Brave faces were on display in New York late last month as Borsa Istanbul, the Istanbul stock exchange, held a conference to promote Turkey’s capital markets. Turkish stock prices have taken a beating over the past year from a wave of mass protests and a government corruption scandal. But to Ibrahim Turhan, who was appointed chair and CEO of the exchange in April 2013, these issues are but short-term blips. “The fundamentals of the economy are still very strong,” he said, pointing to the underlying potential of a country with a young population of 80 million, a growing middle class and a roughly 35 percent public debt–to-GDP ratio.
The initial reaction of investors to last year’s Gezi Park protests was “a little strong,” Turhan conceded.
Coincidentally, this happened contemporaneously with the general investor exodus out of emerging-markets assets, triggered by hints of a shift in U.S. monetary policy. But “once investors realized that these problems have nothing to do with the deep fundamentals of Turkey’s economy, they came back,” Turhan said at the April event in New York.
Although they have rallied in recent weeks, Turkish stocks have suffered more than most EM markets over the past year. Istanbul’s benchmark BIST 100 index was down 18.35 percent in the 52 weeks ended on May 1, whereas the MSCI Emerging Markets Index declined just 4 percent over that period. Yet the portion of the Turkish market’s free float that’s owned by foreign investors has only edged down to 62 percent, from a precrisis peak of 66 percent. Domestic institutional investors hold just 3 percent, giving the local market significant room for growth and emboldening BIST, which was created in 2013 via the merger of the old Istanbul-based equities exchange and the Izmir-based derivatives exchange, as it pushes ahead with ambitious plans for regional expansion.
But political problems still loom large. Prime Minister Recep Tayyip Erdogan has spent much of the past 12 months battling to protect the legacy of his nearly 12 years in power. The Gezi Park protests started as a small environmental demonstration against an initiative to clear trees out of a park adjoining Istanbul’s Taksim Square to make way for a shopping mall styled after Ottoman-era barracks — the contractor for which was the Kalyon Group, a construction firm known for its ties to Turkey’s Islamist-leaning Justice and Development Party (AKP). But within days the Occupy Wall Street–style campout developed into nationwide mass protests against what 3.5 million demonstrators saw as encroaching authoritarianism and the gradual dismantling of the secular Turkish state. Social media, especially Twitter, showed the world images of police hitting protesters with tear gas, including a photo gone viral of a Gezi Park woman in a red dress, her hair set flying by the spray.
Besides any fallout from the protests on the AKP, which Erdogan heads, the prime minister became personally implicated in a corruption scandal late last year, prompting him in recent months to attempt to block Turks from using Twitter and YouTube. This has drawn sharp criticism from the West, but Turhan soft-pedaled Erdogan’s actions as a legitimate contest between free speech and defamation law. “There are several aspects of every phenomenon,” he said. “On the one hand you might see it as a ban on freedom of expression; but others argue that their own human rights are at stake because of irresponsible publications.” Corruption concerns were given similarly short shrift: “Of course corruption is a serious problem, but it is everywhere,” Turhan argued. Late last month Turkey’s Capital Markets Board dismissed more than a dozen senior members in a purge that some perceived to be linked to the corruption scandal; Turhan brushed aside the suggestion that the financial sector is now entangled in broader political woes, adding that what will train the discipline of Turkish policymakers over the long run is the country’s commitment to “being an integrated part of the global financial system.”
Historically, accession to the European Union has been the key plank of the AKP’s voiced platform of economic liberalization, and despite recent turmoil that process appears to be on track. In November last year Brussels and Ankara opened the first new chapter in accession talks since 2010. In the meantime, BIST is proceeding with plans to turn itself into a regional financial center, assisted by policy developments such as the introduction of a new capital markets law in late 2012 and the creation, due to take effect later this year, of new, specialized courts to deal with financial disputes.
Nasdaq OMX Group acquired a 5 percent stake in BIST in December, creating a strategic and technology partnership that Turhan believes will be a catalyst for the achievement of Borsa Istanbul’s global ambitions. “They have real reach into places we just don’t go,” explains Meyer Frucher, Nasdaq’s vice chair, of the deal, adding that the U.S. exchange operator does not usually take minority stakes in other exchanges but was convinced by the quality of Istanbul’s regional expansion plan. This has seen BIST join forces with the European Bank for Reconstruction and Development (EBRD) in a bid to boost capital markets infrastructure in the Balkans, Central Asia and the Middle East. In December, BIST and the EBRD acquired a 25 percent stake in the Montenegro Stock Exchange, the first of what Turhan hopes will be a series of investments that will create the basis for an integrated regional financial marketplace, similar to what the exchanges of Chile, Colombia and Peru have pursued since 2010 with their MILA project to create a common trading platform. “If you are missing a liquid market, you cannot grow your companies, and unless you have big enough companies, you cannot bring liquidity,” Turhan said, adding that the integration of smaller neighbors with BIST will help those markets “cut this vicious circle and change the course of their fate.”
Istanbul is not without competition: The exchanges in Warsaw and Moscow have also articulated expansive plans for regional supremacy. But Turhan is bullish on Istanbul’s prospects. “Unlike some of its competitors, the Turkish economy does not depend on one or two industries or commodities,” Turhan argued. “It’s a very well-diversified, export-oriented economy” whose growth and dynamism are “driven by the private sector, not government,” enhancing the appeal of the local exchange. Geography, too, arguably plays into Istanbul’s hands, given that the exchange is perched on the hills above the European side of the Bosporus, a five-minute drive from the entrance to one of the bridges over the strait to Asia.
It’s not yet clear exactly how deeply Turkey’s recent political woes will eat into these plans for financial expansion; and even though BIST may have suffered from broader country perception problems in recent times, regional rivals such as Moscow have likely suffered more. Several at the conference thought Russia’s recent incursions into Ukraine cast Turkey in a comparatively favorable light. “Turkey’s position has been enhanced by what’s happened next door,” argued Nasdaq’s Frucher. But for all the progress made in developing capital markets, it says much about this onetime market darling’s fall from grace that the best thing going for Turkey right now is that it’s not Russia.
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Follow Aaron Timms on Twitter at @aarontimms.
