Economic Update

With the launch of a new stock exchange, Borsa Istanbul, Turkey has taken one more step towards achieving its goal of becoming a regional financial centre.

The market will eventually combine three former exchanges: the Istanbul Stock Exchange, the Istanbul Gold Exchange and the Derivatives Exchange of Turkey, known internationally as TurkDex. The merger with TurkDex is not yet complete but according to an official announcement by Borsa Istanbul on April 8, it is under way and all TurkDex contracts are expected to be transferred to Borsa Istanbul on August 5.

In the meantime, Borsa Istanbul has already started to offer some derivatives products. In late 2012 single stock options and futures were introduced, followed by stock index options in April. Currency options, energy derivatives and commodity derivatives are expected to be made available in the coming months.

The addition of new products such as derivatives to the exchange is an important development, Ibrahim Turhan, chairman and CEO of Borsa Istanbul, told OBG earlier this year. “Ongoing product differentiation will be critical for the capital markets in Turkey, partly because instrument diversity can create synergies for investors. That is, differentiation gives investors the opportunity to create mixed portfolios that include options and futures, as well as structured products like certificates, warrants and contracts for difference,” he said.

Turhan also noted that the wider availability of derivatives may encourage more investors to buy Turkish bonds, as it will allow for the hedging of these positions. While sovereign debt in Turkey has always been a popular investment, the market for corporate bonds has grown rapidly in recent years, with a total of 235 issues of corporate debt securities worth TL42.3bn (€22.86bn) listed on the bourse in 2012, up from 58 issues at a value of TL18.6bn (€10.05bn) in 2011. Average daily traded volumes in corporate securities have also increased rapidly, rising from TL14m (€7.57m) in 2011 to TL29m (€15.68m) in 2012 and TL42m (€22.7m) in the first quarter of 2013. This figure has only increased further into the second quarter, with the daily traded volume in corporate bonds averaging TL61.76m (€33.38m) in the first half of May.

The new capital markets law, which went into effect last December and will help bring Turkish regulations in line with EU standards, is expected to help attract more investors to the market. Corporate governance rules have been strengthened, identifying clearer responsibilities for independent board members and providing greater protection for investors.

Other important legal changes over the past year include reform to the private pension system. The government is now providing a 25% match to individual contributions, which should boost both savings and domestic participation in the stock market through institutional investors.

Finally, authorities at Borsa Istanbul are targeting greater cooperation with other exchanges. The bourse announced in early May it was in discussions with a number of other exchanges, including the London Stock Exchange, the New York Stock Exchange, NASDAQ and the Deutsche Börse, to establish partnerships that could lead to cooperation on cross-listings and joint indexes.

Borsa Istanbul has signed an MOU with the European Bank for Reconstruction and Development (EBRD), which will involve laying out a plan to develop regional capital markets. This could involve potential investments in exchanges and infrastructure where the EBRD invests, focusing on the Balkans, Central Asia and Mediterranean. “The joint efforts are expected to strengthen the development of local and regional capital markets, which will also boost the role of Borsa Istanbul beyond Turkey and underpin the city’s role as a financial centre and a regional business and investment hub for the wider region,” according to a statement by the EBRD.

While partnerships with major global exchanges and a deal with the EBRD – as well as the development of new products and a more robust bond market – could assist Istanbul in its ambitions to become a regional financial centre, challenges remain. These include a shortage of asset managers with international experience; unlike, for example, Dubai, Turkey is unlikely to import talent from London or New York. However, Turkey has certainly come a long way over the past decade, with inflation and interest rates down, a credible monetary policy and an increased degree of fiscal discipline, all of which will help the country realise its plans to become a regional financial centre.