Roundtable | Turkey

GF: What are some of the challenges for the Turkish financial sector going forward?

Ağci: Around 65% of the Turkish capital markets are dominated by the top five or six banks, so this kills competition, and it doesn’t help the growth of the markets. I don’t see any other market where there is such an oligopolistic structure in the world. Around 70% of all the mutual funds are owned by five banks. The pension funds are increasing, but they are also increasing through the five or six highly-branched banks, and they are managed by their own portfolio companies and supported by their own brokerage houses.

Özcan: As compared to many metrics for banking systems, Turkey is in much better shape than most of its peer countries, and even by comparison, equal or better than most of the developed market countries too. When you compare the technological advancements of the Turkish banking system with some developed markets, you could definitely put Turkey in the developed market  rather than the emerging market basket. But let’s talk about the challenges. The main challenge, again, is the saving deficit problem. We are growing our coverage by 25% on the loan side and 15% on the deposit side. So every year, we have a deficit of 10% or more in funding, and this is coming in the form of home state funding from our European and American partners.

Right now, the loan-to-deposit ratio has reached almost 130 percentage points, which is not sustainable. This is the biggest challenge for Turkey that requires more contributions from international banking systems, the Turkish banking system, and also higher saving ratios for Turkish financial markets.

Another thing is how to make Turkish banks attractive to international investors. That’s only possible with strong bottom-line profitability. Right now, what we are talking about in Turkey is how to use more banking policies to cap domestic demand. As I said, we are carrying 400 basis points more than what we need as a capital base. Basel III requires you to have a base capital ratio of 9.5%. In Turkey, the minimum level is 12%, and on average it’s 16.3%. Having a more stable financial system is only possible with a high cost to the banking system. We have to balance banking policy pressure while still ensuring banking is attractive in the market place. 

Çakir: One major strength of Turkey is its strong banking system. Turkish banks’ strong capital base and supervision remains one of our key strengths. That brings us to the issue of the continuation of profitability of the banks. We are seeing a decline in the return on equity, and that is partly as a result of the macroprudential measures. If profits don’t grow, then the banking system’s ability to give credit over time declines. 

Kenç: The high current-account deficit basically led to increases in the loans-to-deposits ratios for the Turkish banking system. But we are working on the external deficit problem, and we are also specifically working on the banking system’s high loans-to-deposits ratios. 

GF: What is the attractiveness of Turkey to foreign investors, and has it changed?

Ağci: Turkey is still attractive because there is growth potential in the country. It has a very entrepreneurial history, unlike the emerging economies in Eastern Europe. There’s strong corporate governance. There is also a proper auditing system, which attracts both financially and on the compliance side, investments to Turkey. And of course, at a time when the cost of acquisition finance is low, people are more encouraged to buy more in emerging market countries.

Özcan: We don’t have a problem of attractiveness, but one thing I would like to mention is that in the last two years, unfortunately, Turkey has given some wrong impressions to international investors. It is a small part of the problem, but the bigger part of the problem is overall investor perceptions about Turkey have changed dramatically. That requires urgent intervention, not only by government or public authorities but also the private sector. With this new government program led by our prime minister, we are focused again on European Union membership. I see this as an effort to change negative investor perceptions of Turkey by approaching more international standards.

Kenç: There are some problems related to the global economy. One of those problems is very low productivity everywhere. Secondly, there used to be a relationship between global trade and global growth—that relationship collapsed in the last couple of years. The other problem, as a result of low productivity and the global growth performance, is investment. Investment is a problem both in advanced economies and emerging market economies. With respect to foreign direct investment flows to Turkey, we don’t have an attractiveness problem. It is more to do with the source country than the recipient country. Our major providers are European economies, but they are not having good times in their economy, so that’s having some impact on FDI flows to Turkey. 

GF: There were statements made by Fitch on the risk going forward for the Turkish economy. To what extent do you consider the possibility of another negative outlook or even further down the road, a downgrade?

Özcan: I can’t see any economic, social or political changes that will require ratings agencies to make negative changes to their outlook or ratings.

Kenç: One problem of the Turkish economy often highlighted by the rating agencies is external imbalances. Overall, the leverage level in Turkey is not that high. It is around 130%, which is quite reasonable, compared to other emerging market economies. External liabilities with respect to GDP are around 50%, which is also reasonable. The problems we are talking about are therefore flow balances. The important point is whether Turkey will continue on containing the current flow balances problems we have or not. In this respect, we can safely say that the current policies are well designed against any contingencies in flow balances.

Another highlighted specific external liability problem is nonfinancial-sector FX liabilities. The total FX liabilities of the nonfinancial sector are around 35% of GDP. Eleven percentage points to 12 percentage points of that is directly borrowed from outside, and the remaining 23 to 24 percentage points are borrowed from Turkish banks. The second point is whether those liabilities are short- or long-term. The maturity of those liabilities has been lengthening, which is pleasing. Thirdly, you need to look at whether there are any systemic risks that affect those liabilities or not. Again, we looked into that, and there is some concentration in certain areas, but it’s a mild problem.

Çakir: The challenge will be next year to convince these agencies that Turkey deserves to move back to a stable rating, and plus maybe an upgrade in the following years, while in the meantime avoiding a road accident, so that these outlooks don’t turn negative. In addition to maintaining a tight monetary policy, maybe we need to develop a new Turkey story, with the government looking towards the EU and structural reform so that we can change investors’ and the rating agencies’ perceptions.


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