Treasury Today Country Profiles in association with Citi

Turkey: land of opportunity?

Hot air balloons over Turkey

Turkey’s demographics alone make the country stand out: with a median age below 30 and high per-capita GDP, there is significant growth potential. The question is whether the nation can develop a financial and political environment that will attract major private investment from abroad.

Key facts

Population:
74 million1
GDP per capita 2013 (US dollars):
10,5232
GDP percent change 2013:
2.172
Current account balance 2013 (US dollars/billions):
-48.4972
Inflation (average consumer prices) percent change:
(2013) 8.892
Ease of doing business (2013) rank:
69 out of 189 globally1
Corruption perceptions index (2013) rank:
53 out of 175 globally3

What is known as modern Turkey was founded in 1923 from the remaining Anatolian parts of the defeated Ottoman Empire. Following a period of one-party rule, the number of political parties has expanded in the country, although democracy has been interrupted by instability and military coups in 1960, 1971 and 1980, and an ouster of the Islamic-oriented government in 1997.

Turkey’s economy is predominantly free-market based and is led by its industry and service sectors, with its traditional agricultural segment also accounting for a significant portion of employment. In recent years the automotive, construction and electronics industries have played an increasingly important role in the economy, overtaking the textiles sector, which has traditionally been one of Turkey’s key exports. Turkey’s primary import trading partners are Russia, Germany, China and the USA, and its top export trading partners are Germany, Iraq, the UK and Italy. The country applies the EU customs code, and has free trade agreements with a number of countries, including the EU and the European Free Trade Association.

In May 2014, the Central Bank of the Republic of Turkey reduced its benchmark interest rate for the first time in a year, dropping the rate half a percent to 9.5%. Although some economists were critical of the reduction, claiming it could lead to Turkey exceeding its 5% inflation target, Prime Minister Recep Tayyip Erdogan argued the opposite – that the rate cut was not bold enough to stimulate investment.

Erdogan’s comments caused concern in some quarters about the government putting political pressure on the central bank. But the debate over stimulating economic growth also put the spotlight on Turkey’s recent record of growth. Though the country registered GDP growth of 2.17% in 2013, it had been as high as 9.2% in 2010, and as low as -4.8% in 2009. Indeed, Turkey has fluctuated between positive and negative economic growth since the early 1990s.

In the near term, there is reason for cautious optimism. In a May 2014 research note, analysts at Morgan Stanley said they expected GDP growth in Turkey to remain limited to 2.5% in 2014, but to recover in 2015, reaching up to 3.9% for the year.

Household debt challenge

One threat to Turkey’s growth is the country’s level of debt, both corporate and consumer. “After the global financial crisis, we saw significant growth on the personal lending side. Some of this has come at a time where rates have been significantly lower – mid- and high-single digits – than rates have been historically in Turkey,” says David Aserkoff, an Equity Strategist at J.P. Morgan.

Turkish household debt as a share of disposable income has rocketed from 7.5% in 2003 to 55.2% in 2013. “This rapid acceleration in loan growth suggests to us that it will become more difficult for the country to engineer domestic-demand driven growth in the coming years,” says Celal Celikcan, Country Treasurer at Citibank Turkey. The government has even gone as far as to urge Turks against using credit cards, and the banking regulator has put in place caps on card limits.

“The significant increase in the debt levels outstanding we have seen did not proportionally increase the payment burden, as rates were low. Now rates are rising, and the central bank is starting to put macro-prudential regulation on the banks to limit consumer lending. We do not think that it’s a significant problem, but it is something a lot of investors are watching more closely now than they did say, a year ago,” adds Aserkoff. Investors are also likely to be watching movements in the lira exchange rate.

Lira liquidity

The Turkish lira (TRY) is relatively liquid for an emerging market currency, with the spot market estimated to have a daily volume of around $10 billion. “Volume- and liquidity-wise the TRY spot market can be said to be one of the leaders of the emerging markets, along with the MXN, BRL and RUB,” says Citi’s Celikcan.

The TRY has weakened against the USD since 2013. “The currency has depreciated a lot over the last year, from around 1.80 to around 2.10, where we are now. That’s a 15% move in a year, and it was even higher – as weak as 2.30. Higher rates at the central bank have helped steady it, and the slightly better environment for emerging market FX in the last couple of months has also helped steady it,” says J.P. Morgan’s Aserkoff. “Turkey does have significant export competitiveness again, so to a certain extent the drop in the currency has been a positive, and I think going forward we should expect a relatively firm Turkish lira,” he adds.

Payments landscape

Turkey’s payment infrastructure is reasonably advanced. Furthermore, two developments in recent years – one on the infrastructural side and the other on the regulatory side – have laid the foundations for an even more advanced payments network in the future. The Central Bank of the Republic of Turkey has recently made a significant change to the country’s payments and securities settlement systems by differentiating transfers between customers and transfers between banks. The move is intended to make the system more flexible, effective and technologically efficient.

In addition, the ‘Law on Payment and Security Reconciliation Systems, Payment Services and Electronic Money Organisation,’ passed in June 2013, introduced a new regulatory landscape covering the principles and procedures of payment and security reconciliation systems, payment services, payment organisation and electronic money organisation. Within this framework, new definitions and license requirements were established, requiring certain organisations to take further action in order to achieve regulatory compliance.

The four largest banks operating in Turkey – Türkiye Garanti Bankasi AS, Türkiye Is Bankası (Isbank), TC Ziraat Bankası AS and Akbank – control more than half of the banking sector’s total assets. Three of the largest seven banks in Turkey – TC Ziraat Bankası, Halkbank and Vakifbank – are state‑owned. In all there are 47 banks operating in Turkey, of which 13 are investment banks. For banks operating in Turkey, the repatriation of capital is subject to the approval of the country’s Banking Regulation and Supervision Agency.

Several Turkish banks already have the infrastructure in place to enable mobile P2P payments. Given Turkey’s young population (see the section on demographics below), and the large number of mobile telephones in use in the country (almost 68 million according to the CIA’s World Factbook, ranking Turkey 20th in the world by number of mobile phones in use), a proliferation in mobile payments seems inevitable. As of May 2013, 15 banks in Turkey offered mobile banking services.

The use of cheques is gradually declining in Turkey, although they are still widely used for high value corporate payments. The use of direct debits is possible in Turkey, although they are still not widespread.

The ‘Law on Payments and Securities Settlement Systems, Payment Services and Electronic Money Institutions,” introduced by the central bank, provides legal support to developments in the payments area and has strengthened financial stability by supporting the efficient and uninterrupted operation of these systems. Further regulation supporting the use of electronic payments is expected, which should drive growth in the space.

Bank regulation is handled by Turkey’s Banking Regulation and Supervisory Agency. Transactions between residents and non-residents must be reported to the central bank, and banks are responsible for submitting transaction data to the central bank on behalf of their corporate clients. Turkey’s Central bank operates TIC-RTGS, the country’s real-time gross settlement (RTGS) system. It also operates a retail RTGS payment for the consumer space, which was launched at the end of 2012. Cross-border payment instructions are channelled through SWIFT; settlement takes place through accounts with correspondent banks abroad.

Managing cash in Turkey

Turkey is relatively well developed in terms of cash management services, with a wide range of products available, including electronic banking, payments, liquidity management and information monitoring, as well as traditional accounts payable and accounts receivable tools. An increasing number of banks in Turkey are also capable of building more complex products by integrating different product sets, including the provision of e-invoice integration for payments, card integration for direct debits, and payments with e-signatures and mobile signatures.

“This should be a great country to invest in, and companies that have got it right so far have done incredibly well.”

David Aserkoff, Equity Strategist at J.P. Morgan

While traditional liquidity and investment products are widely available in the Turkish market, and the provision of more complex services is increasing, the range of sophisticated products on offer remains limited. However, changes in the regulatory landscape have allowed some local players to develop domestic and cross-border cash concentration solutions, albeit restricted to a certain extent by Turkish tax law and fiscal policy. Turkish corporates therefore lag slightly behind their European peers in terms of the cash and liquidity management solutions and investment products they can call upon.

Demand and time deposits are available in TRY, as well as in several major foreign currencies. Time deposits in Turkey typically have maturities of one, three, six or 12 months. Equities and corporate bonds are settled on a T+2 basis. Government securities settle on either the trade date, or on a negotiated settlement date.

Single-currency cash concentration is allowed in Turkey on an in-country basis between resident and non-resident entities. Cross-border cash concentration is also allowed, although owing to exchange controls its use is somewhat limited. Notional pooling, however, is not permitted in the country.

From a taxation perspective, the standard corporate tax rate in Turkey is 20%; capital gains by resident companies in Turkey are also taxed at this rate. There are no tax rules governing cash pooling arrangements in the country.

The Turkish government’s plans to make Istanbul an international financial hub should boost the provision of cash management services over the coming years. Another development that would undoubtedly boost the sophistication of cash management in the country would be EU membership.

Turkey has made a bid for accession to the European Union (EU), although potential full EU membership is generally considered to be a number of years away. Should it be approved, one of the key and immediate benefits would likely be that it would give foreign investors in the country a much greater sense of stability.

Turkey is a republican parliamentary democracy. Prime Minister Recep Tayyip Erdogan, of the ruling Justice and Development party (AKP), has been in office since 2003, and Abdullah Gul has been president since 2007. Many have tipped the AKP to win the next parliamentary elections in June 2015, in which case Erdogan could move over to the presidency, and Gul could move in the opposite direction into the premiership.

And Turkey’s economic and political future looks reasonably bright, at least judging by the country’s demographic profile.

Demographics: triple crown

One of the country’s key strengths is its demographics. “Turkey wins the demographics triple crown,” says J.P. Morgan’s Aserkoff. “With its large population, population growth, and high per-capita GDP, Turkey matters. MNCs need a Turkey strategy. The country has done a great job, since the crisis began, in diversifying its export base out of Europe into MENA and the rest of Africa. Now that Turkey is rebounding we’re seeing Turkish exports into Europe growing again quite quickly and double-digit year-on-year gains into markets like Germany and Italy. The population continues to grow. This should be a great country to invest in, and companies that have got it right so far have done incredibly well. It’s pretty obvious that the opportunities are massive,” he says.

Turkey’s young population alone – the median age is below 30 – is a key indicator of the opportunities its demographics present. But beyond its demographic strengths, the country also benefits from its key geographic positioning.

“As a natural bridge between both east and west, and north and south, Turkey creates an efficient platform to major markets across Europe, Eurasia, the Middle East and North Africa. Having such a strategic location, multinationals increasingly look to Turkey as a growth engine for their regional business. Turkey offers a robust platform for economic expansion on a regional scale, enabling MNCs to leverage local capabilities,” explains Citi’s Celikcan.

He says basing a regional corporate hub in Turkey has several key advantages. “Turkey provides access to 56 countries and multiple markets with a combined GDP of $25 trillion within a four-hour flight distance. The country also has extensive trade agreements with countries in the region and a vibrant business sector with a business-friendly investment environment,” he adds.

Given Turkey’s demographic and geographic advantages alone, MNCs without a Turkey strategy would be wise to start drawing one up now.

  1. World Bank

  2. IMF World Economic Outlook April 2014

  3. Transparency International

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