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"In 2023 the Turkish economy will be in the top 10 or 12 economies in the world"

Interview - October 1, 2013
In July 2013 Borsa Istanbul (BIST) – which unites all the exchanges operating in the Turkish capital markets under a single roof – struck a partnership deal with NASDAQ that aims to expand the global presence of Turkey’s stock exchange, while significantly bolstering Istanbul's position as a regional hub for capital markets. Dr Ibrahim Turhan, Chairman and CEO of Borsa Istanbul, speaks to World Report about the technology and knowledge transfer the partnership entails, as well as Turkey’s resilient financial services industry and sustaining investor confidence in the sector
Turkey is going through an exciting phase at the moment. In a period of global economic recession, Turkey has been one of the fastest growing economies in Europe for two out of the last three years, and is even projected to post a respectable gross domestic product (GDP) growth figure of 4% for 2013. What impact do you think this economic prosperity has had on the capital markets? 

First of all, let me try to give you a broader picture of the Turkish financial services industry. It is a typical continental-type structure, which depends heavily on bank lending. The direct financial activities via the capital markets have been relatively less pronounced in Turkey. Besides the general systematic structure, which is closer to Europe, we should maybe underline other aspects which have prevented the capital markets in Turkey from developing.
After the liberalisation of the economy in the early 1980s, Turkey enjoyed the positive aspects of this liberalisation, but unfortunately, at that time it was not possible to complete this liberalisation with stabilisation and structural reforms.

As a result, when we reached the end of the decade, there were already three very serious problems in Turkey. First, there was a very high public deficit, followed by the lack of an independent monetary policy. This means that you can be sure that you will end up with very high inflation, which was the case. Because of the unpredictable and unstable environment with high and volatile inflation, combined with an unsustainable public deficit, the Turkish economy suffered a lot. 
Let me give you some brief figures from the 1990s, which I always call the ‘lost decade’ in Turkey. We had 75% inflation on average, and the public deficit reached 5 to 10% of GDP.

The borrowing rate of the treasury in real terms was hovering around 20 to 25%. Under such circumstances, you do not need to be a genius to know that the capital markets cannot develop in this environment. For the capital markets to develop, you need credibility (which was not there at that time), and when government borrowing is yielding 25% per year, then of course you would not look anywhere else.
But after the crisis of 2001, things changed in Turkey, thanks to the disciplined fiscal policies and the Central Bank enjoying independence. The economy experienced a significant transformation process. But it usually takes time for investors to change their perception.

The last crisis (2007/08) in particular served really as a stress test for Turkey. Investors were not expecting that Turkey would be so resilient, because we had such bad memories. But Turkey proved itself to be resilient and healthy. The banking industry is very resilient and the fiscal system is really benign.

In spite of the fiscal and monetary tightening that took place in 2009, in contrary to what we observed in several other countries, the markets paid it back and Turkey enjoyed an unprecedented level of economic performance in almost every area.
We are on a different track now. The potential growth rate of Turkey is between 5 and 6%. Without causing any stress in other areas of the economy, like inflation or overheating, Turkey can grow very safely at a pace of 5%. This means that in a decade, in real terms you can double your GDP.

On the other hand, (of course nowadays we are in a very turbulent environment but this will come to end) nevertheless this does not represent the real picture for Turkey, Brazil or other emerging market economies. On top of this real economic growth, there is an idiosyncratic trend of real appreciation of emerging markets’ currencies against developed markets’ currencies.

It all comes down to the fundamentals – the productivity differential should be reflected as a set-off mechanism in the currency domain. 
In a decade, the Turkish economy can grow twofold, and if you consider the real appreciation of the currency as well, you can easily say that if things continue in this direction, the 2023 target (the centenary of the Republic of Turkey) reaching $25,000 per-capita GDP is not a dream.

But in order to achieve this target, the Turkish economy needs investment. Especially when you consider that during the ‘lost decade’, both households and corporations did not have access to financial services as they would under normal conditions. There is a consumption and investment gap in the Turkish economy.

This is the basic reason behind the current account deficit, which is a reflection of the savings gap. During the whole decade, where other emerging market economies were catching up, Turkey was dealing with more fundamental economic issues, and we could not invest and save. Average living standards compared to per-capita income is $17,500 in adjusted terms, which is relatively low.
When we look at the Turkish economy, it is great – it is productive and it is a very diversified economy, but there is a need for many semi-finished products. We need more investment in some industries. As a result, in 2023, the Turkish economy will be in the top 10 or 12 economies in the world, but in order to do this, we need investment and we need to channel and allocate those investments appropriately.

The banking sector has almost reached maturity now, so to give you an idea, total assets to GDP is slightly over 100%. The loan-to-deposit ratio has already exceeded 100%. Therefore the banking sector will continue to grow, but at a more reasonable pace. From that, the growth engine comes in, in order to support the 2.5-fold increase that we expect to happen. This will be the major dynamism behind the development of the capital markets in Turkey.
Do you think that recent events in Turkey have shaken investor confidence, and if so, what should be done to regain the trust of the international community?

Actually, I have quite a different view on that. I think recent events should have contributed to the perception of the Turkish economy. Peaceful demonstrations are part of the reality in all advanced nations.

I will put two pictures on the table – one from countries like Egypt, Syria, Pakistan or even some African and Latin American countries, where when people demonstrate in the streets, the security forces open fire on them and kill masses of them, or even worse, throw rockets on them etc. I was in London for the G-20 meetings when there were masses in the streets. They threw rocks. Or in Paris, when there was an uprising of the people living in the suburbs. Or in Turkey.

But what is important here is how the Government, State and the society react. Can they manage them in a peaceful way, which complies with an open and democratic society and system? Or do you end up with a total collapse of the system?

My observation is that so far, Turkey could manage to live with those events. They took almost one month, and it was really tough, yet we have not seen people fighting with each other in the streets. There are different views; the protesters are not representing the majority in society. But yet, people who do not think like that express themselves somewhere else in a peaceful way.
Of course there were some problems between the security forces and the demonstrators, as was the case everywhere. I remember the anti-globalisation protests in Geneva during the G-7 meetings or even in Canada when a university student was shot dead by police. But they are accidental, not like in Egypt, Syria or even Venezuela. I think those events are positive as they consolidated the perception of Turkey.

This will continue. Today it is about debt issues and tomorrow there may be some other issues. Look at Spain, Portugal and Greece – people are demonstrating because they are hungry. They do not have the means to survive – they do not have jobs or food. But in Turkey, people are demonstrating because they want higher environmental standards and democracy, and not for food and jobs. 
The situation taking place in Turkey can be compared to growing up of a teenager. And in fact, these are good signs of health in the development of Turkish society. Remember that it took nearly two centuries from 1759 to 1958 for the US to attain its strong and well-established democratic institutions. In the UK, it started earlier, in 1250, and ended I guess at the end of the 18th century. It seems it would take relatively short period of time in Turkey, and those are healthy signs. 
How is the consolidation process of the Borsa going? What do you think the long-term economic benefits will be?

When I first started talking about this consolidation last year, nobody believed me. There was no similar case. All exchanges that exist in the country are being brought together and conglomerated under one single institution and identity.

The capital markets’ law changed and strategic partnerships have taken a huge step forward. It is about the readiness of the institution itself and of the people working there. I may have served only as a catalyst to accelerate the reaction, but the reaction is between the economy of Turkey, which is now ready for such an explosion, and the capital markets, which have been waiting for such a move for years and years.

I am a firm believer in infrastructure, not superstructures. We should give praise to the parliament and government of Turkey, the capital markets’ participants in Turkey and especially people who are working in the exchange, because they make this possible, not me. 
This will really contribute to the development of the capital markets in Turkey, first of all because it will be a market for all financial contracts.

When investors arrive, they will be able to invest any kind of financial contracts that they are familiar with in advanced markets, through a single access point with just one technology platform and single market rules and single clearing practices.

People keep asking what vertical integration is all about. Vertical integration is of the utmost importance, because this enabled the system to function smoothly. Also, up until very recently, this consisted of catching up with the markets.

Of course, we had indexed futures as well, but in another exchange and marketplace with different practices and rules. Now, we will have cash equity markets and related derivatives. We have already introduced single stock options, but we will develop them further. The same goes for indexed options and futures.
Any kind of financial derivatives, like interest rates and currency, and energy products (electric power contracts and derivatives, natural gas contracts and derivatives, and subsequently coal, CO2 etc.) We will have commodities included, like metals and agricultural commodities. We have already done this, but we will develop and integrate them further, and precious metals like gold and silver, and precious stones.

Recently, Antwerp in Belgium and Mumbai in India are main centres in terms of precious stones. However, between those two spots, there is an empty space. The Middle East needs a market place for precious stones, like diamonds. But this is a very sensitive issue.

The market should fully comply with the civilised market principles such as transparency and accountability and fighting against money laundering or financing terrorist activities. Turkey is ideal for that, because we comply with all of those areas, up to international standards. At the same time, we have full access to the Middle East, North Africa and Central Asia, and even southeastern Europe.

This has huge potential for all of those products. Investors are familiar with Turkey’s practices. As I said, especially after the new capital markets law, it fully complies with internationally accepted standards.

To a large extent we comply with the rules of major international institutions, such as the Financial Stability Board (FSB) and European Securities and Markets Authority (ESMA).

Turkey is represented on the financial stability board and the Chairman of our Capital Markets Board (our regulatory authority) is Vice-Chairman of the International Organisation of Securities Commissions (IOSCO) and Chairman of the Emerging Markets Committee. So basically, this is an environment that is very familiar, safe and secure, and there is a level playing field for global investors. 
The Borsa just entered into a strategic partnership with NASDAQ to provide market technologies while the Borsa will provide NASDAQ the opportunity to tap into Eurasia, but can you tell us a little bit about this partnership and what you plan to achieve from it?

The deal has not been closed yet – we need a few more months before the final versions of the contracts are released. We have signed a binding MoU (memorandum of understanding). It is clear that the principles and framework are already there, but it is a sensitive issue, because NASDAQ is a public company, so we have to be careful about the details.

First of all, it is not just about the transfer of technology. It is also related to know-how, which will enable Borsa Istanbul’s team to have a deep knowledge of technology and full control of the system very soon.
Secondly, it is a raw partnership. We will continue our operations especially within the region, side by side and hand in hand; we will open its potential capacity in order to make sure that Borsa Istanbul will have access to the global financial network, and at the same time, Borsa Istanbul will be accessible by this network. Also, thanks to this new technology and know-how transfer, we will be ready to get integrated with major financial centres around the world.

There will be more mutual bilateral projects between Borsa Istanbul and other advanced, developed financial centres. Of course, this will contribute not only in terms of the market turnover and the number of listed companies as well as the issue of securities, but also in terms of the branding and the perceptions of the companies. 
I would like to ask you about the Turkish Islamic banking sector. According to Ernst and Young, over the next 10 years it is going to triple to reach over $100 billion by 2023. Where do you see opportunities for Borsa and Islamic-based equity?

First of all, we should mention the capacity in terms of the demand for such securities, especially because of the developments in the commodities markets. The wealth accumulation in commodity-producing companies has accelerated. In some of those countries, there are quite a number of investors looking for Sharia-compliant assets, and it should continue like this. 
The second issue is that the global investment community is becoming aware of the fact that this system is much healthier than the conventional system. There are some academicians even saying that things would be much better had the common practice in the financial field been based upon Sharia-compliant instruments, seeing the reasons associated with structured financial products behind the recent global crisis.

This is because Sharia-compliant finance ensures that there is a direct relationship between the debtor and the creditor and facilitates the management of both macro and micro-prudential risks. 
Emerging markets will play a more determining role in the global economy. Almost every emerging economy needs a lot of infrastructure investment. Infrastructure projects fit very well with Sharia-compliant instruments, because at the end of the day, it is a sale and leaseback kind of project, and if you have an income-generating real estate asset, then you can easily sell it to investors because there is continuous cash flow and the instrument is based on the asset.
When it comes to Turkey, as you know, there are a lot of on-going infrastructure projects, be it roads, bridges, energy power plants etc. They are very much linked and appropriate projects for sukuk insurance. At the end of last year, we reached an agreement with the World Bank that Turkey is going to host their research centre for Islamic finance. I hope we will be able to announce this after Ramadan. Borsa Istanbul will be the host institution, which is great news.

The research centre will be located within our campus.
London is arguably the global financial capital of the world. Considering Istanbul’s aspirations to be the regional hub, what do you think Istanbul can learn from London in this respect?

It is like a continuous or rolling over mechanism. The basic principles of a trade centre, commercial centre or finance centre have been around for centuries or even thousands of years. The first trade centres were located in this region.

For example, Basra, or even before in India and the Silk Road cities. In Turkey, Bursa, Istanbul, Alexandropoulos. These were all financial and trade centres. The same principles are adopted by centres like Lisbon, London or Singapore for example.

The continuous rolling over process is not like a straight line. We learn a lot from each other. At the end of the day, if you ask me what the main issues are, first of all, it should be predictable, safe and secure. That is of the utmost importance. In order to put your money and wealth in, you need a safe and predictable place. Behind this, you need a well-diversified, strong economic base. The main difference between Istanbul and other places in the region is the strength of the economy.

It is well-diversified and not dependent on just one or a few economies. It is well-diversified with a strong investor base, and deep, liquid domestic markets. There is a rule of law, and a legal framework in line with international standards. In my view, there are two very important developments – first of all, the establishment of an international arbitration court in Istanbul, which will operate in accordance with ICC principles, and also the introduction of specialised courts in financial transactions and special courts for capital markets. 
Also, Istanbul has an ideal geopolitical location, with Asia, Europe and America all close, which is an advantage. We are very much looking forward to increasing the level of cooperation between Istanbul and other major financial centres like London, New York, Singapore and Hong Kong, and we want to make sure that Istanbul will be a globally integrated market, so that it will be convenient for investors. 
As the Chairman of one of the top financial institutions in Turkey – tasked with the development of efficient and effective capital markets, which you say will be the engine for Turkey’s continued growth – pushing to 2023, do you feel a responsibility to the Turkish people and economy?

My first responsibility is to my shareholders, and then of course, investors, employees, companies and the rest of the Turkish economy. I prefer to remain modest. I have a very well-defined domain, which I prefer to remain in.

I am an ex-academician, and we learnt throughout my academic career that you should focus on a well-defined issue. In Turkish, we have a saying – “efradini cami agyarini mani” which translates as “a definition should include everything related to it and should exclude everything which is not”.

I am focusing on the exchange and capital markets. I have my shareholders and personnel, customers, investors – for the time being, that is enough. I am leaving taking care of the Turkish economy to very high senior authorities in Turkey. We have many talented people working in different institutions, who are more competent than me, who can take care of the Turkish economy. For me, the exchange and capital markets are more than enough.