As the credit crisis stopped activity in the leveraged loan market, Turkey has seen a steady deal flow throughout 2008. That the corporate market has in part driven this flow shows how the Turkish market has changed over the past few years. The syndicated loan product is long established in Turkey but activity was long dominated by financial institutions and trade finance business. However, yields have fallen in the FI sector to the extent that clubs have replaced syndication and as a result several yield based lenders have exited the market.The stable record of the top tier FI market, which despite Turkey's sometimes difficult economic history have neither defaulted nor succumbed to a failed syndication, means there is a universe of lenders that are comfortable with Turkish risk. As such when the corporate market began to open there was a willing group of banks ready to book assets. The privatisation of Turk Telecom was the defining point in the evolution of the corporate market. Oger Telekom, the Saudi linked vehicle which controls 55% of Turk Telecom, from 2005 through to last year embarked on a remarkable borrowing programme that showed the depth and sophistication of the corporate market. This culminated in 2007 with a US$3.7bn syndication that was later increased by a further US$1bn coupled with a reverse pricing flex. With around US$7.5bn raised in the initial syndication, at US$4.7bn the deal was equal to the entire Turkish loan market from 1990 to 2003. The success of Ojer's borrowing programme paved the way for borrowers such as Turkcell, which closed a US$3bn war chest financing, Avea, which signed an innovative US$1.6bn bookbuild facility and Hurriyet, a media group that signed a US$550m loan that funded its takeover of London listed Trader Media East. Activity through 2008 has not been so strong, though it has remained steady. Despite the high prices on offer the Turkish market is a bank only market and is underpinned by local bid that maintained discipline throughout the worst excesses of the credit boom of the past few years.“The structures are still pretty solid,” said Hasan Mustafa, head of CEEMA loan syndicate at ABN AMRO. “Turkish liquidity is driven by local bank capacity and while pricing collapsed in Russia and the Middle East, Turkish deals found the required liquidity to get done, and this has provided a pricing floor.”This pricing discipline means the market is in good shape to take advantage of the liquidity that is still available despite the wider credit crunch. Acquisition finance is expected to provide more supply as local firms look to expand abroad. Ulker's recently closed loan supporting its acquisition of chocolate maker Godiver was typical of this trend. The facility was launched at US$800m with a healthy margin of 275bp and secured a good oversubscription to close at US$950m. Ulker is not a frequent borrower but is considered a strong corporate name and the reception in syndication showed that there is still good demand for the right corporate name. The purchase of Godiva gives it a presence beyond Turkey and Europe as Godiva generates around 60% of its sales in the US. As well as corporate acquisition the government's on-going privatisation programme promises to be a good source of supply. Despite concern over the health of the wider global economic that bidders are still prepared to pay up was confirmed by British American Tobacco's acquisition of Tekel, the state tobacco group, for US$1.7bn that came in above analyst expectations.However, while these areas should provide ample opportunities, it is the infrastructure sector that offers the greatest promise. The country is looking at several infrastructure projects including the privatisation of roads and ports. For example a US$600m 13-year project finance loan closed successfully last year for the Mersin Port project. That facility backed PSA International's acquisition of a 36-year operating concession for the port and is likely to be fo
The Istanbul Exchange originated as one of the most prominent associations of bankers, and was established in 1866 by the Sultan of the Turkish Empire. The present Istanbul Exchange (ISE), which was re-establihed in 1986 as a modern and electronic exchange, has achieved phonomenal growth in those 22 years, in which time more than 300 Turkish companies have raised over US$37bn.For blue chips wishing to list on ISE there must be evidence of at least three years’ operations, with the last two years showing profit.Market capitalisation of the publicly offered shares of the corporation must be at least YTL20m and the rate of the nominal value of these shares to paid-in or issued capital must be at least 25%. If this rate is below 25%, market capitalisation of the publicly offered shares must be at least YTL38m.The only securities exchange in Turkey, ISE believes its listing fees are much more competitive than those on exchanges in the other mature markets, with an initial admission fee of US$2,500 and an annual fee of US$500.The ISE Foreign Securities Market targets blue chip companies operating outside Turkey, most of which are established in Europe and Asia. These companies have listed on ISE as this is the regional exchange providing them with with the best prospects for liquidity.ISE is actively involved in regional financing, and participated in the share capital of Baku Stock Exchange in Azerbaijan and the Kyrgyz Stock Exchange.It has been a leader in its region, initiating the establishment of the Federation of Euro Asian Stock Exchange (FEAS), which today includes 32 exchanges and seven Central Securities Depositories as members. FEAS aims to promote fast growth and harmanisation of its members’ systems, to attract issuers and investors from South East Europe, the Middle East, the Caucasus and Central Asia. ISE has been continuously elected to the presidency of FEAS since its inagaration in 1995.Islamic traded products are also a natural product for ISE to deliver. Turkey’s population is 99% Muslim, so such products should find good liquidity here. The exchange has also been watching the trend of consildation among exchanges with interest. As a mutual set-up without ownership rights, ISE is non-purchasable at present, but it can participate in other exchanges share capital, and has stakes in Baku and Kyrgyz Exchanges.A word on the credit crunchToday, the world is seeing the after effects of a rapid expansion in the credit markets. An abundance in global savings, mostly due to the rapid increase in oil prices and the recent meteoric rise of the Chinese economy, led to this global expansion of credit. This has resulted in the proliferation of credit lines, mostly for trade financing, direct investments and naturally portfolio investments.The credit lines can only be sustained as long as it is possible to maintain repayments. As soon as doubt creeps in regarding the ability of borrowers to make these repayments, it triggers a chain reaction in the availability of credit, with commensurate contraction in trading and investments.This has been the story of this credit crunch. Such global shrinkage has the immediate result of causing a slowdown in the production of goods and services.It has also undermined the availability of higher education, which has caused a swelling of the labour market. With less jobs available, unemployment increases and family income goes down. A drop in direct and portfolio investments leads to diminishing asset values, which also undermines family savings. The forthcoming recession will be felt first in trading, transport and tourism, before spilling into production of other services and then goods. The decreased production of necessities will lead to growing inflationary pressures.The Turkish economy will get its share of exposure to the credit crunch. Most of the credit in Turkey has been utilised in trade financing, with some also used to finance production for export demand, and some for stimulating
Turkey has the legal and regulatory framework in place for a range of derivatives contracts to be offered, although currently the country does not enjoy a broad range of derivatives offerings when compared to Greece, the other big economy in the South East Europe (SEE) region. The use of OTC derivatives is relatively common among banks and corporates in Turkey, but demand is also less than in Greece – though significantly bigger, and with much greater potential, than in other countries in the region.Considering the level of development over a relatively short period of time there is a good range of products, maturities and sizes available, and it is telling the growth has come at a time of unusual levels of political and economic stability in Turkey. Today there is a daily OTC turnover of around US$3bn–$4bn, making it bigger than other EMEA emerging markets, and there are several players developing products for Turkish institutions.Hedging is becoming more common among Turkish corporates and Mehmet Mazi, head of HSBC’s emerging markets group for EMEA, said the derivatives market in Turkey has become quite sophisticated. Derivatives represent a real success story for the Turkish financial markets.“In 2005 there was nothing in this market, so in three years the growth has been huge,” said Beat Siegenthaler, chief economic strategist at TD Securities. The lack of an institutional investor base of pension funds, for example, has been an impediment to growth.The most important element to a burgeoning derivatives market is a strong legal framework and contract enforceability and, according to the International Swaps and Derivatives Association, Turkey has these things. It has good enforceability of its netting agreements, which is the legal infrastructure underpinning the development of the OTC market.According to ISDA, the most commonly traded OTC instruments in Turkey are straight-forward forwards and options of currencies and interest rates, which tend to be the first types of derivatives to take root in a new market. Derivatives markets that are driven in large part by domestic corporates tend to see greater proliferation in forwards than in swaps, said Peter Werner, policy director at ISDA.On the corporate side Turkey is seeing a risk build-up in the dollar and euro exposures it is taking on through its loans, which could provide an extra boost to demand for FX derivatives, though Mazi said the relatively benign currency outlook alleviates some of the pressure that might have fed into such FX derivatives demand. Unlike some countries which have regulatory obstacles to the development of certain aspects of the derivatives market, Turkey has no such specific impediments. Derivatives have already started to emerge in credit, equities and other asset classes, and more will arise as demand grows. Commodity derivatives have also started to gain more traction, in a country that is exposed to commodity risk less as a producer and exporter, than as a consumer and importer.According to ISDA, Turkey has been on its radar for around eight years as a market to watch, reflecting the high level of interest in this market from its members. It is covered by both netting and collateral opinions which indicate a high level of ISDA member interest in Turkey.But as with all asset classes in Turkey, the main problems concern the economic instability of the country and its propensity for financial crises. “While several major ISDA members have bought into the Turkish banking sector lately, the local scene was pretty shaky a few years ago and is still prone to crisis,” ISDA said. Greece, which has enjoyed a higher degree of economic stability over the years, has seen commensurately greater development in the range of sophisticated products available.
So much fuss has been made of the political issues raging around Turkey in recent years that it is easy to forget its financial markets. The question of Turkish membership of the EU has received more column inches throughout Europe and Turkey than many other issues put together. More recently, the question of how far Turkey’s secular traditions should be respected has been equally explosive.Interest in the situation extends far and wide, Turkey being the country the US holds up as an example of the kind of democratic, secular but Islamic state it wishes to see proliferate throughout the region. But with a moderate Islamic party holding the reigns of power in the country, some are concerned its secular tradition are being eroded.Almost everyone agrees, however, that the AKP party has delivered stronger than expected performance in the economic sphere, and even the most sceptical and fiercely secular bankers have had to admit the government has been a safe pair of hands, especially when compared to governments Turkey has had in the past.But the markets have provided almost as many surprises as the politics – both good and bad. This year has not been easy for anyone, and emerging markets have finally started getting the hammering some thought they might have escaped when they were outperforming Europe and the US in 2007. Turkey has found it especially hard: a country with few commodity riches of its own, it cannot fall back on high oil prices to make up for falling FDI and chaos in the credit markets.This year has seen nosedives in both the equity market and in the value of the Turkish lira, both of which have been among the worst performers in the region. In both instances the falls can be at least partly justified by the markets going into the year on the back of a strong run, in which values had been driven up beyond fair value. In effect they have just overshot their downward corrections, and there is no reason to believe this freefall will continue.The bond markets have fared better. Turkish sovereign issuance, denominated in dollars and euros, has been well received. Corporates have been a little less ambitious but there is hope for more activity there too.But perhaps the most exciting prospect is the government’s plan to sell off most of its infrastructure assets. This is expected to keep the loan market lively for the foreseeable future, while improving services will help lift the overall economy. There has been some debate about the way these privatisations have been handled, and whether enough is being done to stimulate competition, rather than simply selling at the highest price. Yet despite these concerns the financial community has been unanimous in the view that the government is moving in the right direction.
SMEs have been causing something of a stir in Turkey as banks increasing come to view them as a new source of revenue. According to research published by the European Commission, Turkish SMEs tend to be small by European standards, with annual turnover of less than €10m, illustrating their need for capital and their potential for growth.They represent an underleveraged and underbanked sector in Turkey. Credit only became available to them relatively recently, when the tax regime imposed on SMEs was adapted. Now the sector is taking on debt in a way it previously couldn’t, and banks are thinking carefully about how best to position themselves to benefit from this new market.Changes to the tax system in 2007 provoked this seismic change. Small and medium-sized businesses had previously been gagged with red tape, creating a formidable disincentive to any business looking to tap banks for increased funding. The amount of information necessary in order to qualify for financing through the banks created a huge extra regulatory and reporting burden, which added significant time and cost to the business. The new regime for SMEs swept away this problem.Now more SMEs are looking to expand and be more open about their businesses. New products aimed at the sector have sprung up, including warrants; private placements; and bilateral loans for stronger companies.Some of this debt is being taken to finance consumption, and presents real growth potential to the banks. It is an attractive avenue of growth because although it may result in an increase in non-performing loans as the economy slows, the sector is likely to suffer less than the larger corporations, which will be hardest hit in a more severe economic environment, predicted Fazil Zobu, head of research at Standard Unlu.HSBC has singled out SME business as a major area of potential growth. The bank has hitherto not achieved its desired level of penetration to date, admitted Mehmet Mazi, head of HSBC’s emerging markets group for EMEA, who declined to disclose the bank’s current market share. However, with its extensive branch network and experience gleaned from other markets, HSBC believes it is well positioned to fill a long-standing vacuum in services to the SME sector.Because the sector is still very underleveraged, banks see SMEs as relatively low risk. Some of them have grown very fast, meaning there will be failures amongst them, but developing relationships with those that emerge as the country’s success stories will be a key strategy for banks wishing to access the best of Turkey’s growth in coming years.It is not just banks but international investors of all denominations that are having their interests aroused by the potential of Turkish SMEs. “There is a good demand for this kind of exposure from international institutional investors,” said Mazi. “Five years ago you wouldn’t have believed a small company in South East Turkey would be borrowing money from hedge funds, but that is exactly what we are seeing. HSBC has all the distribution in place.”However, it is a long way from being a trend that is likely to sweep through the whole sector. Hedge funds and other investors looking for specific and unique exposures are only attracted by the best in breed. It will not be without its risks either, Mazi conceded.The World Bank is also playing its part in funnelling funds to Turkish SMEs. It has made a loan of €160m and US$48m to Turkey over five years running from 2007 to 2011 “to increase Turkish SMEs access to medium term finance.”TSKB and Halkbank are the borrowers in the project and each received a €100m equivalent credit line to be intermediated to SMEs. The Turkish Treasury issued a guarantee to the World Bank for the borrowers’ repayment.Halkbank will disburse at least US$25m in sub-loans to SMEs in the central and eastern part of Turkey, where credit is less well developed, via a financial intermediary loan, using IBRD funds. It is a fixed spread loan in euros with a 15-yea
Turkey’s 2001 banking crisis was a useful education for its financial institutions and regulator. Some claim the experience undermined its appetite for the structures blamed for those problems – and those are at the heart of the credit problems today.“Particularly after what happened in 2001, I think the market perceives a high level of regulation as a good thing,” said Caroline von Nathusius, an associate at Linklaters. She praised the Banking Regulation and Supervision Agency (BRSA) for having the flexibility to supplement its rigorous approach to market oversight with regular consultations and feedback to keep its regime relevant.The BRSA has provided “perfect supervision” for Turkey in the recent volatile global environment, said Tolga Egemen, executive vice president of financial institutions and corporate banking at Garanti in Istanbul. He praised the regulator for having done “an excellent job,” while conceding the opinion held by others in the market that its regulatory fervour has been being over-zealous. It has, he said, played an important role in shielding the country from the worst excesses of the credit crunch.Turkish institutions are subjected to relatively high capitalisation and daily reporting requirements. The measures have helped its institutions but have also had a negative impact, driving business offshore, where regulation – and tax – are more favourable. Nonetheless, Turkish banks are reasonably profitable. Egemen called the profitability of Turkish institutions “satisfactory”, pointing to Garanti’s 27% return on equity in 2007.Certainly, Turkish institutions were only marginally exposed to toxic sub-prime mortgages or other instruments that were hit hardest by widening spreads. However, it is not a regulatory straightjacket but a lack of sophistication that has kept Turkish institutions out of the securitised products at the heart of the recent credit crunch, according to Beat Siegenthaler, chief strategist for emerging markets at TD Securities in London. “They are not involved in these kinds of instruments because they don’t have the ability to manage them,” he said. “If they had the chance to do them they would.”Tolga Ediz, emerging market strategist at Lehman Brothers in London, has an even simpler theory: structured products have failed to take off in Turkey because they are not profitable in a country with such high interest rates. As rates fall, structured products will gain traction, he predicted.Whatever reason Turkish banks had for abstaining from structured credit business, “if the profits being made out of these CDOs had continued for another three years perhaps we would have ended up considering getting involved,” Egemen said, before adding: “I don’t think the regulator would ever have let us join in.”“If the banking system was reckless I doubt the regulator would be able to hold it back,” said Siegenthaler. In fact, the biggest influence on the markets has been the large number of foreign players active in it, he said.It is certainly possible to see parallels between 2001 and the most recent banking crisis. In Turkey’s own crisis, T Bills were being repo’d overnight to keep them off balance sheet. In 2007 institutions were warehousing their positions off balance sheet in conduits – the same risks, and the same lessons there to be learned. It seems an economic imperative that such crises occur periodically to remind bankers there are no free lunches in the financial marketplace.When the current crisis is over, global regulatory standards will tighten, putting the BRSA’s regulatory philosophy in the mainstream, predicted Egemen. This view is to see the credit crunch as a nail in the coffin of the light-touch, principles-based regulation favoured by the UK, Germany and others.There is little doubt global regulators will respond with increased regulation. As other regulators get stricter Turkey’s own regime will start to look relatively better, which may help keep more business onshore.
Turkey’s phase of mass privatisations has been driving the loans market and drawing foreign investors into the country, as FDI declines.Turkish privatisations are relatively small scale compared to deals elsewhere in Europe. But the deal flow is showing impressive resilience in the face of drying up credit lines. “The stock market has taken a knock recently and the lira is currently cheap, but many would regard this as a buying opportunity for the mid or long-term investor,” said Carline von Nathusius, associate at Linklaters.Global credit problems have already had some impact. “ambitious programme given the number and size of the projects which have been announced and particularly given the current global liquidity problems which may possibly affect the timetable,” said Brett Hailey, partner at Denton Wilde Sapte. “"It may be very difficult in the current market conditions for all these projects to be financed in the traditional debt markets and the Turkish government and investors in some of these projects may have to look seriously at raising equity and debt from other sources such as in the Gulf region or possibly from sovereign wealth funds."Yet some are calling for the government to show more ambition in its privatisation plans. The government should ramp up its efforts to sell off controlling stakes to bring private sector control to a greater share of the economy, said Tolga Ediz, emerging market strategist at Lehman Brothers in London. The proceeds are needed for reinvestment into infrastructure, as well as in reforms of areas of the economy such as social security.Istanbul’s Bosphorous Bridge and six highways are prize assets soon to be available; though there has been debate regarding whether to sell them individually or as a package. The latter solution was finally selected in a deal expected to fetch US$5bn–$6bn. Macquarie Bank is one of the institutions believed to be interested.Energy and infrastructure constitute the majority of the projects and traditionally came with a sovereign guarantee. This is now harder to provide as it contravenes IMF rules, as the fund insists such a structure only be offered in the most extreme circumstances. The government therefore needs a more sophisticated way of structuring such deals.In fact, a range of problems await the government in its planned privatisation agenda, said Mina Toksoz, head of country risk at Standard Bank. The government seems to underestimate the challenges associated with its large-scale privatisation agenda, she said. Already the government has displayed an inclination to swap state monopolies for corporate ones – presumably, she said, to maximise the price. The government seems to be ignoring the real benefit of privatisation – the introduction of greater competition, she said, indicating perhaps the government does not have a full grasp of the economic rationale underpinning its actions.Istanbul’s natural gas distribution infrastructure, along with that of Iznit, is likely to cause significant excitement among investors when the anticipated deals come to market. Expectations have been raised by the performance of the tender for the much smaller Ankara, which sold for US$1.6bn. Bids for Istanbul are expected to come in Q3 this year.The Istanbul subway project has been launched with no government guarantee. Worth US$7bn–$10bn, investors are picking up the tab themselves, with financing provided by the banks. “Istanbul is attractive to foreign banks,” said Andreas Schroeter, head of operations in Turkey for WestLB, “because it has low debt levels, compared to other cities.”The national lottery, Milli Piyanfo, is another asset coming up for sale, with the UK’s Camelot among the anticipated bidders. It is not yet known what form the sale will take: it is possible the entire operating rights could be transferred to a new owner for a period of seven-to-ten years, although it is also possible the government will retain an interest via a profit sharing agreement.S
Some had convinced themselves that the credit crunch, triggered by the sub-prime crisis in the US, would bypass Turkey. Alas, that has not proved to be the case and by the start of 2008 the pain had spread to its shores.In fact, the economy was already showing signs of slowing at the end of 2006. But the illusion that emerging markets were decoupled and immune to the sub-prime flu held until credit taps dried up early this year. Turkey has now been badly affected, which – combined with the political pressures – explains the recent market selloff that has seen the local equity market among the worst performers of the year, while the lira has fared little better.The lira is 20% down from its peak but it was arguably overvalued after a bull run of 12–18 months in 2006 and early 2007. Momentum was added to its downward correction amid fears about the credit problems, though Turkey has accumulated large reserves of dollars to hedge this problem.“Given the higher-than-initially-anticipated real interest rates, further weakness in local currency and deterioration in consumer sentiment, we expect economic activities to ease in the remaining quarters of 2008,” said Seher Fazlioglu, economist at Global Menkul Degerler in Istanbul.Inflation is a major policy challenge for Turkey. It had originally tied its currency to an FX basket before the 2001 banking crisis but has since moved to a floating currency to manage its inflation, but this has made the country uncompetitive. Although inflation now stands at 9% – with consensus it could be down to 8% by year-end – there is a danger it could be pushed higher, back into double digit territory, warned Fazil Zobu of Standard Unlu in Istanbul.Yet the country also has a tradition of coping with crises. There have been many problems in Turkey over the past decade. What characterises this last political crisis in Turkey is how sanguine the markets have remained throughout.Memories of 2001 loom large in Turkey’s financial psyche. The complete collapse of the banking sector was only averted by intervention from the IMF. “Crises make you stronger – eventually,” said Beat Siegenthaler, chief economic strategist at TD Securities. Banks are better capitalised now than they were before that crisis, which will help them this time round.The fundamentals of Turkey are also quite strong. Its debt is sustainable and the currency is – at least normally – relatively stable. The black cloud is its enormous current account deficit, which stands at 6% of GDP.The deficit was born of Turkey’s low savings rate and weak private pension system. High foreign borrowing gives it a currency mismatch problem that could get worse if the credit crunch deepens.“Higher interest rates will attract some [currency inflow] but probably not enough to make a real difference,” said Fazlioglu.Turkey is therefore arguably in a worse position than its EM peers but the situation is probably already as bad as it is likely to get, said Mehmet Mazi, head of HSBC’s emerging markets group for EMEA – though the market is proving more cautious this year and has a lower risk appetite.Numerous commentators cite the current account deficit as Turkey’s biggest problem. The issue has always been there, but looks more intimidating now that the global economy has taken a turn for the worse. “It doesn’t look like it is going to shrink – so how is it going to be financed?” asked Mina Toksoz, head of country risk at Standard Bank in London. It is a question that echoes around the corridors of Istanbul’s banks and beyond.The high foreign direct investment Turkey has hitherto enjoyed has been the perfect solution to Turkey’s funding problems as it does not add to the debt levels it has already accumulated. “Unfortunately it looks like FDI is going to slow down,” Toksoz said. In January and February 2008 FDI was around US$1.6bn, compared with US$7.4bn in the same period of 2007.Otherwise, it will be possible for banks and corporates to continue to borrow from
Turkey’s current account deficit stands at US$40bn, roughly 6% of GDP, and the country has to find a way of raising money to redress this balance. Nigel Rendell, senior emerging markets strategist at RBC Capital Markets estimated Turkey needs to raise between US$20bn-$25bn from the international capital markets this year. Foreign direct investment (FDI) has rocketed over the last five years due to government reforms, and has become a substantial means of fund raising in Turkey, but there is concern this source could start to dry up as growth in the Eurozone slows. This leaves the bond markets to pick up the slack left by declining FDI.“Turkey has become reliant on overseas investment inflows to cover the deficit and traditionally used the equity market, but there is also scope for bond issuance as investors are attracted to the high rates on offer,” said Rendell. Turkey continues to need foreign financing both at the sovereign and corporate level. “While many countries have reduced the issuance abroad, Turkey remains very active in this market,” said Turker Hamzaoglu, economist for Turkey and covering the Middle East North Africa region at Merrill Lynch. From its US$5.5bn funding programme for 2008, the sovereign has already issued a US$1bn tap of its outstanding 6.75% 2018 bond in January, and a new US$1bn 30-year deal in February. Though Turkey balances issuance between the dollar and euro markets, bankers expect the bulk of the remaining US$3.5bn supply to be dollar denominated. “The yield curve is quite steep and the sovereign prefers as long a duration as possible and would find it easier to tap a longer maturity, either the 2018 or the 2038, with US institutional investors,” said Stefan Weiler, JPMorgan’s head of Turkey and CIS countries in debt capital markets. A euro transaction at the five or seven-year tenor is a possibility, due to the borrower’s redemption profile, but this is questionable because secondary flows in euros have been limited.Turkey may aspire to issue more euro-denominated debt, but the current difficult conditions in that market means the focus is firmly on dollars. Despite many Turkey specific issues on the agenda regarding the economy and politics, and Standard & Poor’s changing the country’s rating outlook to negative from stable, Turkey will be able to fulfil its targeted amount of issuance as long as sentiment improves, said Loni Saul, director in debt origination at ABN AMRO.Though bankers do not exclude the possibility of the sovereign undertaking another liability management exercise, to add to its first and only such feat in 2006, many feel it an unlikely scenario. JPM’s Weiler said that Turkey needs first to achieve its US$5.5bn funding target, which would probably require most of the year to accomplish. If the sovereign achieves its target by the summer it leaves the door open to such a move in the second half, though there is a low probability of this occuring, said Weiler.The first exercise was undertaken when markets were very supportive and Turkey had already completed a significant amount of its targeted annual funding needs, giving it room to do a liability management exercise. “I see it less likely compared to previous years as conditions are totally different. You lose one of your key potential issuance windows for an exercise where you do not necessarily raise a lot of money and just restructure your existing bonds,” said Saul. “If there is a new exchange, I doubt it will be in the euro market due to the different type of investor base and a higher premium for new issues,” said Ahmet Bekce, managing director in syndicated loan and bond origination CEEMEA debt markets at Citi. “It makes sense for Turkey to focus on longer maturities than trying an exchange.”Growth in eurobond issuance in Turkey has been slow and though the only Turkish corporate deal this year is February’s US$150m five-year bond for Bankpozitif, bankers are hopeful more supply will be forthcoming. Corporates have
Sitting between Europe on one side and the Middle East on the other, Turkey in some ways has its feet in both camps, and in other ways in neither. It has expended much energy in recent years bringing its economy closer to that of Europe. And yet it is to the East where many expect to see the best performing economies of the future.As geopolitical tensions mount, Turkey increasingly finds itself situated on an important international fault-line, which adds importance – as well as risk – to its position. The country is in a unique position to broker relations between the two sides as, politically and diplomatically, they move ever further apart.On the financial front, Turkey has been attracting investment from all sides. Among its emerging markets peers it is an attractive proposition. “Turkey has a dynamic corporate sector,” said Mehmet Mazi, head of HSBC’s emerging markets group for EMEA. “It is quicker to react to events than you see in comparable countries like Russia and the Central European states. Turkey is less sensitive to ongoing political tensions.”Around 70% of Turkey’s equities are held by foreigners, as well as around 30% its bonds. This unusually high level of foreign influence leaves the country exposed as foreigners are more likely to quit the market when times are tough. Investment in Turkey has already dropped off in 2008, relative to the huge flows witnessed in 2007.Looking westThis also makes European Union accession talks crucial, because foreign investors need to see this process is continuing, even if progress is slow. “If either the EU or Turkey stopped the negotiations it would be a disaster,” said Beat Siegenthaler, chief strategist for emerging markets at TD Securities in London. The very fact this is so well understood by all parties involved means it is very unlikely to be a problem, he added.The European Union membership process remains an important question hanging over the country. There is much debate about the likelihood of a favourable outcome at the end of it, but Turkey’s government has given outward signs of commitment to the cause by putting in place a predominantly pro-EU cabinet after the last general election. This sends out the right signals to the market.But there is no doubt Turkey is feeling a little unwelcome at the moment. “The Turkish people are very independent, that is there mentality,” said Andreas Schroeter, head of operations in Turkey for WestLB. “They know Europe is good for their economy so they will continue to implement the reforms but I wonder whether they will join the EU even if they are invited. They may take the economic benefits but back away from the prospect of greater political integration.”In some ways, however, this is irrelevant, as many Turkish bankers and observers attest. “The journey is more important than the destination,” when it comes to EU accession talks, said Caroline von Nathusius, an associate at Linklaters. The process is helping Turkey stay on the right path with its inflation, interest and GDP growth targets, all of which help attract FDI.“I don’t care whether Turkey eventually joins the EU or not, as long as it continues to implement the reforms it would need were it to join,” agreed Siegenthaler. But the talks remain important as visible proof to investors that the country is committed to continuing the reforms. Many investors don’t have the trust in Turkey yet to free it to move forward without the EU talks as an anchor, Siegenthaler said.In terms of implementing the kinds of reforms necessary to pave the way for EU membership in the future, Turkey is progressing nicely. Since 1999 Turkey has recognised the legitimacy of international arbitration in disputes involving contracts for public services with a foreign element. The FDI Law of 2003 and International arbitration Law of 2001 have further created a level playing field for international investors. The enforceability of contracts in Turkey, one of the factors that potential investors lo
Turkey’s Justice and Development (AKP) party is not short of admirers. And unlike in the first years of its ascension to government, many of them are inhabitants of the country’s financial community. The AKP has won admiration by upholding Central Bank independence and running a tight fiscal budget. Under AKP guidance, Turkey has made some important strides with its economy, for which the party rightly takes credit. Public sector debt, for instance, stands at 50% GDP, which is below the Maastricht convergence criteria, and while inflation is still too high to be at European entry levels, it has at least been in single digits for three consecutive years. Considering the surge in commodity prices, that is noteworthy, said Tolga Egemen, executive vice president of financial institutions and corporate banking at Garanti in Istanbul.Added to this are 24 consecutive quarters of economic growth. That is the longest period of uninterrupted growth in modern Turkey’s history, said Beat Siegenthaler, chief strategist for emerging markets at TD Securities in London, and represents an impressive achievement for the country.One of the AKP’s key strengths is its pragmatism. It has made mistakes but has been quick to change course when it was clear something was wrong. Siegenthaler argues that on questions of economics the party has been receptive to advice, which to an extent has offset the economic inexperience in the party.The AKP has also restored some level of economic trust in Turkey. The electorate deserves some of the credit, as voting in a party with a large majority gave it the freedom to take decisions that a more divided coalition could not have done. But the AKP itself deserves most of the credit, said Siegenthaler. “The government has done the simple things, but it has made a difference,” he said, adding that the seeming simplicity of some of the problems it has resolved must not conceal the fact previous governments have tried and failed to resolve them. “The next step will be more difficult,” Siegenthaler added.Turkey is benefiting from AKP’s fiscal policies too. It has the biggest primary surplus among the emerging markets, Siegenthaler said, having resisted the temptation to increase spending, even in the run up to the last election. Interest rates were hiked when the lira was selling off, while the currency revaluation, with six zeros knocked off the denominations, allowed TD Securities to begin trading the lira.But the AKP has been timid when it comes to the more difficult problems the country faces, said Tolga Ediz, emerging market strategist at Lehman Brothers in London. In 2007, despite the lengthy global bull market, Turkey is still shackled with real interest rates in double figures and inflation in high single digits. Although inflation has come down markedly from its previous levels, it has not come down enough, said Ediz, and remains higher than levels seen in neighbouring countries.Similarly, government debt burden has come down from its previous highs, but remains uncomfortably high and is still concentrated in bonds with very short denominations: local government, for instance, has not been able to borrow fixed interest rates in more than five year issues.Political turmoilTurkey has been rocked by significant political turbulence recently, arising from its presidential and parliamentary elections, held in quick succession in 2007. The election results triggered a political crisis in the country, with parliamentary elections proving inconclusive.There are grounds for hope that Turkey’s financial markets can shrug off these concerns. The financial markets in Turkey need not pay too much attention to politics, said Mehmet Mazi, head of HSBC’s emerging markets group for EMEA, as both the governing party and the opposition have shown themselves to be pro-market, pro-business and economically rational.“This is evidence of a critical change in Turkey. Markets have shown they have become less vulnerable to political pro
Global credit crunch aside, Turkey should be an ECM hot spot with a government eager to privatise former state enterprises and widespread familiarity with equity issuance as a means to raise capital.However, a much touted run of deals has not yet materialised and two transactions have already been cancelled this year.Most ECM bankers involved in the country retain high hopes, meanwhile, citing robust macroeconomic prospects over the short and medium term. Annual GDP growth is tipped to exceed 5% next year as the economy continues to bounce back from a crisis in 2001. The government is eager to be perceived as friendly to foreign investment and up to 70% of the country's stock market is in non Turkish hands."Turkey is an economic growth story. It has a growing population that is becoming more wealthy," said Christopher Laing, managing director and co-head of Central and Eastern Europe, Middle East and African ECM at Deutsche Bank.Though it falls into the emerging markets category, it is also far from being labelled "frontier" like some of its neighbours further east. "It's a little less scary than some markets in the region," said one ECM banker familiar with the market.Deutsche Bank's Laing also points to the "secular" nature of society, boasting a populous middle class with similar consumer spending habits as peers in other emerging markets across the GCC region and East Asia. In spite of this positive outlook, however, investors are notoriously unforgiving when it comes to Turkey, and prone to withdraw at the slightest sign of trouble."Turkey is absolutely fantastic in a good bull market... but in a bear market it can be very exposed," said one ECM banker who asked not to be named.Any upset to economic outlook and Turkish equities are punished hard, in part because unlike other emerging markets such as Russia, it does not have the benefit of large oil reserves to fall back on. A graph of relative stock market performance over the past two years illustrates the point, with the ISE National 100 index evidencing considerable volatility.In terms of equity issuance, therefore, valuation sensitivities are heightened significantly at the first sign of clouds on the economic horizon. This is exacerbated by the fact that under Turkish law, at least 30% of an equity issue must be made available to local investors who are notoriously jumpy during a bookbuild.In practice, much of the domestic allocation in an IPO finds its way into the hands of international investors who buy the shares shortly afterwards in the market. But the locals still have to be kept on side for an issue to be successful, particularly given that local regulator, the Capital Markets Board, is mulling an increase in the domestic allocation rule to around 45%.Indeed, one banker with experience of the country said a publicity budget of at least $100,000 was a standard expense of leading a deal in Turkey because of the importance of winning over local retail investors.International investors can also be fickle about Turkish opportunities. The country's location at a cultural crossroads between Europe, the Middle East and central Asia has its advantages but also presents its fair share of problems that can spook investors.Trouble involving Kurdish separatists in the east of the country and unruly neighbours such as Syria, Iran and Iraq make investors demand more assurances than usual when taking a punt on emerging markets. There is also a tendency towards political instability, though the current Justice and Development Party (AKP) led by the prime minister, Recep Tayyip Erdogan appears to be consolidating its hold on power.Unfortunately, Turkey is suffering from just such a downturn in sentiment currently which has resulted in pulled deals and delayed launches. Many fund managers continue to fret about fiscal and monetary irresponsibility which has led to a stubbornly high current account deficit. This has led to a number of investors going underweight on Turkey while