Previous examples show that the development of capital markets goes hand-in-hand with economic prosperity. Although wealth accumulation is a prerequisite for capital markets growth, alone it is insufficient. A stable macro environment and well-functioning market structure are also needed. We believe Turkey’s capital markets are at an inflection point, and expect them to be driven by tailwinds in the coming years. Turkey has taken huge steps to reduce its macro vulnerabilities in the last decade. A long period of high inflation, high real interest rates, an unstable exchange rate and an unsustainable fiscal policy has come to an end. Turkey enjoys low inflation and interest rates, fiscal discipline and a credible monetary policy. These have produced an environment conducive to capital markets growth.
However, Turkey’s progress also has generated a major risk. Turkish consumers, who enjoy accessing low-cost financing, have begun spending more, satisfying pent-up demand. As a result, the private savings rate has declined from 25% to 12%, putting a dent on the country’s future growth potential. This has prompted the government to take initiatives to reverse the spending trend. The message from the government is clear: use less debt and more equity and save more.
Among these initiatives, the recently introduced pension reform is the most vital. Under the new regime, the government will match 25% of contributions to pensions that pay in full only on retirement. In the first two months of 2013, pension contributions and the number of participants rose by 6.6% and 6.5%, respectively. We expect these incentives to boost private pensions – and capital markets with them – and improve the national savings rate. Furthermore, the project to make Istanbul a regional and global financial centre, and the establishment of Borsa Istanbul through the merging of all of Turkey’s exchanges, demonstrate the existence of a concrete vision, and an intention to create a more favourable regulatory landscape. The new Capital Markets Law is another milestone, levelling the playing field by redefining the market structure for intermediary institutions, and enhancing investor protection and transparency. These measures should foster competition and investor participation.
We also see positive demand and supply-side conditions. For domestic investors, the main demand-side motivation is low interest rates, which have emerged in developing markets worldwide by monetary easing in developed countries. Turkey has been no exception. After facing high interest rates for many years, Turkish investors have finally been introduced to the “search for yield” concept. The result has been increased investor participation in our capital markets. Turkish financial intermediaries have responded to the evolving needs of investors by launching new products, including forex transactions, warrants, options, capital-protected funds, exchange-traded funds, regulated hedge funds and funds that provide exposure to foreign assets.
We have observed huge foreign interest in Turkish assets, and expect Turkish markets to remain in the spotlight for global investors, especially since Turkey’s recent investment-grade rating from Fitch. Current and potential alliances between Borsa Istanbul and foreign exchanges are likely to facilitate global inflows and further boost foreign appetite, and such alliances will pave the way for local investors to tap global markets.
Low interest rates and improved valuations have also boosted local issuances. Corporate bond issuances shot up after banks were allowed to issue local bonds in 2010. We predict that more industrial firms will begin issuing bonds. The investment-grade rating has allowed banks and big industrial firms to issue bonds abroad, with some banks issuing Turkish lira-denominated Eurobonds for the first time. On the equity side, many Turkish corporates have taken advantage of the current environment by making public offerings. Increased issuances from the bond and equity sides will play a big part in deepening the markets. Ultimately, recent developments are extremely favourable, and we expect Turkey’s capital markets to continue to thrive, creating exciting opportunities for the investment community.
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