Author: Dan Keeler
SPONSORED ROUNDTABLE

At a roundtable in Istanbul, Global Finance brought together Turkey’s central banker and other leading figures to discuss the prospects for the country’s economy.

GLOBAL FINANCE: The Turkish government seems to be redoubling its efforts to join the European Union. What impact is this having on the country, society and economy?

DURMUS YILMAZ, governor, Central Bank of Turkey : When Turkey decided to go into the EU, it had in mind, and it still has in mind, that we have to reform ourselves so that with the new way of doing business, we will enhance the welfare of our society. It needs and demands from us to change ourselves and to adapt ourselves to the rules and the tenets of the entity that we are going into. They are basically the freedom of expression, freedom of economic activity, accepting the universal values that the world has come to. The EU process will act as a galvanizer to change ourselves and the society and the way in which we conduct our daily lives and doing business. From an economic point of view, the EU accession process is a major anchor to which we have to tie ourselves. It is incumbent upon us to utilize this anchor, to modernize ourselves, to effect and accept the change that is needed, on which we can build a society that will benefit all. Even if the Europeans are not ready to accept us, we have to reform, to modernize ourselves and to change the management of the economy.

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Tuna: "Turkey cannot decouple from this general credit crunch.

MURAT DOGAN ERDEN, head of treasury, Turkcell : The European Union is offering us a chain of values, a system that offers significant modernization and improvement of the economy. Everyone accepts that Turkey’s accession into the EU will be a long process. But whether it happens or not, Turkey will have benefited—and by the time the decision is made, Turkey may have passed the point at which it needs to join the EU. We believe in the Turkish society’s flexibility, adaptability and strength. There has been a significant improvement in the Turkish corporate sector in the past three to four years based on the twin anchors of the EU accession process and the IMF. Right now Turkey has a very good story, but it is not only dependent on the EU.


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TUNA, executive vice president, Garanti Securities : Just looking at the way central and eastern European countries that have gone through the EU accession process have benefited gives us a good target to go after. We are barely at the beginning of this long road, and we have already benefited a lot so far. It is not a coincidence that there has been so much FDI coming into Turkey in the past few years. Most of the credible companies here have created international partnerships; this, too, is not a coincidence. But because we are at the start of an important process, we have to do as much as we can to be in line with this process. We have more to do in terms of attracting this international investment which is waiting to come into Turkey. We must create a transparent environment for international investors, to be in line with international financing requirements, corporate governance issues, legislative and regulatory adequacy besides maintaining political stability.

CEM YALÇINKAYA, CEO, Ak Asset Management : EU accession is the main anchor for Turkey that creates economic and political stability and also the main motivation to improve the institutional and legal infrastructure.

Y. OGUZHAN ALOGLU , vice president, Istanbul Gold Exchange: It’s about the competition. During and after this process, Turkish companies will be working to compete with other companies located in other EU cities. Istanbul is very close to many EU capitals, and we have a connection with those cities in terms of trade and so on. Whether we get into the EU or not, we will benefit a lot—our companies and our society—and everybody will work hard to promote the growth of Turkey.

ERDEN : The two anchors, the IMF and the EU, have really been behind the recent economic stability. But now significant reforms have taken place in Turkey; we can decide how to go ahead with the IMF. Right now Turkey is much more active in the decision-making process.

YILMAZ : Some of the changes that we have effected to our economy wouldn’t have been carried out solely internally. Our relationship with the IMF and the European Union has been very much instrumental in achieving some of these changes. My feeling is that we have learned great lessons, but we have not completely fulfilled our graduation. We still need some sort of anchor to ensure we maintain the fiscal discipline that we have been for the past five years.

TUNA : We still need some anchors, and the IMF anchor is a good one. With the understanding we’ve gained through our IMF relationship, we can further educate ourselves and get into a more disciplined path.

YALÇINKAYA : Turkey does not require the IMF as a subsidizing system anymore. Rather, it should be regarded as a discipline that will guide us to a more mature and developed economic status.

GF: Turkey seems to have been relatively immune to the global financial market’s turmoil of the past eight months. How has this happened, and will it continue?

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Aloglu: "Returns are still high compared with the EU and the US."

YALÇINKAYA : The slowdown in the US economy’s growth does affect the Turkish economy, of course, but the impact is limited. The turbulence is continuing, however, and the global inflation climate is changing, which could impact Turkish inflation in the near future.

YILMAZ : When the subprime problem appeared in August last year, it was not clear what direction it would go and what shape it would take. Initially, there was talk that some countries could decouple from the United States and the other European markets. I personally did not believe that the decoupling was possible. We are living in a global world, with integrated financial markets and trade relationships, so it is not easy for any single country to be immune to what is happening in the world’s major economies. The question is how much each country will be influenced. So far Turkey has not been affected, first of all because we do not have any toxic instruments contaminating the system, and, at the micro level, we have very low public debt, we have an independent central bank, which administers a monetary policy that is tied to the needs of the economy, and also we have a strong banking system. We have diversified our markets and diversified the products that take place in international trade. There have been great improvements in the investment climate, which are reflected in the inflow of FDI. But this does not necessarily mean we will stay unaffected. While only 10% of our exports go to the US, around 60% go to the EU. The EU-US trade relationship is huge, so adverse developments in the US will definitely affect Europe, which will in turn affect us. This problem could also affect us through the credit channel. Turkish banks and businesses might find it harder or more costly to get credit. And, if the credit crunch causes a winding up of investments in mature markets, investors might decide to liquidate their investment in the Turkish market as well.


GF: Are you expecting a delayed impact of the credit crunch?

TUNA : Turkey cannot decouple from this general credit crunch, but we see that important transactions are still being completed in Turkey, like the recent ones, Migros and Tekel, each being above $1 billion transactions. International investors have not been putting off their investment decisions in Turkey, but the financing conditions may be more difficult—more expensive, perhaps, or with shorter maturity. We do not see any diminishing factor in terms of the pipeline of the investment banking business that we are doing. Nothing has stopped, but maybe some terms have changed.

ERDEN : All investors are very much concentrated on growth right now. As long as we can maintain our stable growth—on average not less than 4% to 5%—and explain that Turkey is maintaining its multi-quarter-long positive figures, we will still be an attractive investment area. Second, we must stick with our inflation targeting. Emerging markets are driving global growth, and we are one of them, so growth should be maintained as strong as possible.

ALOGLU : Investors are coming here for returns they can’t find in their countries. There is great potential here, so even though the credit crunch is affecting the US and the EU, investors will keep on coming here

YALÇINKAYA : While the market capitalization of Turkey’s banks is much smaller than that of the big international banks, they are outperforming their international peers. Of course, investors could sell Turkish assets to raise liquidity, but right now, even after eight months of turmoil, we are still strong in Turkey—in the stock market, in FDI and in interest rates.

GF: How has the worldwide financial turmoil affected the Turkish privatization, FDI and M&A; environment?

ALOGLU : The returns are still high here, compared with the European Union, the United States and even some other emerging economies, and there’s big potential here. If growth can continue around 4% each year, FDI and the privatization deals will continue. Margins might increase on the financing side, but that creates an opportunity for Turkish banks, which have plenty of liquidity. Our banks learned many things from the 2000 and 2001 banking crisis here, and they have experienced risk departments, and we have money for them to lend. They will benefit from this position.

TUNA : M&A; activity and the privatizations will go on. Maybe there will be some slowdown in the pace, but it will definitely keep attracting international investors. It will not be only the top-tier companies but also the smaller ones. We see huge potential in the smaller companies in terms of attracting new international investment, in terms of partnership or private equity investment. Turkish companies are also increasingly investing cross-border, which also is another important means of growth in terms of market diversification.

YILMAZ : So far, Turkish privatization and the FDI environment have not been affected. So long as the confidence in the Turkish economy is maintained and the authorities continue to send the right signals to the markets, the momentum will continue. There is a question concerning growth: Turkey’s potential growth rate is between 6% and 7%, so we are not achieving our potential growth. But during this turbulent international situation, our aim should be to preserve what we have gained so far—to maintain the long-term potential growth of the economy for the future, not to sacrifice it for the short-term gains.

YALÇINKAYA : We have not seen any significant impact from the turmoil on M&A; and FDI activities. We also see that the foreign interest for small and mid-size companies continues while the large-scale privatization deals are still attracting investors. We all know the central banks are working hard to solve the turmoil, and I hope that the situation will change in the near future.

ERDEN : With respect to M&A; activities from the corporate sector, we continue our investment activities because we think that this market is an opportunity for the operating companies. In the past few years we were competing with the investors who had significant borrowing capacity or could take extremely high risks. Now the competition has reduced because they can’t get the leverage, which means that potential acquisition targets are much more reasonably valued compared to last year.

GF: What impact is the private equity industry having on FDI into Turkey?

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Erden: "By the time the decision is made, Turkey may have passed the point at which it needs to join the EU."

ERDEN : Private equity has become a key funding source. In the medium term they will bring much more operational efficiency to the companies they invest in. If we can attract further private equity, it should be good for the economy.

TUNA : Private equity looks for real value, so they need to be sure the environment is right for investment. At the macro level, the growth prospects and the regulatory and legal environment are very important for them. They need to be sure corruption has been minimized in the country. The due diligence process run by the private equity investors is also disciplinary for the companies they are looking at. We are getting some actions to start a private equity fund establishment, possibly with international partners, for which the timing and size will be determined in line with the partnership talks and the general economic conjuncture, but the tendency is there. This is an example of how investment activity and interest in Turkey is still alive, but it is important that the right investment conditions should be there both at the country level and the company level.

YILMAZ : The central bank’s attitude toward private equity is to do what we can to maintain the environment in which the free investment activity can take place. The key condition is price stability.

YALÇINKAYA : There will be less leverage available, especially for private equity investors, due to the squeezed balance sheets of global banks. We can’t say that the worsening conditions have changed the liquidity flow to Turkey so far, but it has the potential to limit private equity investments for Turkey.

ALOGLU : Real interest rates used to be around 30% here, but now they are much more under control, so the environment is far more predictable. That’s why private equity funds are coming and will continue coming here.

GF: How can a central bank effectively contain inflation in a global inflationary environment?

YILMAZ : It is going to be a difficult task. When there is concern over growth and rising costs, everyone begins to ask, what should our priority be? Should it be fighting inflation, enhancing the growth, or something else? Well, we believe there is no trade-off between growth and inflation and financial stability. They are different faces of the same coin. The main priority is to maintain price stability. The only tool available to the central bank is short-term interest rates. So the target itself serves as an anchor for businessmen or decision-makers. The role of the money in monetary policy has become somewhat less important. What has taken the place of the role of the money is people’s expectations. If the central bank can secure the expectations in a direction that will take it to the inflation target that it set for itself, then I think the monetary policy will be successful. The guidance and the securing of the expectations is much more important than it used to be. Under these circumstances, it is incumbent on central banks like us, primarily, to be predictable.

ERDEN : The central bank is not the only responsible body for reaching this target. That is also a responsibility of the government, which has an important role to play in giving the right messages and ensuring transparency. Second, with energy and soft commodity prices rising, it is important to manage the public’s expectations and understanding—and the central bank is not responsible for that. The government’s fiscal discipline is a must to support the central bank to achieve its goal with its monetary policies.

YALÇINKAYA : Central banks have injected significant amounts of liquidity to the financial system in recent months to prevent a systemic crisis. But inflation rates have risen above the comfort zone in the US and other regions, so now we have surging inflation and a slowdown in growth, which complicates the job of the central banks all over the world. We see the biggest risk to Turkish inflation coming from the surge in global food prices, which comprise 30% of the total CPI basket, and unfortunately this is an area where monetary and fiscal policies can do very little.

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Yilmaz: "We have to make the investment decisions if we [want] Istanbul [to be] a financial hub."

GF: How realistic are the Turkish people about what’s happening with growth and inflation?

YILMAZ : Our communication policy seems to be effective. We send out questionnaires to 500 participants in the real sector and the financial sector to assess their inflation expectations. We found that despite real increases in energy prices, the general inflation expectations did not worsen much. The public at large believes the disinflation process is working. By and large, the public at large very well understands the oral and written communications from the central bank.

GF: What factors are hindering economic growth in Turkey?

ERDEN : We lost momentum through two factors. One was the government’s delay in enacting the economic program. The second, right after the elections, was the economic turmoil in the global financial markets. We are also seeing some weakness in consumer spending, but we now expect that to recover at least to 2006 levels, having slowed down considerably last year. We’re expecting around 5% growth. Sectors such as the telecommunication sector that are driving the operational efficiency while minimizing the unregistered, informal economy are heavily taxed. Necessary government incentives should be given to sectors with growth potential, and officials should reconsider excess tax burdens on basic private consumption.

YALÇINKAYA : We need to expand the availability of credit to corporations. They have to use new instruments to finance growth because there is limited room to grow otherwise.

YILMAZ : We still have reasonable rates of growth, although not as high as in previous years. Lately, the main driving force behind growth has been private sector activity. An important contributor has been productivity growth, so despite the latest slowdown both in external and domestic demand, we still expect reasonable growth in the Turkish economy. Aggregate demand conditions are still conducive to the disinflation process, as well as conducive to reasonable growth, but not to the extent that we had previously.

ALOGLU : The construction side was very important the past two or three years. As interest rates came down, construction companies grew much faster than other sectors. This year, the big players in construction expect at least 15% growth. The most recent banking sector growth number, which is December 2007, was 4%. We will achieve reasonable growth rates for 2008 and 2009, across all sectors, but mainly it will be driven by the construction sector.

TUNA : In terms of world growth, infrastructure investments are significant for Turkey, where there are many prospective infrastructural investments lined up. This year we will see the privatization of the motorways and bridges, the revenue from which will be used in the investment in constructing new motorways, of which there is a huge lack in Turkey. This is attracting investment from both local and international players—including pension funds and sovereign wealth funds. Other infrastructure investments expected in Turkey are in different sectors like energy, water treatment, dams, ports, all areas of transportation and health.

ERDEN : One issue we should not forget is employment. Turkey has been very successful bringing inflation down to single figures and maintaining stable growth, but we are not very successful creating employment. That’s why it is important to promote the right sectors—such as banking, telecommunications and especially real estate—to generate employment.

GF: What are corporations in Turkey doing to finance future growth?

ERDEN : With respect to future growth, we are looking for consolidation in the global market due to recent turmoil and expect some targets will become available. Some other Turkish corporates are in a position where they could do the same. For companies that don’t have the liquidity, the domestic bank debt liquidity window provides an opportunity that they should consider.

TUNA : Private sector bond issuance has been underutilized in recent years, but we believe that it will develop. We need to see more sizes and longer maturities and, of course, at reasonable prices. Such an alternative funding source would help growth in the private sector.

YILMAZ : Of banking and non-banking sector’s $50 billion foreign currency debt, over $25 billion is owed by the corporate sector, mainly in trade debt. This is adding to the productive capacity of the economy, so it is enhancing the future growth.

YALÇINKAYA : Wealth in Turkey is moving from the upper 20% to the mid-income levels. Corporations should be looking to mass-market clients for the growth.

ALOGLU : Companies should make more use of the Istanbul Stock Exchange to raise capital. Most Turkish companies are not open to the public still, yet this is another funding possibility for their growth. That would bring more new investors not only from London and New York but maybe from Japan and China—and maybe more Turkish investors.

ERDEN : Turkish companies are still reluctant to list on foreign exchanges. Turkcell is still the only one that has done so, yet it is a huge benefit for us in terms of raising funding. Turkish corporates also don’t have much corporate bond issuance because, perhaps, people are still waiting for the cost to come down.

TUNA : The private sector bond issuance market in Turkey still has not developed enough. For example, a Japanese investment bank has recently sold a Turkish-lira-denominated bond to Japanese investors—corporate and private individual investors. The issue size has been around $0.5 billion. It’s not easy to place a bond like that in Turkey within the near future. Investors outside Turkey have more confidence in Turkish instruments, for which we need to create more confidence and awareness both on the issuer and the investor sides.

YALÇINKAYA : The financial history of Turkey and the investment culture of the investors are the main problems here. Whenever Turkish people start to get nervous about the outlook for the economy, they start buying US dollars. Once that attitude is changed, the market for corporate bonds and other financial instruments might start growing.

GF: What is being done to encourage the development of Istanbul as a regional financial center?

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Yalçinkaya: "We need to expand the availability of credit to corporations."

YILMAZ : There is almost 100% consensus in Turkey that Istanbul deserves to be a financial hub of the region. It has the location, it has the time zone; everything is favorable. But it is not easy to make a financial hub by just saying that we are going to make it. There have to be the right legal foundations, the right culture and so on. The legal system must not differentiate between the citizens and the state or between foreigners and domestics. There should be competent courts. If businesses encounter problems, they should be easy to solve. We have to have international standards of conduct—ethical conduct, accounting standards—respected by everyone. And, of course, people have to have a good, easy life, and we have to make sure there are good schools here—at every level. Also, we have to be very predictable. If capital comes here, it should be sure that in 10 to 20 years’ time things will go as it was planned at the beginning.

TUNA : The most important aspect is ensuring that we have the regulations in place to establish a viable international financial center.

YILMAZ : Also the infrastructure—from transportation to communication—as well as the payment system and all associated facilities are essential to it. We have to make the necessary investment decisions if we are really serious about making Istanbul a financial hub.

ALOGLU : Istanbul is already well established and has great experience compared to other centers in the region, so we are doing our best to ensure it is the regional financial hub. Turkey is one of the biggest players in the world in terms of gold and jewelry trade. Now we are trying to set up what will become the region’s biggest diamond market. It is the same in other sectors. We are trying to do our best in all sectors to catch this train. We have some strengths here—geography, experience and so on—and if we do our best and we work hard, I think we will achieve it.


Moderated by Dan Keeler