Foreign investors still believe in Turkey’s potential despite current challenges

ISTANBUL – Hürriyet Daily News

Borsa İstanbul is an investor in a number of exchanges across the Eurasian region, says Baltacı adding, ‘the strategy to increase our presence. This will contribute to become a financial center.’ Hürriyet photos, Levent KULU

Turkey’s current political turmoil is affecting the perception of foreign investors, yet the long-term outlook is still extremely positive, according to the executive vice president of Borsa İstanbul (BIST).

A strategic partnership with Nasdaq OMX is proof of the confidence in Turkey’s future, said Mustafa Baltacı, recalling that the official announcement was made Dec. 31, 2013, exactly two weeks after a massive a corruption probe was launched, releasing a new wave of supposed uncertainty after the Gezi events in the summer.

Tell us about Borsa Istanbul’s vision and what it has accomplished since the acquisition of its new name.

We are relatively leading in the Eurasian geography, which for us, comprises of Central Asia, the Balkans, Southeast Europe and partially the MENA region. In terms of liquidity, diversity of financial instruments, the Istanbul exchange comes to the forefront. 65 percent of the shares listed belong to foreigners and an important majority is Western. So, we are in a position to be integrated with global markets. But it is not sufficient to say foreigners are here. You need diversity. Last year, we merged with Turkish Derivatives Exchange (Turkdex).  Then, the gold and precious metals exchange came under our roof. But that in itself does not mean much; Turkey has become an energy corridor. In Ankara there is a relatively primitive, old school electricity market. We will turn it to a modern one. So, our aim is to have energy exchange.

Turkey is the world’s sixth biggest producer of iron and steel production. It is a country of construction and huge infrastructure projects are on the agenda. It is important that prices are set in Turkey. So we will have an exchange that will deal in base metals and steel.

Turkey’s agricultural output puts us in an interesting position, but we don’t set the prices for certain major agricultural products like figs or hazelnuts. They are famous, world-known products that we produce here. But we don’t set the prices.  It makes sense to have a full-fledged exchange and market place, not only to have the prices set here, but a secondary market for all those products.  So we have a cash market, equity market including fixed income market and derivatives market; not only financial products, but commodity products, as well as commodity exchange and commodity products; put these all together and this is a world class, state of the art exchanging market place. If you have an active liquid secondary market, this is an international exchange. Regionally, we are already a leader.
Globally, we are a potential leader.

What’s your timetable for this roadmap?

Obviously, it is a matter of time; it does not happen in the blink of an eye. You have to invest in the infrastructure. First, technology; second, regulatory framework. Exchange technology is a peculiar area.
 
You can either do it in house with your resources, hire IT experts and software developers, which you can do here. Or, you can basically import the technology from some technology vendors, and in the meantime engage in doing it yourself, because it is a costly investment. What we did is something interesting; we have enough resources here in terms of the number of IT experts. But your technology should be reliable; you would remember the times we had some glitches. This is a matter of technology. If you don’t have reliable technology, you are prone to risks.

It happens all over the world. We decided to take the technology from Nasdaq OMX, a technology leader in this particular industry. The agreement is not only about the technology seller-buyer relationship, they also bought a five percent stake.

So, the idea is having Nasdaq as the technology vendor here through state of the art, cutting edge technology, and in the meantime having the brand name “Nasdaq” will add a lot of value to our future plans. We have already created a wave across the industry. People all around the world are talking about this development.

Want does this cooperation tell us?

Borsa Istanbul is changing; it is becoming a place to go to, to invest. This is what they are talking about. Istanbul has become a buzz word, not only as a tourist destination, but also as a market place. They believe in the future of this country. You have heard about the timing of the announcement, it was Dec. 31. It is critical to remind all of us they decided to stay in, even during the turmoil.

What makes this an example is they also bought a share here, because they are not private equity investors.

We were pushing for a strategic partnership. They have also bought the idea that there is a future here. They persuaded their management and decision makers as well that things are moving quickly in Turkey, in terms of commitment, decidedness and dedication to capital markets.

In Turkey, capital markets lag behind. We have 425 companies listed here. If you look at the 1000 largest companies, only ten percent are listed. It is a miss, but on the flip side, it signifies potential. If you bring 50 blue chip companies in the next 2 years, that would be a huge success, because it will bring a lot of investors from around the globe. 

Nasdaq gives a very good sign for other investors as well. What we are trying to achieve is making this company a listed one. A self-listed company here on the exchange. We need to do more on branding and that will require some further investment. The Nasdaq deal is just the beginning. We will have additional investors this year. We will have additional shareholders in Borsa Istanbul and this is going to be happening prior to the IPO, which will take place next year. The idea is to have, starting with Nasdaq, additional investors this year and next year having the IPO, making this a floating company with good governance.

Can you give us a hint about the new potential investors?

I can give the definition on how we look at it. It should be some globally known and recognized name.  It is also about branding: perhaps, we will have some large funds; some of them could be government funds. Some of them might be large fund asset managers, some endowments, some of them, perhaps, will be liquidity providers; market makers;  this final category is important. Liquidity mostly goes through market makers; if you have market makers who bring more orders and trade to your local market, then that is an achievement, which is why we are thinking of having some additional investors, mostly among market makers.

Can you elaborate on your regional vision?

Borsa Istanbul is an investor in a number of exchanges across the Eurasian region.
We have a 25 percent share in the Kyrgyz exchange, 5 in Baku stock exchange, 15 percent in Sarajevo stock exchange and most recently we acquired shares from Montenegro, around 25 percent.

We have this strategy to increase our presence and visibility. We believe this will contribute to our vision to turn this place into a financial center. The focus is mostly on the Balkans and Central Asia and partly on MENA countries. Expanding presence is good, but we will not go that far. We signed an agreement with the European Bank of reconstruction and Development (EBRD). They are trying to use leverage on our status and existence in the region. The Montenegro stock exchange will be the first example of the cooperation. We will have more investment, but we are not trying to control these markets. We believe in local exchange. We are there to support them, to provide know how, infrastructure and technology.

You must be aware of the challenges as well.

We know what is being discussed and it is also effecting the perception of the investors. But the long term perception is still extremely positive. If you look at the fundamentals of this country, they are still incredibly positive: the population, the growing middle class, the wealth, the increasing of income distribution. It adds up to this country’s long term success.

Investors are basically more open to challenges and risks than us. They recognize the fact there might be some challenges today, but they also believe there is potential in the future

That’s what Nasdaq told us and that is a very good benchmark. Since we will engage with some potential investors, this is another indicator of belief for the future.

There have been sharp drops in the exchange, especially after the Gezi events, as well as the Dec. 17 developments. There have been speculations of manipulation. How do your interlocutors take all of this?

The discussions we are having today are good ones; they will all add up to the success of the political projector, as well as economic success and progress; these all are only helping us mature in the level of democracy and economy. 

But for an investor, rule of law is essential. How can this country appear to be promising with all the developments regarding the judicial system?

This is a country in progress. There are plenty of projects under construction. We should be aware that having 10 years of success does not necessarily mean we have done everything the right way. This is a work in progress; this is a process of learning through experience. Democracy, rule of law, accountability and transparency – they are all intertwined. Again, we have done so many good things in the right direction, if you look at the overall picture, we have some flaws, but we have to find a way to fix them. Since we are in a democracy, we have the opportunity to fix these errors.

What’s the dimension of the outflow after Dec. 17?

We have seen some outflow, but it was not just after Dec. 17; there are so many things that are coupled with each other. Even during Gezi Park, it overlapped with the Fed’s decision in terms of tapering. It is difficult to separate things from each other. If you look at the numbers, it is in line with what’s going around with emerging markets.

But the head of the U.S. Fed said Turkey was among the most fragile among emerging markets.

Turkey has proven itself to be a promising country. At the moment, we might have some financial problems, but if you look at public finances, they are still solid and sound.

We are doing a lot of good things. This is the right place to be, because if you don’t have risks, you don’t always have returns. I told you the share of foreigners was around 65 percent. It is interesting that the number has not gone down significantly; it is around 62 to 63 percent and foreigners are still there. The outflow does not only come from foreigners. Up until last week, it had been about $500 million since Dec. 17.

Despite the general view that the U.S. Fed’s decision will have a negative impact on emerging markets, you believe the contrary, that there will be more foreign capital coming to Turkey?

I think that approach was adjusted.  When the Fed’s tapering was announced, people were quite cautious and nervous, but if you look at reports, people were saying the outlook is not that negative; we won’t see that much withdrawal from emerging markets. Looking at some of the decisions, people and investors were a bit nervous, but the outlook is not that negative.

What’s your projection for the new IPO’s this year?

Last year, we spoke with at least 250 companies to entice them to be listed here. Most of them are family businesses. Of course they have concerns. We expect to have a least 20 to 30 companies be listed.

Triple elections are not affecting your projections?

It is a reality. We have to live with it, but there are economic realities as well.

Some believe that because of the foreigners’ shares, Turkey is dependent on foreign forces and some buttons could be pushed from abroad to harm Turkey.

Think about the discussions at the end of the 90’s. We were afraid of having foreign banks, losing the control of the bank industry. Today, approximately 50 percent of our banks are foreign; what has changed?

We have to face the fact that the markets are global and they are linked, to the contrary of conventional wisdom, it is a good indicator, meaning investors believe in Turkish markets.