, and bankers believe that this is only the beginning.
And in the loan market, Turkish FIG borrowers have been able to get record-sized loans at prices not seen since before the country’s 2001 crisis. The falling pricing for the top borrowers is only likely to fuel lenders’ appetite for small banks and a burgeoning corporate market.
The equity capital markets offer a more mixed picture, with some bad secondary market performance from 2004’s ECM deals, and high-profile issues pulled. One interesting development here is the government’s new-found enthusiasm for the public markets as a means of privatisation.
Across all asset classes, a suitable legislative framework and its subsequent enforcement are essential to encourage foreign investment. In recent years, Turkey has suffered from a low ratio of foreign direct investment to GDP, as well as a series of headline-grabbing scandals. But with significant legislative change on the way – on mortgages, banking and in the commercial code – analysts are watching for signs of a fundamental shift in the treatment of investors.
The organisation responsible for regulating a lot of these areas is the Capital Markets Board of Turkey, sometimes criticised for a lack of teeth. As the government bids to introduce a series of new laws, make tax changes and maintain low inflation, with a resulting expansion in the range of financial instruments, the CMB’s role and importance look set to increase.
Overall, this is an exciting but still challenging time for Turkey and its financial markets. The country is firmly on the right track, but there is a long way to go.