Borsa Istanbul 'a change for investment progress'

ISTANBUL - Hürriyet Daily News

‘Turkey has become a financial construction site. Now the ground, or let’s say the infrastructure, is being prepared,’ Arif Ünver of the Capital Market Investors’ Association tells the Daily News. DAILY NEWS photos, Emrah GÜREL

Turkey has been increasingly branded as a “safe harbor” for investors, a designation Capital Market Investors’ Association in Turkey head Arif Ünver has said is “not incorrect.” However, he said the market should be deepened to cater to a larger number of investors. He advocates tax breaks to encourage new firms to hold public offerings and increased participation in the stock market by Turkish investors to prevent exaggerated fluctuations in equity. “If the house is in order, the interest of foreigners will increase automatically.”

Tell us why Borsa İstanbul has replaced the Istanbul Stock Exchange (İMKB).

Obviously it is not just a name change. The new exchange body has merged stock and gold exchanges under a single umbrella organization. This is part of the government’s strategic action plan to make Istanbul an international finance center.

Turkey has become a financial construction site. Now the ground, or let’s say the infrastructure, is being prepared. The new Capital Markets Law entered into force in 2013. The laws about specialized courts and arbitration are currently in Parliament.

The second leg is about product diversification. Think of it as a supermarket. Turkey is putting in place the shelves, now it will start putting the products on them; so when you enter the market you will have safe access to products. Therefore these are positive steps, but more need to be done. The market needs to be deepened. It is not important if you have only one type of bread on the shelf, you need several different types.

When you look to our near geography, we see the situation in Greek Cyprus, the situation in Europe and the United States. In Turkey the banking system is strong; the “safe harbor” used for Turkey is not incorrect. But the harbor is too small. It can only cater for a small number of boats. The market needs to be deepened so that greater numbers of boats can come to anchor.

How can the deepening take place?

We need to widen the stock of equity, which means by new firms being subject to public offerings. We [the association] had a meeting with Finance Minister Mehmet Şimşek last week. We proposed that companies in the ISO 1000 benefit from a tax reduction when they decide to go public. The number of companies open to the public is 15 percent of the total number of companies in the ISO 1000. That ratio should be around 50 percent. Unfortunately, we did not get a positive answer from the minister to our proposal. But the government needs to put forward how its aim to spread the capital to the grassroots, which is in its strategic action plan, will be realized; how it will encourage big companies to go public.

Isn’t there any way other than tax reduction to encourage companies for public offerings?

I don’t think there is any. If there are big initial public offerings (IPO), think about the resources these IPOs will create and the positive effect it will have on employment. With the investor base widening, the mid-income groups will benefit from that economic development, and as the middle-income groups become stronger, the capital market becomes the guarantee of the democratic environment.

When you look to developed countries, the ratio of investment to capital markets is very big. When you compare it to Turkey’s population, this is around 1 percent. This is too low.

Why are the public offerings so limited?

Being open to the public brings with it some responsibilities. Turkey has a problem of institutionalization. Companies in Turkey are still family firms. In addition, you need to develop new business with the resources created from the public offering, and our companies have a problem with coming up with new projects. That’s one of the reasons why we don’t have global brand names coming out from Turkey. The market capitalization in the U.S. is 14.5 trillion dollars. That of Turkey is 100 billion dollars. That of Germany is 1 trillion dollars. In Turkey there are more than 400 billion liras in deposits and look at the level interest rates have reached. Turkish people are in search of alternative investment opportunities, but they don’t even come [to the stock market].

So why would more foreign investors come to a market that is not even attractive to local investors.
Actually, the small size of the market brings an additional problem: Entry and exit flows to the market cause exaggerated fluctuations in equity.

In fact this leads to speculations and to conspiracy theories in Turkey, as some say this is the way for foreign forces to have an influence over Turkish governments.

Portfolio investments are speculative. Turkey needs to attract foreign capital investment rather than portfolio investments. But it is important that foreign investors come for IPOs.

But actually the problems we have are normal when you consider Turkey’s past with the stock exchange, which spans back 25-30 years. The stock exchange has been active for 27 years. Those of developed countries are older than 100 years. When you compare them and think that Turkey needs to cover the distance in a much shorter time, then it is normal that we will have difficulties. My personal expectation is that Turkey will have a capital market that will be taken seriously by the global market after 2020.

Turks also have bitter memories of the past when it comes to the stock exchange.

There were tremendous “road accidents” in the first half of the 1990s. People became very skeptical as we had serious ups and downs. It’s only after 2003 that we say stability. So we have to understand the feelings of the Turkish people, and therefore we need the necessary arrangements to win back the local investors.

And actually there needs to be a balance in the ratio of Turkish and foreign investors in the capital market. At the moment foreigners own 65 percent of Turkish equities. If the share of Turkish investors increases, that will create a security waive during the global economic crises. There is serious capital in Turkey that remains rather idle. We need first to attract local investors before focusing on foreign investors. We need to put the house in order; if the house is in order, the interest of foreigners will increase automatically.

What do you think about privatizing Borsa İstanbul?

I am not against its privatization, but it is not right to privatize it before the market has deepened and everything is on track. Look, if the right steps are taken, the market will grow to three or four times its current volume. But if strategic mistakes are made, Borsa İstanbul will be more detrimental than beneficial.