TRUST MEASURES

Turkey 2014 | FINANCE | VIP INTERVIEW

TBY talks to Dr. Ibrahim Turhan, CEO & Chairman of Borsa Istanbul, on a potential deal with NASDAQ OMX, Istanbul as a financial hub, and attempting to reach an 80% market cap to GDP ratio.

This has been a very active and successful year for Borsa Istanbul, with the capital markets law being implemented and progress on a partnership with NASDAQ OMX. What else do you hope to achieve by the end of the year?

Of course, the strategic partnership with NASDAQ remains at the MoU stage. We need to conclude the negotiations and resolve all the technical details, while, at the same time, both parties require Securities Exchange Commission (SEC) approval, or, in our case, that of the Capital Markets Board (CMB). At the same time, we need to reach an agreement with NASDAQ OMX on certain details of the content, as to whether it will include an equity partnership, the scale, and so forth. And, of course, this partnership does not only consist of a transfer of technology and an equity partnership, as we also plan on taking full advantage of such a strong strategic partner. We are also now revising the entire business model of the capital markets, including collateral management, risk management, and the process right from ordering to post-trade transactions. We will develop a truly state-of-the-art business model, which will enable us to slash all unnecessary intermediary costs and create a market-friendly environment, especially for institutional investors. This is our most important aim for 2013, although, at the same time, there are also several issues related to the merger of three large institutions, namely TURKDEX, the gold exchange, which includes precious metals and gem stones, and, of course, at the core, Borsa Istanbul. This combination should lead us to peak efficiency, enabling full synergies between the three entities. I should also add that we are trying to become the eligible partner of the Electricity Exchange in Turkey. This exchange will start with electricity, but very soon will also include natural gas and then, perhaps, coal, oil, carbon dioxide, and so forth, thereby encompassing the entire energy market. Borsa Istanbul will be the main shareholder of the Electricity Exchange, and the institution itself will be the major shareholder at the same time. Meanwhile, for energy derivatives, Borsa Istanbul will be the market operator, which is another agenda item for the remainder of this year. And last but not least, we are now working on a new project to create a market for commodities. Most probably, it will start out with non-precious metals, for example iron and steel, and then perhaps include copper as well, to be followed by agricultural commodities; we have already started the preliminary drafting of the project. These are the four main issues on my agenda for the rest of the year.

Istanbul also has very ambitious plans to become a regional or even a global financial hub. How would the partnership with NASDAQ help you achieve this?

First of all, it would provide us with the most critical element of the exchange, which is infrastructure. When we incorporate the NASDAQ brand into our logo, it will inspire greater confidence among other parties. And, thanks to the latest technology, and in addition to the know-how and creation of a market-friendly environment, the already-high liquidity of the Turkish market will increase further. We will include institutional investors and expand our institutional investor base. And, as a result, Borsa Istanbul will be more financially integrated with the global financial network. Also, for exchanges in the region, the location, hosting, and data center services will be more attractively offered up by Borsa Istanbul.

This year, despite many impressive gains, there is still some way to go to reach your stated goal of an 80% market cap to GDP ratio. What is your strategy for reaching this target?

The second half of 2013 in particular was a difficult period from many perspectives. It was difficult for developed economies and emerging markets alike, although I think that we have now reached a more satisfactory position when considering the surrounding environment. I am still confident that our ambitious target is achievable because, when I look at what is taking place in banking on a global scale in terms of the regulatory framework, and especially in light of the US Fed tapering decision, financing organizations through banking will no longer be as easy as it once was. This was especially true during the 2008-2013 period. Credit will become more expensive, especially given the capital liquidity provisions of the regulatory framework. It will become even tougher to borrow and those corporations that need to expand their operational base or increase their market share will become more competitive. This is exactly the current situation of Turkish corporations, which will need to rely more on the capital markets, a trend that has already begun. While corporates are not currently large players in the liquidity market, we are observing more of them utilizing the corporate bond markets, or even the sukuk market. This is the partnership that we plan to sign with the World Bank regarding the opening of the first ever center for Islamic finance in Istanbul, of which Borsa Istanbul will be the host institution. This will contribute significantly to the development of this segment of the capital markets. I am also sure that after a certain threshold of awareness, the opportunities presented by the capital markets on the issuer-side, including interest from the company side, will increase further. This will bring them to the liquidity market as well, whereby we will achieve our target of 80% of GDP within a period of five years.

“Within five years, Borsa Istanbul will definitely be the center of this region."

How would you assess investor confidence in Istanbul today?

Certain elements merit closer analysis, such as the leverage ratio, both for the public sector and the private sector. When I look at the fiscal outlook for the Turkish economy, I am amazed. I would like to point out that Turkey has the strongest fiscal outlook among the non-commodity exporters of the emerging markets; we are the first by far. The budget deficit is less than 2% of GDP, and the country is running a primary surplus, thanks to which the debt-to-GDP ratio is declining continually. For 2013, we expect it to be below 35%, rendering it a key element of the evaluation. In the private sector, the household sector is not leveraged at all, compared to any international measures. The leverage of Turkish households remains very low, which lends further credence to our evaluation. More importantly, Turkish households are inclined to the long position, which contradicts many other emerging markets where the households are in effect indebted. A glance at the banking industry reveals a high level of financial preparedness, and an acute knowledge of risk management, as well as robust capitalization. Meanwhile, the industry's capital adequacy and liquidity ratios constitute further strengths and provide another anchor for the Turkish economy. And so, in terms of leverage, I think this business discipline is the most advantageous and competitive aspect of the Turkish economy. One particular risk related to the current account deficit (CAD) concerns the low level of domestic savings. We note that Turkey imports almost all of its energy needs. All in all, when I look at the fundamental indicators, such as productivity, labor market conditions, demographics, and the investment environment, as well as other macro indicators, such as the fiscal outlook, financial service industry resilience to external shocks, and the leverage level, they all imply that the Turkish economy will be much stronger in the future. Therefore, confidence is already present, and we observe this in the approach of global investors as well. Moreover, the fact that we, as Borsa Istanbul, can strike a partnership agreement in 2013 amid market volatility is a clear indication of the high level of confidence in the Turkish market.

And finally, what is your outlook for Borsa Istanbul over the next five years?

Within five years, Borsa Istanbul will definitely be the center of this region, including Southeastern and Central Europe, and the Middle East and North Africa (MENA). We will establish strategic links and partnerships with highly respected global players, and we have already begun with NASDAQ OMX. We will have a more vertically integrated system, a state-of-the-art business model for the capital markets, and an efficient, effective, fast, confident, and secure market place both for domestic and global investors. I am confident that we will reach all of our targets.

© The Business Year - November 2013