Pole positioning 

IFR Turkey Special Report May 2013
9 min read

Turkey has taken steps to reform its pension system, which should eventually come to be the basis of stable and resilient capital markets. The nation is following the path to developing a deep pool of domestic institutional investors previously travelled by Poland.

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Imitation is the sincerest form of flattery they say, and one country will often emulate another’s perceived success in particular areas. Growing industrial powerhouses like China, for instance, aspire to Germany and Japan’s engineering clout. The process even extends to finding replicas – historic buildings included – of English public schools in the UAE and French chateau in rural China.

Financial hubs like London and Wall Street have laid the blueprint for Dubai and Shanghai, often down to the finest technical detail.

Yet it is not always the obvious targets that countries look to mimic. Take Turkey’s increasingly amorous relationship with Poland.

At first glance, it is not clear what the Turks covet. But narrow it down to the economy and the answer is clear: Poland’s deep and active capital markets. In Turkey’s financial capital, Istanbul, barely a meeting passes by without a mention of the Warsaw Stock Exchange.

The desire to emulate Poland, bordering on hero worship, is not so surprising. Warsaw is not only the most active bourse in Central and Eastern Europe, but WSE trading volume now exceeds activity on all CEE-region stock markets combined.

Visible emerging power

Everywhere one looks in Turkey, one sees the sort of economic confidence visible only in aspiring or re-emerging superpowers: booming retail sales; cities packed with construction cranes; conglomerates exporting like mad to Europe, Asia, and the transition states of Middle East and North Africa.

Turkey’s economy has grown in leaps and bounds since a harrowing financial meltdown at the turn of the millennium. GDP rose 8.5% in 2011 and 9.2% the previous year, according to CIA World Factbook data. That dipped to 2.2% last year, but Turkey’s economy is on track to expand by 3.8% this year and 4.5% in 2014.

Only on the issue of capital markets does Turkey fall short, and that brings us back to Poland. Far-sighted legislators in Warsaw made a succession of far-reaching decisions in the mid to late 1990s that continue to resound today.

First, the WSE’s directors declined repeated offers to lock themselves into a joint venture with a bourse from Western Europe – which would likely have made them a minority player in their homeland – or to sell up entirely. Rather, they opted to blaze their own trail, remaining independent – not an easy option to take in a country impoverished by the retreating Soviet Union – while seeking over the long term to promote them as the CEE’s bourse of choice.

Warsaw solution

Poland managed this tricky feat by systematically stripping out assets from the state fundament, transforming them into well-run private enterprises, then listing them on the WSE. Banks, carriers, insurance firms, utilities: all were sold in a series of IPOs to a mix of retail and institutional shareholders.

In time, the world started to take notice. Warsaw’s stock exchange, housed in a large, clinical building (situated, ironically, opposite the old Polish United Workers’ Party headquarters) now hosts institutional investors from across the world. Corporations from Hungary, Austria (where the Vienna stock exchange used to be the link between West and East) and Ukraine have made Warsaw their home.

This, above all, is what Turkey is seeking to imitate, and for good reason. Any equity or debt market offering, wherever it takes place, is dependent on a wide array of market conditions. But deeper, more liquid markets – and Poland is one – can absorb, say, an IPO or chunky corporate debt sale even when the wider world has an off-day.

Turkey operates at the other extreme.

“You can’t complete an IPO here without Europe and America having a good day,” said one Istanbul-based investment banker. “I’ve done dozens of big stocks sales, and if one thing goes wrong, like bad US jobs figures or awful eurozone news, the sale goes down the toilet.”

This brings us back to Turkey’s most prominent problem: the glaring lack of a deep pool of domestic institutional investors. “A big shortcoming of Turkey’s capital markets is the lack of local institutional investors,” said Bahar Sayiner, head of corporate finance at Erste Securities Istanbul.

“I’ve done dozens of big stocks sales, and if one thing goes wrong, like bad US jobs figures or awful eurozone news, the sale goes down the toilet”

“The local market is effectively a retail market. A successful IPO requires a good balance between institutional and retail investors to ensure a healthy trading activity.”

Nor can retail investors compensate for the paucity of sizeable local institutional investors on any given deal, as is possible in strongly retail-geared markets like Hong Kong, Seoul or, to a lesser extent, Poland.

Decades of slow growth and soaring inflation (still a residual problem here), punctuated with financial crises and currency devaluations, have left Turkish retail investors highly suspicious of the volatility of stock trading.

“There is a very limited institutional shareholder base in Turkey at the moment,” said Cem Ciprut, head of investment banking, Turkey, at UBS.

Key reforms

But the country’s financial leaders and political leaders are trying. On January 1, legislators in Ankara approved key pension reforms designed to deepen the country’s capital market investor base while convincing Turkey’s spendthrift consumers to save a little more.

These reforms consist primarily of two key measures. First, any individual can now claim a tax deduction of up to 15% on any pension contribution. Second, the government has pledged to match any contribution of up to TL799.50 (US$443) – the level of the minimum wage per month – with a matching contribution of 25%.

Ankara hopes these measures will, at a stroke, solve several entrenched Turkish problems. It should boost the country’s rather forlorn gross domestic savings rate, which was 16.3% at end-2012, according to Fitch. Higher savings should, if all goes to plan, feed through the system, into domestic insurance firms and pension funds.

And this, in turn, should aid Turkey’s quest to achieve its ultimate ambition: the creation of a deep new well of domestic institutional capital, able to steer an IPO or major debt sale home, without too much help from the outside world.

Such was Poland’s success in this arena that in recent years there have been occasions where Warsaw is the only place in EMEA that could host an IPO.

This process won’t be simple or quick. Ankara’s January surprise – widely applauded in Istanbul’s financial and corporate boardrooms – is, said Turalay Kenc, deputy governor at the Central Bank, “only the beginning of a very long-term process. The government is actively trying to introduce a private pension scheme that is open to everyone, and which encourages people to save. It’s only a start, but it’s a very good start”.

Ankara’s pension reforms, though largely overlooked by the wider world, may come to be seen, a decade hence, as a huge step forward for the development of Turkey’s capital markets. Again, there are similarities here with Poland. In the 1990s, Poland was a financial backwater; the WSE was widely expected, long term, to play second fiddle to bourses in Prague or Budapest.

But that did not happen. Warsaw opted to blend mass privatisation with an open attitude to share ownership that embraced both retail investors and foreign institutional funds. Its position as the beating heart of the CEE’s capital markets is testament to the country’s ability to take the long view.

Turkey recognises what Poland has achieved. Istanbul bridges Asia, Europe, and the Middle East, but for now the focus is on a small part of Eastern Europe.

Turkish F1 Grand Prix at the Istanbul Park circuit in Istanbul