TBY talks to İbrahim M. Turhan, Chairman & CEO of Borsa Istanbul, on the new Capital Markets Law, Turkey as a potential financial center, and credit rating agencies.

 İbrahim M. Turhan
İbrahim M. Turhan graduated with a Bachelor’s degree from Boğaziçi University, Faculty of Economics and Administrative Sciences, Department of Management. He received his MA in International Banking in 1995 and his PhD from the same university in 2001. In 2004, he was elected as Board Member by the General Assembly of the Central Bank of the Republic of Turkey. He was appointed as Deputy Governor in 2008. He also served as a member of the Advisory Board of the Contemporary Turkish Studies Chair at the London School of Economics (LSE) European Institute until the end of 2011. He was appointed as the Chairman and CEO of the Istanbul Borsası on January 1, 2012.

How would you characterize the past year for Turkey's capital markets?

The past year was a real success. Maybe the most important development was the enactment of the new Capital Markets Law, which reconfigures the legal infrastructure of the capital markets. In terms of stock exchanges, the law suggests that the exchanges be established in the form of joint-stock companies. This clause enabled our exchange to complete its demutualization process. Furthermore, through the law, the IMKB and Istanbul Gold Exchange merged under Borsa Istanbul, and the shareholders of the Turkish Derivatives Exchange (TURKDEX) are expected to join this new bourse, exchanging their shares with those of the new company at a predetermined rate. It is one of the most prominent steps in the history of Turkey's capital markets in terms of horizontal integration. In addition, our attempts continue in the course of vertical integration through increasing the shares of Borsa Istanbul in Takasbank, the local clearing and custody institution. Our bourse is already the major shareholder of MKK (Turkish CSD). Regarding the performance of the market we can look at the developments in our main index, the BIST-100. During 2012, the index has appreciated by 52%, making us first among the members of World Federation of Exchanges (WFE). Accordingly, as of December 31, 2012, our market cap has increased to its 2010 levels, namely around $310 billion, recovering the decreases in 2011. Our liquidity remained relatively strong given huge decreases in the global market place. As of December 2012, we were the eighth biggest exchange among emerging market exchanges in equity market turnover. Daily average turnover was $1.8 billion during 2012. On the other hand, we maintained our position as the fourth exchange in the world in debt instrument market turnover, with a daily average volume of around $14 billion. In terms of IPOs, we can say that we had a good performance as well as compared to other bourses given 26 new companies started to be traded in our markets. Furthermore, 240 new issuances of bonds were made by Turkish companies, corresponding to a value of about $24 billion. All of these figures suggest that we will positively differentiate ourselves from the major world markets despite the continuing impacts of the global financial crisis.

How would you characterize the potential for Turkey to become an international financial center?

The political stability and macroeconomic developments of the last decade have converted Turkey into a center of gravity both for the region and for global companies that want to reach it. What is most remarkable here is that we could achieve this through market-friendly policies and mainly by the attempts of the Turkish private sector. Today, when we talk about Turkey, we talk about a country that has the 16th largest economy in the world with a PPP-adjusted per capita income above $15,000, with exports over $150 billion. In terms of the banking sector, today the total asset size of the sector relative to GDP is nearly 100%. This is a good indicator that the overdomination of the government on national savings is already over. Even at the heaviest times of the financial crisis, we did not put a penny into the banking system, displaying the soundness of the sector. Those are just a few simple examples. With a growing population whose median age is below 30 years, Turkey has great potential to reach its goals for 2023, namely becoming one of the 10 biggest economies of the world with a PPP-adjusted GDP of $2 trillion and exports worth $500 billion. In terms of finance, Turkey and Istanbul have great potential as well. First of all, Istanbul has already been a financial hub, historically. During history, its geographical position as a transition point between Asia and Europe has always made it a center where financial transactions take place. Secondly, there is an example I usually give. If we look to the world map, there seems a great gap between Asia and Europe. There should be a center that fulfills the needs of this empty time zone and I strongly believe that Istanbul is a natural candidate to satisfy the needs of both regional as well as global actors in terms of financial transactions. The Turkish banking sector is already well established and strong. In the course of the capital markets, the strategic attempts we have taken since last year are to serve to the overall objective of turning Istanbul into an international financial center.

Although Fitch upgraded Turkey's foreign-currency rating to investment grade in November 2012, there is uncertainty over whether S&P will follow suit in 2013. How do you expect this to affect investment inflows over the coming year?

With respect to ratings provided by credit rating agencies, the recent financial crisis has brought about some significant issues and I believe that issues such as heavily relying on historical data and not being able to capture structural changes within an economy also hold in the case of Turkey. Therefore, I strongly believe that Turkey should have already been within the investable country range. In fact, what is not seen yet by credit rating agencies is seen by the market. If you look to the spreads on sovereign debt, you might realize that the difference between the spread of Turkish government bonds and those of the US with 30 years of maturity decreased to 180 basis points in 1Q2013. This figure is an important indicator of the recognition of the strong macro fundamentals of Turkey by international investors. Despite these concerns, the role of credit rating agencies in attracting global capital cannot be disregarded. Therefore, any increase in ratings will positively affect the investment flow. We observed this in the Fitch case.

“We plan to increase our market cap to GDP ratio to around 80%."

What are your medium-term goals for Borsa Istanbul?

At the beginning of 2012, we determined a strategy composed of four main building blocks. The first main pillar was the demutualization of our stock exchange and achieving horizontal integration within the Turkish capital markets. These two goals were reached last year. We launched Borsa Istanbul as a joint-stock company that combines the IMKB, Istanbul Gold Exchange, and TURKDEX under one roof. The second component was to build up a strategic alliance. In addition, increasing the depth of our market is another important concern. First of all, our activities to increase IPOs are continuing. We had 409 companies listed on our equity market in early 2013. In 2012, we visited nearly 180 of the 1,000 biggest companies in Turkey. We introduced them to the opportunities provided by the capital markets, and according to a survey conducted by our team, one-third of them are looking to go public by 2015. Additionally, one-third suggested that they will include an IPO into their agenda by 2018. This means that more than 120 companies are planning to join the capital markets by 2018. Furthermore, our visits to SMEs in Anatolia are ongoing. Through various summits we promote the capital markets and try to increase the awareness of institutionalization throughout Turkish companies. In the medium term, we plan to increase our market cap to GDP ratio levels to around 80%, in congruence with world averages. In January 2012, this ratio was 26%, and in 2013 it is 40%. We believe that we will be able to reach the projected levels. On the demand side, we want to develop an institutional investor base.