AS TURKEY STRUGGLES to overcome the effects of more than a decade of chaos in its public sector finances, the private sector continues to be debilitated by restricted access to capital that threatens to limit growth.
"The single greatest ailment of the Turkish private sector is the crippling cost of capital compared with its competitors in the European Union," says Murat Gulkan, director of research at Bender Securities in Istanbul.
"The high cost of borrowing and the limited use of the capital markets put the vast majority of Turkish companies at a great disadvantage. Continued high GDP growth requires vastly improved access to capital, and right now the source of that capital is not obvious," he adds.
The owner of a pharmaceuticals firm says that lack of externally generated capital is one of the main reasons why his company has remained relatively small. "We generate enough cash to keep the business running at its current size, but we have nothing available for growth," he says. "Borrowing from banks at high interest rates is not an option. Using high-interest, short-term loans for long-term growth investments is a recipe for disaster."
Turkish firms don't have the tools to finance growth that are available to European, Asian or US rivals. Financing methods in those markets ? venture capital, long-term bank credit and flexible capital markets are limited or absent in Turkey.
"During the period of high inflation, companies had to rely on cash generated by operations to create capital for investment," says John McCarthy, managing director of ING. "The techniques used for this cash generation were unique to an inflationary environment. They are becoming less and less applicable as Turkey adopts inflation-adjusted accounting and inflation and interest rates decline."
Crippling borrowing rates
The traditional ways of raising capital in Turkey reflect the relative youth of the industrial sector, constant political upheaval, inconsistent and capricious regulations regarding capital accumulation and foreign investment, and incompetent economic management. A more rational economic environment will require a different corporate mindset and new skills.
A handful of Turkish companies can borrow at European rates, but the majority face real borrowing rates of 15% to 20%. These are punishing enough but are an improvement on rates exceeding 30% that were typical less than two years ago.
Turkish firms also face a much less flexible lending environment than their international competitors. European firms have access to unsecured credit and different classes of borrowing such as subordinated debt, mezzanine debt, convertible debt, and ? most importantly ? long maturities. Turkish firms, in contrast, can access just one type of debt, usually secured against real estate, and very short maturities. A one-year loan is considered long-term.
The entire Turkish financial system and the companies it is supposed to serve are paying a high price for the distortions caused by the chronic high inflation and irresponsible public financial policies of the past 20 years.
Soaring public-sector expenditures coupled with a very limited tax base forced the government to resort to short-term debt financing to close the widening expenditure/revenue gap. The ever-increasing borrowing requirements of the government simply crowded the private sector out of the picture.
Little incentive for corporate loans
The entire financial system laboured under a mound of self-reinforcing problems that sharply limited corporate borrowing: high borrowing requirements, high inflation, high interest rates, and expensive and short-term bank funding. Banks able to lend short term to the government at real rates of 30% had limited appetite, or funds, to grant corporate loans.
Banks also faced a series of transaction charges that pushed the cost of lending even higher. Companies would turn to banks only as a last resort. As a result the ratio of total corporate borrowing to GDP in Turkey is only around 20% compared with Poland's 40%.
Capital markets offered only partial relief. The Istanbul Stock Exchange has about 270 companies listed on the national market, and the total market capitalization is just over $75 billion. Fewer than 20 companies have market caps of more than $1 billion. Because of the overall low percentage of free float the number of companies with a free float of more than $1 billion drops to just three ? all of which are banks.
By contrast, there are over 100 companies with a free float of less than $10 million. Since 1994, $17.4 billion has been raised on the Istanbul Stock Exchange ? $4.5 billion in initial public offerings, $3.7 billion in secondary offerings, and $9.2 billion in rights issues. More than half of the total funds from IPOs and secondary offerings was raised in 2000 when such large companies as Turkcell and Tupras had major international offerings. Funds raised from rights issues generally went into the companies, while funds from initial and secondary offerings went to the selling shareholders.
Capital markets are also hampered by the limited number of instruments available. The corporate bond market is almost non-existent, convertible bonds are available only in theory, and such instruments as preferred stock and warrants are absent.
As one frustrated market participant says: "It's as if we offer the companies a small bakkal [corner shop] with one product while our competitors in other markets can shop at what amounts to a financial Carrefour."
Stock exchange officials say they are seeking to remedy this situation. "We are working to introduce a range of more flexible products to help companies use the capital markets for their intended purpose ? raising capital for the real, productive sector of the economy," says Huseyin Erkan, executive vice-chairman of the Istanbul Stock Exchange.
During the period of high inflation, companies had to rely on funds that they could generate internally. Officials and companies devised ingenious ways to create the cashflow required for capital investments. What was known as the revaluation fund allowed companies to revalue fixed assets according to an inflation-adjusted percentage announced each year by the government. Turbo-charged depreciation rules far exceeded the normal accelerated depreciation in most other countries. For example, if an investment project was begun late in December, companies were allowed to take 50% depreciation that same year. The government also offered investment incentives that allowed significant tax deductions. If firms paid dividends they often recaptured those funds in subsequent rights issues.