TBY talks to İlhami Koç, General Director of İş Investment, on the interaction between the economy and the capital markets.
TBY What is your assessment of the Central Bank of Turkey’s policy of cutting interest rates and raising capital reserve requirements?
İLHAMİ KOÇ It is a new policy. Normally the policy of the Central Bank of Turkey (CBT) was price stability. Price stability was perceived as something local, and previously only inflation and growth expectations were taken into account. This is the first time the bank has considered external factors such as capital inflows. This new policy is not based only on interest rates, but also reserve requirements. It is considered that capital inflows create pressure on the Turkish lira, and thus are a factor in the current account deficit. The CBT believes that by decreasing interest rates, the account deficit issue will be alleviated. When interest rates are decreased, this will also stimulate local demand, and this will be compensated for by increasing reserve requirements. We cannot predict the overall effect. However, we know that it will have an effect on the Turkish lira. The lira has been overvalued, and this year its valuation will drop.
What is your outlook for mergers and acquisitions (M&As) in Turkey?
In 2010 we saw the highest levels of M&As in Turkish history. One reason behind this was the presence of major energy privatization deals, increasing the value of M&As to $25 billion. The other specific reason was the Garanti Bank deal, which saw BBVA buy a large share in the bank. In 2011 we expect the market to remain lively in various sectors. The total amount will most likely be around $15 billion. There are still some privatization deals to be done in the energy sector, as well as motorways and ports. Privatization efforts began in the early 1980s, around the same time as in the UK. In the last few years the Turkish government has sold off a number of large assets. The second phase is now beginning, and concession businesses will be sold. There is great interest in these deals, and the prices are higher than our expectations. Private equity companies have just started to work on Turkey. At first, companies based in the US and UK discovered Turkey and began to invest, then companies from the Gulf and Russia entered the market. These companies are just beginning to invest again following the crisis and will continue to invest in the country.
İş Bank was one of the first private banks to sell Turkish lira-denominated bonds. Can you tell us a little about these activities?
Until the mid-1990s Turkey had a very active Turkish lira bond market. After the 1994 Turkish financial crisis, due to tax regulations and high interest rates, this market became inactive. A few years ago the tax regime changed, and interest rates decreased again. This led to a reopening of the market. Three years ago we issued the first Turkish lira bond, and 2010 was an active year that saw us close six deals. These bonds are traded on the Istanbul Stock Exchange and are real moneymakers. We see this trend continuing. This year most large banks have announced that they will issue Turkish lira bonds, as well as some of the smaller sized banks. This market will continue to be dominated by the banking industry.
The Turkish market has seen a high level of IPOs in 2010. What is your outlook for the IPO market in the medium term?
In the first half of the year there was a demand for IPOs in the capital markets. However, due to market conditions, and the problems the euro and eurozone countries faced, demand was fragile. Funds in Europe were reluctant to subscribe to IPOs and due to various economic reasons and uncertainty they preferred to wait. In the second half of 2010 the picture changed. We saw higher subscription levels for Turkish IPOs, and companies believed in the strength of the Turkish economy despite the global economic woes. IPOs thus became very successful, and we believe this trend will continue over 2011. A few months ago we closed a deal for Do & Co, a catering company. This company is based in Austria and had traded on the Vienna stock exchange. The main shareholder, however, is Turkish and at the IPO we sold €65 million worth of stock, and it was 15 times oversubscribed. This example shows the level of appetite.
What is behind this high investor interest and confidence in the Turkish story?
Generally, the economies of countries in this region are based on natural resources. Turkey has the only economy that is based on production. Turkey produces everything. There are many companies in each industry, and each industry exports. The economy is highly diversified, and there is no single driving force. This is the main advantage of this country.
What structural weaknesses can you identify in the Turkish economy?
The main challenge is the current account deficit. Our exports are growing, yet our imports are also growing. This poses a challenge for Turkey and for the region as a whole. Our economy is reliant on imports. We have few natural energy resources and must import. A steel company, for example, needs scrap and energy. It imports scrap, produces steel, and then exports it. This is the main characteristic of
Do you see Turkey’s investment grade improving in the near future?
Yes, I believe it will increase. We now have better economic figures, and our economic indicators are stronger than some nations in Europe. We are still one or two notches below investment grade level. We believe the ratings systems must be changed, as previously identified hurdles to increasing the rating, such as the budget deficit, have been solved. Yet Turkey’s rating remains lower than it should be. After the inevitable upgrade, we don’t believe we will see a major difference for the first few years. From an investor point of view, Turkey’s future is bright, and the investment rating is not considered. Currently, foreigners hold 67% of equities on the stock market, and they make up around 20% of the trading volume each day. So, they are not trading actively, and are holding onto their positions. Five years from now they will still be holding onto their positions. Some of them will sell into the good news, but I believe Turkey’s banking bond rates already reflect that we are at investment grade. Five years down the line an increased rating will begin to attract more FDI, and this is the long-term effect we hope to see.
What are İş Investment’s main operations, and what are your visions for the future of the company?
More and more capital market products such as futures, capital guaranteed funds, warrants, and hedge funds came to the market after regulatory changes. Another trend is the sophistication of the capital markets. We are the leader of the industry and the largest investment house in Turkey. As interest rates decline, clients will look for new ways to invest and we will be pioneering new products. We will continue to be leaders in the equity, fixed income, and derivatives markets. We are trying to create a bond market in the country following the six deals we made in 2010. This year we will see the options market boom, and we will be very active in that area too. We have the most comprehensive collection of services, including a portfolio management arm and a specific private equity company. We have offices outside of Turkey in Almaty and London, and we are about to open another office in Dubai. We expect further regulations to open the fixed market, allowing us to perform leveraged fixed transactions. We are investing heavily in technology, and our electronic platform will improve. It is now possible to use the iPad and soon the iPhone to perform transactions.
© The Business Year