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In little over a decade, Turkey has gone from being the sick man to the rich man of Europe. While other European countries have come through the crisis indebted, stunted and broke, Turkey has gone from strength to strength. Last year was a watershed, with growth coming in at 8.9%, inflation in low single digits and real interest rates close to zero.
But Turkey’s activity in the capital markets has not yet matched its economic status. The preponderance of bank finance, distrust of the equity markets and a dismally small local institutional investor base means the country punches well below its weight when it comes to capital markets activity.
That is changing. A highly successful privatisation process is underway, setting the stage for years of ongoing financing activity, from loans, through bonds, to IPOs and M&A. A wide array of financial products is being embraced, such as covered bonds, Islamic finance, warrants and REITs. A sizeable pipeline of IPOs is developing of a size that will interest international institutions.
Central to everything has been the taming of the inflationary beast, from which all this activity has come. Companies can now afford to issue bonds, rather than relying on retained earnings or short term bank finance for growth. Equities look attractive compared to bank deposits. And the government’s finances are in such good shape that an upgrade to investment grade status is more probable than not.
This will spur on much financing activity. The government deserves credit for getting the country into the macro position that will allow this to happen. But it still needs to focus on the micro. Post-election, its biggest challenge is developing the local institutional investor base, allowing Turkey to fund itself and to some extent liberating it from volatile external markets. Indeed, it is a reversal of some magnitude that there is more demand for Turkish exposure than there is supply of product.
This supplement will look at the challenges that remain as well as analysing the deals that have happened. Sovereign issuance, IPOs, privatisations, REITs, bank bonds and syndications provide a rich buffet for international financiers. But for all the riches on offer, it is still a table that is half laid.