Interview: İbrahim Turhan

The İMKB lost 40% of its value in 2011, while the economy grew 8%. How will changes in the market diminish the risks of future losses on this scale?

IBRAHIM TURHAN: The İMKB 100 index went down for primarily two reasons. First, due to the depreciation of the lira against the dollar by 22-25%, and second, because of the European debt crisis. The European fiscal crisis caused global investors’ risk appetites to decrease significantly. The İMKB has to become more immune to such external shocks, because they might happen again. To do so, we need to increase the scale and scope of the bourse, both vertically and horizontally.

“Vertically” means increasing the liquidity of the market, in terms of both domestic and global liquidity. “Horizontal” expansion will mean offering more variety – growing the range of financial instruments – with those that will be based on real estate or assetbacked financial securities, rental certificates and sharia-compliant options. This is an emerging segment, but even today, the total asset size for such securities is $1.2trn and growing. We are trying to combine the cash, the securities and commodities markets, etc. After that, there will be greater synergy, which will contribute positively to the liquidity of the market.

What is driving the steady decrease in the share of stocks held by foreigners, which fell to approximately 60% at the start of 2012?

TURHAN: The share of foreign investors in the stock market is not an issue for us; rather, the problem is that domestic participation is low. We want the participation of foreign investors to increase, but at the same time, as we raise the scale and scope of investable instruments or the investable asset pool, we want domestic participants to take part more and more often. We want foreign capital to increase, but domestic capital needs to expand even further.

Turkey lost a whole decade – the 1990s – due to high inflation, high volatility, uncertainty and myopia, very high real interest rates, and problems in the banking and financial services industry that ended up resulting in the crisis during the year 2001.

Now that we have accomplished a fiscal restoration – with the budget deficit approaching 1.7 and declining, and the debt-to-GDP ratio at 38% in 2011 – we are able to raise domestic confidence. Inflation is slowing, though it is still high because of some external and supply-side shocks, but we are confident that the central bank will bring inflation down to the 5% target, consistent with the price stability framework. The financial services industry is much more tightly regulated and very profitable, compared to a decade ago. Thus, this restoration has offered us a new beginning from which to develop our capital markets. In terms of their size, differentiation and company competitiveness, the capital markets are in a much better position to see high growth, particularly from the domestic side.

Do exchange-traded funds (ETFs) offer an avenue for increased listings in the greater “participation” segment and what reforms are taking place?

TURHAN: ETFs have been discussed as a key means by which the participation segment could become more involved in the bourse; however, the 10% withholding tax presented a key obstacle to investors. Now, the tax issue is – in theory – resolved, because we have the consent of all the parties and are now just waiting for the legislature to approve the changes. The stakeholders have lobbied for the removal of the tax, and the government and the minister of finance have agreed.

The government will issue a decree solving the tax issue for ETFs. This is crucial as they are currently the fastest-growing segment in the capital markets sector. They are very important instruments, and İMKB cannot miss this opportunity. We will do whatever it takes to open the way for their development and are fortunate to have the support of international experts. We are also drawing on the competency of other institutions like the Deutsche Börse, the New York Stock Exchange and the London Stock Exchange.