Turkey is going through an exciting time at the moment. In a period of global economic recession, Turkey has been the fastest growing economy in Europe for the past two to three last years and is even projected for an expected growth in GDP of 4% for 2013. But what impact has this impressive economic growth had on the insurance sector?
Actually the insurance sector has been quite neglected in our inflationary years, I would say, which is the natural outcome of things, because when you are actually tackling too high inflation, you cannot talk about something you need to insure to keep its value; and the value has been changing quite rapidly. So after the 2001 crisis, and after Turkey had gone through an interesting way to actually cope with inflation, and also straighten out the banking sector which is definitely vital for a healthier economy, those years actually added up to being more attractive for insurance in Turkey as well, both on the side of the population, because of the insurance sector’s basis on insuring lives and keeping people in better shape, and health insurance in all sorts of things, not just credit insurance.
Well credit insurance is relatively very new in Turkey, again purely based on the fact that we have been going through a huge inflationary period for slightly more than two decades. So that has had an effect on keeping the insurance market suppressed in a way which is not the case right now of course. If you looked at Turkey’s insurance market from let’s say 2006 onwards, you would definitely see a lot of mergers, a lot of buyouts, a lot of foreign companies coming into Turkey. I’m not just talking about credit insurance of course, but the overall insurance sector.
When we start talking about the credit insurance side, we like to describe it in Turkish as more of a translation of it, like trade credit coverage or something. Because when you speak about credit insurance in Turkey, in most cases people can actually get mixed up with the insuring of the banking side of it, the financial risk of it, which is not the case in our sense. So when you look into that, COFACE has been in Turkey since 1998 onwards, but as a service company working together with some of the conventional insurance companies, which in fact didn’t really turn out to be that nice I would say because of the fact that credit insurance is actually a niche product; when you look into the conventional side of the insurance product, it’s totally a different approach. When you talk about trade credit insurance, it is more like banking and factoring in a way, so we’re closer to the banking and factoring side more than the conventional insurance side.
COFACE decided in the end to become an insurance company in Turkey solely for the credit insurance by the end of 2006 and we started issuing policies by the very first days of 2007, so it is a relatively very young product for Turkey indeed. Many of the Turkish companies, many of the exporters actually, know this product through Turkey EXIM Bank.
Do you think these inflation days are finally behind Turkey?
I think so. Let me tell you, it’s been some years that I’ve been spending time in the financial sector and in the 90s we were tackling 180% interest rates. Literally there were days that you would charge 1000% for an overnight credit. So yes, those days are definitely behind us now. We know that we will not go back to that hyper-inflationary period but of course inflation is something that you need to tackle. You need some sort of it to keep things going on, but of course too high is definitely distortive. Those years were really distortive for Turkey in many ways: literally the real sector where the production companies were actually talking about financial profit or loss rather than usual production line profit or loss; or even the trade companies were actually talking not about their own business profit and loss but the financial profit and loss; and those who profited actually did so because they kept the money in their accounts, not paying their sellers on time, so things were very much distorted which is not the case as of today .
Turkey is now more global than ever; literally over 60% of our GDP is dependent on what is going around the world, which of course is good in a way, but is also something that needs to be handled. In that case of course, you are more volatile in the sense of protection, because if you’re global that means you actually have to work with all those global companies around the world. Then of course as a seller, being an exporter country, you need to cope with longer terms of credit, open terms of credit, this and that.
So this is something Turkey needs to cope with, both on the export side and also the domestic side. Don’t forget, the momentum currently in Turkey is depending more on not just the export side but also the domestic market, so we have that spirit of growth because of our domestic demand also; so we need to be both thinking about domestic side and also the export side.
So being more global, being more not on the emerging side, but more on the developed side of the economy, then you need to keep an eye on the open terms of credit. So credit insurance is becoming more and more something that all of those companies need to be careful about; so you need that protection to actually cope with the terms of those credits.
What we literally say to garment companies, textile businesses, is that they have been pioneers in almost every new tool introduced into the Turkish market. Why? Because they have been throughout the globe; they actually know what is going on outside Turkey even in those volatile years that we passed through. So textile companies have a good appetite for trying out new tools and know things that can be good for their trade and production. So yes, they were our very first customers and they are now getting more of the benefit, also using the credit protection within the country; because as I said both domestic and foreign trade is very important for Turkey, so we cannot just say Turkey is growing on the export side only; no, there is an interesting demand on the domestic side.
And this is an incredible advantage because a lot of emerging markets do not have that local demand.
Yes, this actually makes Turkey a star in a way. So when you become a star just as we are today in a way – because it’s the second investment grade by Moody’s after Fitch – and then of course we will be attracting more and more foreign capital, more foreign funds. That means more volatile and hot money in a way, so right now we have more challenges than ever to cope with this kind of attraction. This is why credit insurance definitely is the tool for all commercial companies: trades, production, whatever, selling services, selling garments, selling energy, whatever you can say. Any company that can work on an open account basis needs to have that kind of protection, because what we like to simply quote: we will pay if they not pay, so would you like then that kind of protection? I would think they would all say yes.
So it is very important, in a market like Turkey right now, because credibility counts right now. We used to be more restrictive with instruments like checks. Turkey had this check instrument in three decades probably, which has actually been the very top document that you use whether you sell services, or you sell products, then you need to have some sort of a checking account that you can write down checks due dated in four months, six months or whatever. It was a fortune telling contest actually: simply by looking at the check, will he pay or will he not pay on time? God knows. And luckily the government actually was very determined to cope with this problem because this problem created a money supply which you cannot control – it was not even under the governance of the Central Bank, who didn’t even know how much it was worth, as you could only tell that when you declared it to the bank.
With the global crisis in 2008 the check law has been changed to recognise the due date on checks, so that actually put a stop on any credit institution. For example if they heard somewhere that one of the commercial companies was in trouble for not paying this certain amount, all the financial institutions would actually declare all those checks to their bank account, and it would be bounced, of course with future dates for six months or so, and the poor guy goes bankrupt because of not having sufficient funds for projects. This has changed in 2008, and the banks had to actually recognise the fact that if the check bears a due date for six months, it should be cashed in six month; this was the first step. Then in 2012 they lifted the prison sentence on the check law also – there used to be an imprisonment penalty if your check bounced...
We saw it in Dubai…
Well, it was not like Dubai, I know what they do in Dubai for that, but no, it was not like Dubai. Turkish companies would have too many chances of paying through the legal side. However since there was imprisonment within the law, actually those issuers were scared not to do it. This is banned now, there is no imprisonment on an economic value of check, you can only go to court and not be issuing any more checks, etc.; it’s a normal legal case. This is changing the whole story right now, so we’re in an interesting period regarding credit insurance at the moment.
If you can actually have a limit on the buyer for your policyholder – because you obviously need to give a limit to the buyer – where the policyholder can trade on open terms and if they do not pay on time, then he will come back to you and say: “My insurer, would you would please reimburse me, cover me for this?” And you carry on whatever you can do with this buyer.
To do that you absolutely need financial information of the buyers which was rather scarce in Turkey, because of the fact that none of the Turkish companies actually complied with rules and regulations that they should actually declare their financial accounts to a public site that we can log on to and get it from, so it’s purely on a voluntary basis that they give you that sort of information. However there was one key site: the banks among themselves did have this credit bureau where they follow the check performance of the commercial companies and also the overall credit exposure. And very recently the Credit Bureau, along with the Turkish Bankers Association and the Insurance Association, actually said that credit insurance companies can have access to this credit information in order to assess the limits on the buyers, which is an interesting change again on our side.
So along with this ban on imprisonment for bounced checks, the usage of checks will definitely be reduced as a security. A check is actually an instrument to just make sure that the payment is there; if you cannot put the total cash on the top of the table, you can just keep a check; and this is a pure paying instrument, nothing as a security, nothing as a note that “I owe you this”, etc.
So with these final legislative changes and also the fact that we can have now an access to the Credit Bureau in order to assess a small buyer and a large buyer and this and that, this is now going to be improving very fast in Turkey.
With these new developments, what are your expansion plans and your goals for 2013 and beyond in Turkey?
As you said in the opening, Turkey has been growing over almost 8%-9% in two consecutive years: 2010 and 2012. And 2012 turned out to be an interesting period, because it was an engineered slowdown by the Turkish Central Bank, which had to be done in order to be more sustainable in the sense that you were talking about now (for almost 4%-5%), a more sustainable levelled growth for Turkey. Even with that period, we have grown nearly 40% in 2012; with Turkey going 2.2% – I don’t know how much the credit insurance market has grown, but we are 50% of the market – so we can say it’s quite a big chunk. It is still peanuts, stuff we are taking about, even though Coface is covering nearly 28,000 buyers in Turkey, this is reaching €5.7 billion worth of exposure. This is quite a big chunk actually, but still the number of policy holders is low, and the penetration within the overall credit insurance market is still low, because we are in the very first days, we are in the baby days, not even the toddler days.
It sounds like you want to increase your policy holders base. Would it be SMEs you’re targeting?
Yes, what we are targeting at the moment is actually to grow not less than 30% in the next coming three years you can say. Definitely as you mentioned, our target is the SME side because when you are talking about Turkish companies, over 80% of Turkish companies are SMEs and this is what makes Turkey more alive in a way, the domestic sense. So we need to address their needs, especially their needs of financing their working capital. In order to have a better working capital base, they need financing and their bigger assets, their most valuable assets, are their receivables actually. So once we give coverage to their receivables – which we can easily do because we do have access to information, we have an access to the buyer’s site. We are already in Turkey, and not outside Turkey and coming in and out. We’re an established company in Turkey, and we’re growing at not less than 30% each and every year, except 2009 which was the problematic year. So this is actually going to be very attractive for many of the Turkish commercial companies because they can literally ask Coface to cover their receivables in the case of non-payment, then they would assign that policy to a bank where they can finance themselves.
This is going to be I think our big target for the coming years, together with the banks and the factoring companies. Because up until now, banks have been more conventional on their lending to SMEs; they could actually be careless regarding the credit insurance policies, etc. Why? Because of the checks mainly; because they could actually have thousands or millions of checks, based on the fact that those receivables are guaranteed in a way. This is not going to be the issue anymore, so they need to actually get something more valid on their portfolio to make sure that this SME is actually able to pay back its loan, because they have guaranteed a cash cycle by the fact that their trade receivables are guaranteed. I think this is going to be a very basic, simple, but effective tool.
At the moment is it safe to say that the apparel and garment industry is the largest sector of your portfolio?
No, not really, they are one of the largest.
So which industry would that be and additionally in which sectors do you see opportunities in the Turkish economy to grow?
Actually we do see a lot of opportunities. Of course textiles, not just the garment side, but textiles in a wider term – even the chemicals related to textiles, the clothing, whatever, even the raw material side of textiles is an interesting sector for us to cover.
Pharmaceuticals definitely, trades of all kinds, chemicals, plastics, anything you can name in a country which is growing at a pace like Turkey, and exporting at a pace like Turkey.
Because as you probably noticed before, Turkey actually imports a lot to produce its export lines as well; so within this global economy, we cannot really say everything is made in Turkey and compiled together and sold as an export. Many of those components do come from abroad. This is something Turkey needs to manage as well, because the volume of it needs to be very carefully adjusted, so that our current account deficit is really not enlarging too high at a very volatile level, not about 6% to 7% of the GDP. So in order to do that you need to actually give more incentives to the production side in the country. So what we do intend to control that in Coface is that we do not have more than 20% of the coverage in any sector.
Ok, so diversification...
This is of course manageable right now. Yes, diversification is key. This is manageable right now because the potential in the country is so huge and as I said we are in the very early days right now, so we can actually enlarge the market. Our aim is not to fight with our other competitors, which are all three global competitors. Actually, the three of us – Coface, Euler Hermes and ATRADIUS – have 85% of the overall market of credit insurance. However we do not look at the picture as them being here; we don’t need to hack at each other’s portfolio or anything like that – there is enough potential in the market that we should all of us be aiming to grow our market share, with adding more companies which have not been insured before. This is our target.
And as a world-leading credit insurance company, you’re experts in country risk, in sectors of the economy, in rating agencies within the country: what advice would you give to UK investors who want to invest in Turkey?
To tell you the very attractive side of it, I would just quote an example. As I said we started this company in 2007 in Turkey, literally issuing policies by Coface Turkey. And we grew maybe 200% because it was from scratch. By the end of 2008, just after the Lehman crisis, there was an interesting problem in the Turkish market where banks stopped lending, and all of a sudden we saw lot of claims piling up on the credit insurance side, because of the fact that commercial companies were paying back their bank loans, because banks stopped lending for an uncertain period, because as you know Turkey is growing at an interesting pace and our savings ratio is not actually enough to cover the growth. So what did banks do? They got funds all around the world, and they were not really sure whether they could renew all these indications and circulations, etc. For a period of six months everything stopped and we had really enormous difficulty on handling the claim side. But this was a trial period for us, and we got through that period within two quarters: it started by the fourth quarter of 2008 and it ended by the first quarter of 2009. After that there was an enormous comeback and Turkish buyers paid their debts, most of them. It is not like the euro zone where the company disappears; they pay over a longer time but they do pay, there are more “payers” than “flyers” who disappear.
This has been tested by us in the market, and Coface in fact – although our country note is slightly different from what you can see on Fitch and Moody’s etc. – we based our country ratings on mainly the commercial side of the country, how the commercial debts are handled in the country, do they pay on time, is the commercial data available, is it transparent enough? Of course we do value the political risk etc., but the most thing we test in a country, being in the country actually, is how the trade is going on, whether it’s healthy or unhealthy or whatever.
Turkey used to be a B grade in Coface. We have four grades in Coface – we can provide you that information – of A B C D: an A has four levels, an A is the top level, an A4 is an investment grade, what you can actually call an investment grade in Coface. So Turkey used to be B for so many years actually in Coface. By September 2010, Coface increased Turkey’s note to A4, which is already an investment grade for us. Why? Because we were actually observing that test. So what I can tell UK traders, investors or anybody who is interested in Turkey, is that Turkish companies are reliable companies, they pay on time most of the cases, and there is always a way to handle problems. And what we are experiencing through all these years right now is that the recovery is good also and it is definitely more secure than the euro zone.
This is actually the kind of comments we’ve got from a lot of the government officials we’ve met such as Beşir Atalay and Minister Çağlayan who have talked about the credit rating is long overdue, you know, the investment grade for Turkey.
Sure, but since we are there right now, we need to talk about what is going to happen after this. Turkey needs to be more careful than ever right now, because it is going to be in a way more open and more volatile in the global sense. It is not just the domestic problems that will become volatile; there is nothing volatile about at the moment except this year side of it over there, which is not our domestic problem definitely.
What do you think the government can do to maybe instil more trust and confidence in the economy which is probably one of the most essential for any emerging economy, trust and confidence...
Production. It is the key actually. You need to have some sort of incentive on the production side, and they have already introduced many incentives. I must actually say that they have a very good incentive plan that has been introduced. It needs to be very closely monitored; it needs to be maybe more attractive, maybe with more longer terms, etc. But we definitely do need production. When you look into the global crisis that we are still going through, the major problem has always been the production side. Countries who actually vastly switched to service sectors are suffering right now. We need to have a balance of everything, it’s purely a balance really. In a country like Turkey with over 70% of its population being very young, we need to be very careful about unemployment for those between the ages of say right after university up to 35. We should be very careful about this, it needs to be very closely monitored. And for that reason we need really production within the country. So this is what it is all about it.
Surely having internationally recognized brands like Coface in a country must interest people outside interest and give them confidence in Turkey?
In a way, true, yes. Turkey has been following the global changes very closely, most of our commercial people, company owners, private shareholders... I mean private entrepreneurs are all around Turkey actually. Even in a very small town in Anatolia, you can find at least five entrepreneurs who have brilliant ideas; there needs to be more. I would not say more standardised, as then you would lose the magic of it; not up to that level, not losing the magic. But we need to be more careful, especially the State and the quasi-State organisations like the associations, like TOBB and others. They need to actually make sure those entrepreneurs, acting in a more transparent way, that they feel that they declare everything, not deal with something on the black market or anything like that. So it needs to be more transparent, more reachable in a way to any kind of institution, so that they can provide more help for their entrepreneurial skills, and to maybe help them get more organised for partnerships, joint-ventures, because you cannot have just sole entrepreneurship and grow around the globe. Maybe you can grow in your tiny little village but then you need to have more access to the global site. So then of course being public or having more shareholders, having joint ventures, making more intercultural marriages on the commercial side… this needs to be nurtured by the State and to be more encouraged.
ISPAT President Mr Ayci has claimed that the insurance sector is under close watch by investors particularly because of the government’s new initiatives for private pension plans. What would you say is the big attraction to Turkey’s insurance sector of foreign investors?
Actually as we were talking about it, the insurance sector in Turkey is really not very much developed, so there is a lot to it, there is a lot of potential, but it needs to be very carefully engineered. The population is huge compared to many of the European countries where the market is really stagnant right now; so it looks very attractive, but I have a warning to say about all these interested companies trying to make all the profit in Turkey just based on the fact that there is a huge population, and there is a huge young population.
First of all, it is not very easy for our mind set to really get rid of the inflationary period myths. It will take some time for Turks to think about the future, at age of 70 or something when you’re 30 years old. It is really not on our minds right now. We are still very shortsighted compared to – actually I wouldn’t say compared to Europeans anymore because they now have seen the disaster of the pension funds – so we need to be very careful about that. We need to get used to the way of things being more stable; this is why this past year was very much engineered by the Central Bank and also the government. Ok, it was maybe too much of a break as Mr Çağlayan says, but still I am in favour of the Central Bank in that sense; we needed to see this. This too much growth is also not healthy for the country to be on a sustainable level: to be on a sustainable level you need roughly around 4-5% of growth in Turkey. This needs to be maintained and when maintaining this, we need to have a sufficient savings ratio, domestic savings need to be sufficient; it is not yet there. Why is it not yet there? Because we are just getting rid of the inflationary environment right now....
We have to have trust in the banks...
Not just the trust in the banks; I think we have gone farther than that. I don’t think there is mistrust among the common people towards the banking sector right now, we’ve passed that. In Turkey, it is not like what Europeans are experiencing right now, because we’ve been there and we’ve seen the worst. So right now I don’t think we do have a problem of that sort; the only problem we have is that we do not have enough funds to put in the bank. I am talking about the average person’s income. Luckily households are not that in debt as well, but we need to promote the savings side. In order to promote the savings side, you need to have more production actually; so it’s a circle of sorts, not a vicious one, but it’s a circle. It is all connected to each other, so we need to have more incentives, more growth, especially with the peace now being lighter than ever in the East and South East Anatolia. This is actually going to have much effect on the Turkish economy in a positive way, because we need the labour force over there, because we know that there is an interesting unemployment level among the young people in this area, so we need to be very careful on promoting that, and production again. It is going to be a longer and more patient way than we are used to; it is not just going to happen in a day, so Turkish companies need to be very careful that from here onwards the journey is going to be more patient; it needs to be more stable.
If we came back here in let’s say five years’ time and interviewed you again, optimally which achievements or accomplishments would you like to have completed?
I would definitely like to talk about over say 10,000 insured companies, which are roughly at around 500 now. I think the growth will be this drastic and we will be definitely talking at least five times the exposure that we are covering today. I really do foresee that future.
So you’re going to be very busy for the next five years.
I think so, I hope so.
And then finally what would your final message be to all our readers in the UK: in the printed version in The i and the Independent, as well as our millions of readers around the world on worldfolio? What would your final message be about Coface or even about Turkey as a whole?
About Coface: I think we have been here to observe the change in the country which is very lucky for a multinational company like Coface, being on site, seeing the developments in reality; so we think we are lucky in that sense. And with us being here, I think many of the investors and also the traders from UK can actually feel that this is an open-credit secured market where you can do all sort of things you can do even better in a development market.
And regarding Turkey: we have come a long way in a very short time and the dynamics of the country are actually here to stay – not just for one day or one year or even three-to-five years, they are there to stay. And of course it is better to actually get into the market via Turkish partners, working together with locals who know the markets and the people. This is something key. It’s totally different all around the world. I am pretty sure UK investors know much better, compared to the average European investors.
Why? Because the UK is almost literally all around the world. So your investors will actually have a better understanding of the local-global approach in a way. So it is good to benefit from what the locals know –local expertise is very important. They should not be hesitant in dealing with trade or selling in Turkey. There is secure way with us definitely. We are waiting for them to come.