Features : Turkey’s Transition
At a recent meeting in Istanbul, Global Finance brought together some of the key figures in Turkey’s banking and finance industry to discuss the country’s prospects.

Global Finance: Will recent improvements in Turkey’s economic fortunes prove sustainable in the long term?


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Serdengecti: By applying the present policies, we can achieve better results in the future

Sureyya Serdengecti,
governor, Central Bank of Turkey: Important lessons have been learned from stabilization programs in the past that have failed; probably that explains why this final stabilization program has been successful. For the first time, all areas of the program went hand in hand. Also, there was nowhere else to go compared with the past; the government could no longer deviate from its track of strict fiscal policy.
Levent Celebioglu, financial institutions assistant general manager, Türk Ekonomi Bankasi: This time we have a very stable political environment. We have a single-party government that respects what the bureaucrats are doing, so the bureaucrats, the politicians and the private sector are working in harmony.
Hayri Culhaci, executive vice president, strategic planning, Akbank: Having a strong, independent central bank has helped a lot. For the first time in our history we have a central bank that is seriously enabled to control inflation.
Erkan Uysal, head of research department, Capital Markets Board of Turkey: International developments have helped, too. Due to the low levels of return in developed countries, international funds are flowing to emerging markets, which has helped them finance current deficit and restore stability.

Hakan Ates, president and CEO, DenizBank: There’s a long way to go. Sustainability of this condition requires three changes: tax reform, social security reform and privatization. If necessary, deregulation and structural reforms should come next to maintain the sustainability of these conditions.
Hüseyin Imece, executive vice president, Yapi Kredi: The economic achievements are very impressive, but a good part of this can be seen as normalization after a long period of chronic instability and crisis. But it might be difficult to maintain the existing successful environment. While the banking system has cleaned up in the last three or four years, the corporate sector has not yet.
Zeki Önder, executive vice president, Sekerbank: We have to also give credit to the people. The single-party government became successful implementing the economic plan, but from time to time they wanted to follow their own agenda, and it was always public pressure—and the markets—that brought them back on the path.
Neslihan Tombul, managing director and senior representative, The Bank of New York: Success has to be homegrown. Even though the IMF and the EU served as very important anchors in setting Turkey on a straight path, most of the work was done inside Turkey. We should not rely too much on the IMF and EU if we want it to be sustainable and permanent.

GF: How has Turkey managed to bring inflation under control, and will price increases remain at such levels? 
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Culhaci: Having a firm foothold in Turkey will give a bank strong potential across the region

Serdengecti: It’s not a miracle; we finally did what we needed to do. The first step was central bank independence and then strict fiscal and incomes policies. Shaping the expectations of the public has been important, too. We have to achieve lower inflation levels in time. The current level—about 9%—is still higher than many other emerging markets. By applying the present policies, we can achieve better results in the future.
Culhaci: The restructuring in the banking sector has also helped, because there’s always a correlation between high interest rates and high inflation rates, so having had a moral hazard in the banking system up to 2001 never gave a chance to the players in the market to pull the interest rates down. Continuous appreciation of the Turkish lira has helped to instill confidence and encourage capital inflows.
Imece: Further improvements in inflation may require changes on the supply side—structural reforms where productivity increases.
Ates: We should also consider real interest rates, which are as big as inflation itself. Fiscal policy measures need to be carried out hand in hand with price stability and inflation targeting measures.
Celebioglu: The main reason for the lower inflation is the breaking of the inflation inertia. The private sector used to make their own targets and price adjustments; even small retailers made price adjustments monthly because they expected inflation to be 60% to 65%. After the successful implementation of the past three years, the private sector, the banks and others are making budgets more in line with the central bank’s forecast.
Uysal: Turkish success in lowering inflation is very important. Now both the real sector and the financial sector believe that there will be lower inflation rates and, more importantly, lower real interest rates in Turkey for the near future. Uncertainty has been eliminated.

GF: How can Turkey balance the fact that it occupies a neighborhood that is politically challenging while at the same time offering significant economic potential for Turkish companies and banks?

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Uysal: Both the real sector and the financial sector believe that there will be lower inflation rates
Ates:
Trade with our neighboring countries has helped us to overcome the crisis, and of course it will continue to be so. Nevertheless, there is unrest in some neighboring areas, which of course is harmful for our economy, but hopefully it will get better soon.
Tombul: Turkey enjoys very friendly relations, politically and economically, with most of the countries surrounding it. There is a lot of activity in the region that both Turkey and its neighbors are benefiting from. There’s room to grow here as well. Politically it enjoys favorable relationships, even though it can be a difficult neighborhood at times.
Celebioglu: There is huge potential for trade with the countries around us, particularly Iran and Iraq. Before the Iran-Iraq war, these two were among Turkey’s top-five trading partners. With the slowdown in Europe, exporters are starting to look at these markets, which within three years could represent as much as 25% of our foreign trade.
Imece: I think the challenges outweigh opportunities for Turkey, especially with Syria, Iran and Iraq. In the long run, yes, there are opportunities there, but in the short run there will be more challenges.
Culhaci: From a banking point of view, there are enormous opportunities in the future, but in the short run we are not totally able to take that opportunity because of the risk concerns. Having a firm foothold in Turkey, though, will give a bank strong potential across the region as those countries become more stable.
Önder: We have connections with our neighbors, culturally, ethnically and historically, so Turkey’s efforts should be guided by a focus on their well-being. The more prosperous they are, the better partners they become for us.

GF: What is the future for Turkey and the IMF or with IMF programs? 
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Ates: This country is under-banked; it’s a land of opportunities. Real growth... will continue

Serdengecti: We have to continue with the IMF, as this is a medium-term program. The credibility built up by the present government and the central bank is simply not enough since we have a very bad past track record behind us. Also people are suggesting that with the possible EU accession we no longer need the anchor of the IMF. But most people fail to realize the IMF and the European Union are not competing anchors but complementary anchors.
Celebioglu: Another IMF agreement is not crucial for Turkey because we are in a very stable environment. We can now borrow from international markets easily. Domestic and international borrowing maturities have been extended. The IMF is not as important from a financing point of view, but the markets are already giving credit to the government for the decision to make another three-year standby agreement with the IMF.
Ates: Turkey and the IMF have a good relationship, but the work is not finished yet. The emerging market crises and the problems in 2000 and 2001 showed the IMF was not well enough organized, so Turkey has become a role model. The coming three-year standby agreement is important for Turkey, but it is as important for the IMF.
Culhaci: There’s been a paradigm shift. IMF agreements are the new reality of our time. It is not compromising on sovereignty because it is the same case for anyone—not only for Turkey but for developed countries, too.
Önder: The program just completed was significant because it was the first ever successfully completed, and it was basically designed by Turkish technocrats in line with the needs of the economy and supported by the IMF. The one about to be signed is very important because it will be a support for Turkey’s effort for a more stable environment.
Imece: The IMF program has done a lot for Turkey’s success, but we’re seeing some loss of momentum on the government’s side. In the upcoming year there is a lot of difficult work we need to do—like the structural reforms—so it will be good to continue to work with the IMF.
Tombul: What happens when the IMF leaves? The markets have enjoyed having the IMF around because they know the Turkish government will abide by a whole host of rules, but three years from now will any Turkish government be able to maintain that momentum and keep it going? Governments tend to make more populist moves when they don’t have somebody watching them.

GF: Is it fair to describe Turkey’s accession to the EU as “far in the future and painful but inevitable”?

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Imece: The challenges outweigh opportunities for Turkey, especially with Syria, Iran and Iraq
Önder: There are all kinds of opinions on how long it will take, but the process will be politically and economically extremely beneficial for Turkey. It’s a very healthy process.
Tombul: Look at other members that resembled Turkey’s profile, like Spain and Greece and Portugal. They had very similar issues to deal with, and they have become rising stars within Europe—real success stories.
Celebioglu: Turkey is already a part of the European Economic Union because we have the customs union—we have all the benefits of that economic environment—but we are not in the social part. I believe in the long run Turkey will become part of the social union as well.
Uysal: Europe has to show more that they are willing and sincere to accept Turkey as a full member in the future. There is mutual benefit to Turkey and Europe, and also it will contribute to global stability if Turkey becomes a full member. If sincerity is established, I believe it is not painful and far in the future.
Serdengecti: The process of the next 10 years is more important than the eventual outcome itself. We have to make the public conscious that we simply have to do all of this social reform for ourselves, not because Europeans want it.
Ates: The process itself is very important to our country, but there’s a big chance for Europe, too. It is inevitable both for Europe and Turkey, but it doesn’t necessarily need to be painful.
Culhaci: It is clear that Europe will have many benefits from taking Turkey within the union—economically, politically, socially. The common wisdom for Europe says that Turkey is inevitable for the future of Europe.

GF: Turkey’s banks are stronger and better run than in the past but still face challenges. Where are they headed? 
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Önder: Accession to the EU will be politically and economically extremely beneficial for Turkey

Tombul: Two things concern me. How will these banks be able to grow profitability, and can they better match their assets and liabilities? They’ve diversified the way they generate revenues but into some low-margin, highly competitive businesses. Secondly, many of their deposits are short term—about three to four months—but the assets on the complementary side are longer in maturity. They have to convince the Turkish public to leave their money for longer periods.
Serdengecti: Important steps have been taken to reform the banking system. The process has been quite painful and is still continuing, but now the financial system in this country offers quite a number of opportunities for potential investors, domestic or foreign.
Ates: Capitalization of the banks is important, so consolidation will continue. It turned out to be a seller’s market, though: There are lots of potential buyers and just a few sellers. Turkey is under-banked; it’s a land of opportunities. Real growth in the banking sector will continue.
Culhaci: The party has not started yet. When the interest rates stabilize at low levels, then the challenge for the banking system will be making a profit with those narrow margins. The only option will be to increase leveraging, increasing the volume of assets. Today, deposits are not sufficiently funding the assets of the banking system.

GF: What can be done to attract even more FDI to Turkey?

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Tombul: We should not rely too much on the IMF and EU if we want our success to be sustainable and permanent
Culhaci: The low inflation environment was important, and that has already been mostly achieved and seems sustainable. Now it’s up to the government to reduce bureaucracy and give some incentives for FDI.
Celebioglu: Brazil allows all FDI, but it’s not creating any foreign currency for the country, and the profit transfers cause big deficits on the country’s balance of payments Should Turkey impose rules that FDI should create foreign currency? Secondly, why should FDI come to Turkey? Price and cost stability is not enough. Turkey is an attractive market, but there are other countries such as Bulgaria or Romania, where utilities and labor are far cheaper than Turkey.
Tombul: There are still a lot of inefficiencies in the market that represent opportunities for foreign investors. There is a huge potential—in the local market more so than exporting. There’s a huge young population—70% is under 30—but unfortunately they don’t have high disposable incomes. But there is a lack of transparency here, and the rule of law has always been sort of nebulous.
Imece: We may be nearly there in terms of macro stability, but we need to create a fairer playing field. Without corporate sector restructuring, it will be very difficult for international companies to compete fairly. An efficient and competent bureaucracy also is needed—and a well-functioning legal environment.
Ates: If you look at FDI from a banking sector perspective, foreign banks may first improve the quality and availability of financial services in the domestic market and stimulate the development of the supervisory and legal framework—but there is evidence that the non-interest income and overall expenses of domestic banks are negatively affected by foreign bank entry. Because foreign banks pay relatively low taxes, they have an incentive to shift profits out of high-tax jurisdictions. Foreign banks may cause a lowering of credit standards by increasing competition and may suddenly cut their domestic activities when faced with problems at home. The same could apply for companies in any other industry.


Moderated by Joseph Giarraputo
 

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