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Turkey’s capital markets reach transformational milestone

Interview - May 17, 2013
Dr Vahdettin Ertaş, Chairman of the Capital Markets Board of Turkey, speaks to World Report about how the restructuring of the Turkish banking sector after Turkey’s economic crisis in 2001 it has become one of the major banking systems in the world with regard to soundness and profitability. He also discusses how the new capital market law “ is a milestone for us to ready our markets to realize the Vision 2023.”
Turkey is going through a very exciting time at the moment. During the global economic recession, Turkey has been the fastest growing economy in Europe out of two of the past three years, and gross domestic product (GDP) is expected to grow by a respectable 4% in 2013. What would you say are the primary goals of the government to continue with this economic development?
Turkey’s annual GDP growth rate was 5% over the past decade, but when we look at the EU’s economic performance over the same period, this was just 1.5%. Turkey is an emerging market and has different dynamics in this respect. The central government decides on what Turkey’s GDP growth rate should be for both the middle term and following year and the Central Bank arranges the monetary policy accordingly. In this respect, Turkey’s growth requirement is even more than 4%, but we want to be sustainable, which is important.
Instead of a volatile growth rate, the Turkish government is in fact favouring a more sustainable growth rate, which we foresee to be around 5% per annum.
Turkey is currently the 16th largest economy in the world, and part of Prime Minister Erdogan’s Vision 2023 is to push Turkey to become one of the top 10 most developed countries in the world. What role does the Capital Markets Board play in this regard?
Turkey’s vision is to become one of the top 10 economies in the world in 2023. In terms of capital market development we are at the early stages at the moment. After the 2001 economic crisis in Turkey, the Turkish banking sector was restructured very well so it has become one of the major banking systems in the world in terms of both soundness and profitability. But to realize the Vision 2023 we need well-functioning capital markets to attain sustainable economic growth. And the prerequisite for building a well-functioning capital market structure is to retain investors’ confidence. With this in mind, we have committed ourselves to protecting investors and serving to their needs. The new capital market law in this regard is a milestone for us to ready our markets to realize the Vision 2023. 2013 will be the year of “restructuring and transformation” for our markets while 2014 onwards will be the period of steady and sustainable growth. 
2012 was certainly a year to remember for the Borsa Istanbul, closing at a record high of 78,000. What would you attribute to this impressive growth? 
There are two main reasons. One of them is the economic performance over the past 10 years, which is also a result of political stability, and the second is the market’s perception about Turkey’s future.
As the Chairman of the Capital Markets Board, can you briefly highlight how you ensure your mandate of achieving further development of the capital markets and protecting consumers and investors more importantly?
The new capital markets law was enacted on the last day of 2012, and during the process of enacting the law, we took EU legislation into account and we learnt lessons from the global financial crisis of 2008. We melted everything down into this new legislation. We have not copied all the EU directives directly; we have adopted what we needed for the best possible outcome for our markets. 
Within this context, in 2013 we are revising and renewing our secondary market legislation. We aim to establish a solid regulatory framework with sustainability in mind. When we are finished with the renewing process in 2013, there will be numerous changes in the capital market legislation, such as incorporation of corporate governance rules, squeeze out and sell out legislation restructuring of markets, implementation of central counterparty, and establishment of international arbitration. These regulations and many more will be enacted within the year.  
During this process we give utmost importance to market participants’ views. We know we are on a tight schedule but with the human resources employed at the Capital Markets Board of Turkey, I feel confident that we will provide the best regulatory framework for our markets on time. 
I have seen various articles in the press where you state that transparency and solid corporate governance are key to continued economic stability, not only for Turkey, but for the global economy. I know you were a panel member of the International Corporate Governance Summit in January, with leading figures of the Turkish economy such as Mustafa Koç, the Chairman of Koç Holding, Güler Sabancı from Sabancı Group, Tuncay Özilhan from Anadolu Group and the Chairman and CEO of the Borsa İstanbul. Why do you feel so strongly about this?
It is the investors who decide on which markets and which companies will endure today’s fierce competition, and liquidity in markets directly depends on investors’ confidence. I believe good governance is paramount for both companies and markets in attracting investors and capital. I basically define corporate governance as the continuous journey to betterment company management. It is in fact a culture, a way of living and doing things, that we need to incorporate in our lives. 
We at the Capital Markets Board of Turkey do share the belief that markets do exist at the grace of investors. Therefore we aim to make sure that our markets provide the required level of disclosure by high quality information, our accounting and reporting standards are solid and globally compatible, and our corporations are managed with governance. To increase our both local and global investor base, we have to make their investment decision process easier but safer. And we need to make them feel they are treated fair.
But having regulations is not enough. We need to make sure that these regulations are applied. As I mentioned, we need to embrace good governance as a way of living and doing things. 
In your opinion what are the greatest threats to continued growth of the capital markets in Turkey?
On the demand side of capital markets in Turkey, there are two types of investors – local investors and international investors. We do not have many problems with international investors, as there is quite a lot of interest in our markets. But we have issues with local and domestic investors, because Turkey has one of the lowest savings rates out of the OECD countries. Whilst the average rate in the OECD is 25.7%, it is just 12.5% in Turkey. In this regard, we have initiated a private pensions fund legislation and we want to reach the OECD average by 2023. 

Today IPOs in developing countries such as Turkey represent 60% of all IPOs around the world. Why do you think this number is so high?
There has been a contraction in the global IPO market since 2008. This is mostly felt in the US and European markets, but particularly in China and in most developing countries, the IPO market is still dynamic. On one side the interest rates are so low, making the IPOs not very attractive for companies but one the other side this low levels of interest push investors seek for greater value, particularly in emerging markets. Today the interest rates have decreased to historic lows in Turkey making our IPO market more lucrative than ever. 

You mentioned that you are going to be implementing more sharia and sukuk banking. Ernst and Young in fact has projected that the Islamic banking sector is going to triple in ten years, to reach US$100 billion. With regards to Turkey, can you tell us a little more about the financial instruments you are going to be introducing? 
99% of the Turkish population is Muslim and we perceive Islamic financial products as an important way to attract not just local but also regional investors. Currently, in the absence of a developed local İslamic financial product market, investors seeking products with Sheria compliance channel their funds into either real estate, gold or foreign exchange. We have a vision to make İstanbul first a regional then a global financial hub by 2023. Therefore we aim to diversify financial instruments provided in our markets and in this regard, Islamic finance products are one of the major areas that we assign priority.
We have talked about trust and confidence, and how important they are to capital markets. In fact the President of Turkey’s banking regulation supervision authority said that “a rehabilitation of the risk perception of Turkey was the number one reason why the banking sector grew by 12.6% in 2012”. How important is this trust, and what are you doing to increase it further?
Unfortunately we have had quite a lot experience in financial crises. But the last one which was in 2001 was a good starting point for us. From thereon we built our banking regulation from scratch and managed to establish one of the soundest banking sectors in the world. 
Starting with the new capital market law which was enacted on the last day of 2012, we will rebuild our regulatory infrastructure in global standards, with the goal of establishing a global financial centre. To fulfil this long-term vision, we perceive building and enhancing the trust in our markets as our starting point. So by the end of 2013 all the existing regulations will be renewed, with the aim to enhance trust in our markets. But at this point, I also need to point out that our aim is not just to bring stringent regulations that would be an obstacle for our markets’ development.
London is arguably the financial capital of the world, with a GDP rate that is higher than several European nations, including Belgium and Sweden. Considering Istanbul’s aspirations to be the financial capital in the region, what do you think Istanbul can learn in this regard?
There is a lot to learn from New York and London. And at least we are learning what not to do! We aim to build upon our geographical strategic position in the world. We want to become one of the financial centres between Frankfurt and Singapore. GDP growth rates in developed countries around the world have stagnated. Turkey has a population over 75 million, and it is in a strategic location. We have cultural ties with the Balkans, the Middle East and former Russian states. We want to build on these propositions which are unique to us. 
Considering the historic low levels of CDS spreads of Turkey, the performance of Borsa Istanbul in 2012 and credit rating agencies’ positive announcements regarding Turkey, we expect to see the global interest in our markets growing. But our aim is to make this growth to be sustainable. So for us and for İstanbul, the main lesson to be learnt from the prominent financial centres around the world is how to make growth sustainable. 
Bilateral relations between Turkey and the UK have never been better. Turkey is one of the first countries that David Cameron visited after he was elected in 2010. They pledged to dramatically increase bilateral trade, which has now jumped to about $17 billion annually. What do you think can be done to increase this number even further?
Historically, both countries have a good relationship, and the UK is one of the major supporters of Turkey in the EU membership process. The two countries are partners not just in terms of trade but also in terms of tourism and many other areas. We have close ties with the UK. London is like a second address for many finance professionals in İstanbul. Boris Johnson visited İstanbul recently, and the City of London Administration is supporting the Istanbul Financial Centre Project. I believe the future will create mutual benefits for both countries as long as we continue and enhance our collaboration. 

As chairman of one of the top financial institutions, in charge of making the capital market efficient and effective, which is one of the lifebloods of the economy, do you feel a sense of responsibility to the Turkish people and the Turkish economy?
Very much so. I feel personally responsible not just with regard to Turkish citizens, but any investor who invests in Turkey. That is why we are sitting here in this room.
If we were to come back here in five years’ time and interview you again, ideally what improvements or achievements would you have liked to have completed?
Over the past few days, I have been working on how the capital markets should function in the next 10 years. We have been working night and day on this; 2023 Vision is not an illusion – it is a realistic, long-term target. 
But if you were to come back here in 2018, ideally I would have liked to give some figures about our markets’ in 2018 such as – 10 million private pension fund investors, 250 billion TL assets under management of private pensions, more than 1,000 publically traded companies that attract investors from all around the world, a one-stop financial supermarket in which any kind of financial instrument can be traded on, 24 hours a day, on an electronic trading platform.
What would your final message be to the half a million readers of The Independent and 40 million online readers about the Capital Markets Board or about Turkey, which they may not know before? 
Keep watching Turkey. I invite everyone to support and be a part of Turkey’s growth. In addition to this, I also would like to invite all the readers to come and explore Turkey’s cultural and historical wealth and beauties.