When the Islamic/centre-right coalition banned Turkish nationals from entering the country’s 74 casinos from October 1, where did gambling addicts put their money? On the Istanbul Stock Exchange of course. That, according to the popular daily Hürriyet, explained the inexorable rise of the stock exchange index in the final days of September.
Experienced Turkish brokers immediately recognized this story for what it was complete rubbish. Mehmet Akkent, manager at Citicorp Securities in Istanbul, took time off to call the journalist and scold him for giving another jerk to an already chaotic market.
It’s a game played by a whole raft of newspapers and magazines. Sometimes the stories, like this one, can be harmless fun. Sometimes they make a bunch of speculators, and perhaps the journalist, a heap of money. Sometimes they can be damaging, like the story flown by Sabah, Turkey’s highest-circulation daily, on August 7.
Sabah said that the securities watchdog, the Capital Markets Board (CMB), was investigating two alleged irregularities: first, that a former head of the Privatization Administration (PA) had done a sweetheart deal with one broker in June, selling it stock in the national airline (THY) just before earnings announcements tripled the price. It also claimed that the same PA head had given the broker early warning of a cancelled tender for stock in Eregli Iron & Steel (Erdemir).
The broker, Global Securities, issued a statement the same day, explaining that it had bought the THY stock legitimately on behalf of two US clients. The CMB also announced within the hour that there had been no abnormal selling of Erdemir stock and there was nothing to investigate. Global and former privatization chief Ugur Bayar seemed to be cleared on both counts.
Unfortunately, analysts at Merrill Lynch in London had picked up the Sabah story and reported the inquiry as fact in its daily fax to clients, referring to Global only as “a leading Turkish broker”. Merrill later retracted the story, saying there had been no intent to damage Global.
Turkish brokers are used to the extravagances of their own irresponsible media. But when the game spills into the international arena, the impact can be more severe. In the pressure-cooker world of Turkish politics, business and finance, the multi-coloured newspapers and gossip-mongers delight in seeing conspiracies and nepotism in every cranny of the market. They have found plenty of mileage in the fact that Mehmet Kutman, founder and CEO of Global Securities, is the first cousin of Mesut Yžlmaz, prime minister of the last centre-right coalition and former protégé of late president Turgut Özal. The media also exult in the fact that Kutman and Bayar share a pedigree going back to populist prime minister Adnan Menderes, who was hanged after the military coup of 1960. Each had a grandfather who shared a prison cell with Menderes.
No smoke without fire
Kutman points out that Global grew big before Yžlmaz had any influence in Ankara: “We never won a mandate while he was in power.” Yet once the press discovered the relationship he wasn’t allowed to forget it. Now that Yžlmaz is in opposition, the pro-government press has declared open season on Global. Bayar, who was fired in July after clashing with the new coalition government, also complains that he’s been stigmatized by the press. The youngest-ever privatization chief at 32, he seems to have fallen out with both centre-right parties, despite close relations with president Süleyman Demirel. “Today I have more friends in the [Islamic] Refah party,” he says.
While the Turkish media are generally regarded with contempt, there is always the suspicion that there’s no smoke without fire. Indeed, the Sabah piece did alert the CMB to what it believes was manipulation of THY stock, not by Global but by a group of domestic speculators using foreign brokers.
“We saw a 50% to 80% price increase in the stock,” says Cemal Küçüksözen, deputy head of the CMB’s enforcement department. “We also saw that 80% to 90% of the transactions were executed by foreign investors.” This trading pattern looks to the CMB like a classic case of manipulation by Turkish speculators, who cover their tracks by dealing through foreign brokers. The CMB’s suspicions were heightened by the appearance of a series of articles on THY in leading Turkish newspapers, talking up the stock, together with an unprecedented announcement of monthly profits.
The CMB asked the five Turkish brokers through which most of these suspicious trades had been executed to indicate who was behind the trades. The CMB was politely referred to the foreign brokers and on August 21 it wrote to six of them asking them to name their clients. Four Morgan Stanley International, UBS, SBC Warburg and Prime SpA Global Fund, Milan replied, regretting that client confidentiality prevented them from giving names. Salomon Brothers and Morgan Stanley Asset Management didn’t answer.
Not satisfied with this, CMB chief Ali Ihsan Karacan on October 7 invoked a 1992 provision in the board’s statutes, which requires that every investor, domestic or foreign, should declare its identity to the local intermediary. The CMB said that in future it would want this information for every trade triggering incredulity among foreign investors and an almost complete halt to foreign buying of Turkish stocks. Arnhold & S Bleichroeder of New York obliged with a client list. The CMB also received letters from UK brokers SBC Warburg, Kleinwort Benson and Caspian Securities advising them to apply to their regulators. So the CMB approached its fellow regulators, the Securities & Investments Board (SIB) and the Securities & Futures Authority (SFA) in the UK and the Consob in Italy, to put pressure on brokers to comply with this ruling. The foreign regulators said they couldn’t oblige in the THY case, but they would put pressure on brokers in any future inquiry.
That didn’t seem so satisfy the CMB, which on November 2 banned the three UK brokers from dealing in the Turkish securities markets. Foreign brokers saw this as an example of the CMB’s excessive zeal in a market which makes up in regulation what it lacks in self-discipline. “The CMB and the Istanbul stock exchange (ISE) have their hearts in the right place,” says a London-based Turkey analyst. “They’re trying to apply different rules to a different culture.”
Foreign portfolio investors love Turkey precisely because it dances to a different tune. While other emerging markets are jerked up and down by US interest rates or other global economic indicators, the Turkish market is refreshingly counter-cyclical and provides what asset allocators most seek diversification. Foreigners own around 40% of the market’s free float, but they account for only 10% or 15% of the trading volume. The bulk of trading is by short-term Turkish investors who discovered the wonders of stock-trading long before the Islamists turned them out of the casinos. There are the legendary names, touted in the weekly magazines, such as Halil Güvener, Mehmet Esener (known as Monsieur Butterfly), Refik Aydogan, and groups that hunt in packs, such as the once-active, now slightly chastened, Group from the Covered Bazaar.
One former dealer at Finansbank recalls with awe the size of one private customer account, admittedly in the heyday of 1993: “This man had a $75 million position in Turkish stocks, and that was just with us. He probably had similar positions with other brokers.”
Behind the big players, and the less well known company chief executives and finance directors who trade on what might in more polite markets be called inside information comes the herd. These are the small and medium-size investors, who read the money magazines, listen to the manipulators, the çžtžrcžlar (chatterers), and find themselves whipsawed by every scramble into and out of stock. Sudden crazes can start, either on information that is not official but has become generally known, or on information that has been available, but whose significance is suddenly recognized. Cüneyt Demirgüres, head of equity research at Eczacžbasž Securities, recalls writing about the hidden assets of Altžnyžldžz, a wool products firm, which took the form of a 13% stake in the acrylic-fibre plant Aksa. That stake added $83 million to the asset value of the company but Altžnyžldžz was trading at $66 million. “As soon as we wrote about it, the stock rose 50%,” says Demirgüres. Aksu Iplik, another textile firm, has a closed plant in Istanbul. “I have written that one day they will sell,” says Demirgüres. “All the same, come the sale, the speculators will pile in.”
Turkey is a gloriously inefficient market. Others refer to it as “one big inside trade” although no worse than Greece or Pakistan. While “unofficial” information circulates swiftly, the ISE says it is quick to quiz companies on new rumours. “If there’s no fact behind the rumour, we publish the company’s denial in the stock exchange bulletin,” says ISE vice-chairman Aril Seren. The ISE and the CMB are fighting a battle against great odds. But their efforts are respected. “I live in constant fear of the CMB,” says a Turkish broker in London. “Anyone who doesn’t is an idiot.” Article 47 of the capital markets law is “draconian,” the broker says. “You can be put in jail.”
The longest wrangle
But the Turkish courts are not used to applying the law. In the 15 years of its existence the CMB has successfully concluded only one prosecution. That was a case of insider dealing at Bahar Securities. Five people received one-year jail sentences commuted to fines of around TL1 billion ($11,100). The offences were detected in April 1995, brought to court in June of that year, and the case concluded this July. “There’s no court specialized in capital markets,” laments Hülya Kemahli, acting head of the CMB’s legal department. “Small cases can take three years to come to court.” The CMB’s longest wrangle has been over Çukurova Elektrik, a power company whose state share was sold in 1993. Since then its balance sheet has been pillaged, to the detriment of shareholder value, by member companies of the Uzan group which built up a 30% stake, effectively controlling the management. The CMB brought a prosecution in 1995, but a guilty verdict was overturned by the supreme court, and a final judgement is pending. Today, the CMB has 49 prosecutions outstanding, but no great hopes of securing convictions.
Many firms, including Global Securities and Garanti Investment Bank, have caught employees front-running their clients. “It has happened at this firm,” says Kutman at Global. “Three people have been fired because of front-running.” Mustafa Gürtin at Garanti admits: “We’ve fired some people on serious suspicion of front-running, and they’ve been hired by other institutions.” Those institutions should know perfectly well why the employees lost their jobs, says Gürtin, “but we don’t officially let them know. As an industry we have to talk about this.”
Global, Garanti and others have grown up in a jungle. Global, in particular, has won a reputation for aggressive dealing and “pushing the edge of the ethical envelope”, in the words of a former employee. Many foreign brokers won’t deal with Global. Ostensibly this is because it is the only Turkish broker perceived as direct competition it markets direct to foreign institutional investors, while the others go through foreign brokers. But some foreign firms have other reasons for not using Global. They believe it is too aggressive, sometimes sloppy on execution and its research has gone off the boil. “I’ve seen Global ask for a 5% commission including doing a foreign exchange transaction on our behalf,” says a broker in London. Says another: “We don’t use Global. It’s competition, and, because of its size and position it moves share prices around.”
But much of the criticism is the politics of envy. Global employs twice as many staff, around 300, as its nearest rival. It is undisputed market leader, although other firms claim higher turnover in government bonds, and primary issue volume. Unlike any of the other big brokers it is independent, not answerable to a banking or industrial parent. “They decide things quickly, they’re extremely ambitious, they may have overstretched themselves,” says the head of research at a close rival. A Turkish trader now in London sums up Global: “They may be doing only 15% of things right, but they’re leading the pack.”
Mehmet Kutman started Global in 1990 at the age of 30. He and Erol Göker were at tourism company Net Holding when they raised $50,000 from friends and started with seven people. From the beginning the target was foreign institutions. The big years for Turkish stocks were 1993 when the market index moved from 4,072 to over 2,000, in Turkish lira terms and 1994 which was so volatile that the brokers continued to do well. Global grew from a seven-person show to a company employing 90 people and making revenues of $16 million a year. The International Finance Corporation (IFC) spotted a winner and bought a 9% stake in 1993. Global’s success encouraged it to do a flotation on the ISE in May 1995, in retrospect “the biggest mistake we made in Global’s history,” says Kutman. Securities firms shouldn’t go public, he warns, because “your clients become your shareholders”.
For the initial public offering (IPO), Global estimated its share price at TL6,000 a share, but at the Dutch auction it was swamped with offers, some as high as TL100,000. The issue was priced by lead manager Paribas at TL60,000, but in the first hour of trading it dipped 11%. “Paribas had a Greenshoe option but, because of lack of knowledge of the market, it couldn’t stabilize the price,” says Kutman. Since then, the Global share price has gone south and now languishes at around TL1,300, leaving a bad feeling with some major shareholders. They include Kleinwort Benson Investment Management, Morgan Stanley Asset Management, Genesis, Fidelity, the IFC and Moore Capital, a hedge fund with over 10%. “With the IPO, a lot of people got upset,” says the head of another brokerage firm.
Kutman is regarded as smart but short on management skills for the size of firm that Global has become. “We’ve had a lot of criticism, some warranted, some unwarranted,” says Kutman. “In the last six months, politics in Turkey has got extremely dirty, with everyone digging up everything. The press carries no responsibility for what it writes.”
But internally, Kutman recognizes a turning-point has been reached: “Now it’s cleaning-up period,” he says. He has a compliance committee of three. There has been more pressure on compliance this year since Global opened an office in New York, which is regulated by the Securities & Exchange Commission (SEC). Kutman is still looking for an independent compliance officer fluent in the rule books of the SEC and the Turkish CMB.
Bad blood
Rival firms acknowledge that Kutman and Göker showed the Turkish market what brokers could achieve with good research and extensive foreign marketing. But they’re quick to point to egg on the face of their biggest competitor. Take Yatas, an IPO led by Global in August this year. Originally, Garanti Investment Bank had the mandate and was looking at a price of TL23,000 a share. According to market sources, Garanti “had already signed the contract with Yatas” when Global barged in and insisted it could do the deal at TL26,000 a share. Global got the mandate, but the issue was badly received and the price fell 12% in two months. Global tells a different story. It says it was approached out of the blue by Yatas for a second opinion on Garanti’s recommended issue price. Global, having said the price should be TL24,000 to TL28,000, was offered the mandate instead. Kutman relates: “I called Ferit Sahenk [vice chairman at Garanti] and said ‘We won’t do the transaction if Garanti isn’t in it’. Ferit said ‘No problem’, but then he called again and said apologetically ‘My team doesn’t accept’.” Kutman decided Global would have to go it alone. But the switch of lead managers leaked into the market and bad blood affected the issue, Kutman believes: “Garanti suffered, we suffered, the market suffered.”
In such cases, market participants won’t give Global the benefit of the doubt. They love to see it embarrassed. They relate with glee how Global was shut down for a day, omitting to mention that seven other brokers were too. It happened on April 18 this year. The CMB says it detected abnormally high volumes and suspected stock manipulation at eight brokers Delta, Erciyes, Global, Genel Yatžržm, Öner, Polen, Üniversal and Tür (which was shut down by the CMB in July). But Global argues that it was the fallout of a turf battle between the CMB and the ISE: Global was picked on because its volume is always among the highest.
“We never want to grow as big as Global,” says a rival broker. “If you grow too far in Turkey, you take a huge market risk.” Such rivals calculate that with 300 people, some on wages that can touch $300,000 a year, Global would have been hurting during this summer’s sluggish markets. They blame Global for inflating salaries in Istanbul to around twice what others are prepared to pay.
The demand for high-calibre people is likely to increase in the short term. The CMB has ruled that banks must put their equity trading activity into a separately capitalized entity by January 2. Although there is still horse-trading about how much the capital should be the options to date are TL500 billion for full trading powers, and TL125 billion for limited trading powers banks, such as Is Bankasž, Demirbank, Finansbank and Türk Ekonomi Bank (TEB) will have to staff up separate subsidiaries. Garanti Investment Bank is one of the few that already has a securities subsidiary, Garanti Securities, although it had been mothballed.
There is much criticism of the CMB’s attempt to impose a mini Glass-Steagall Act. Global expects it will benefit in the short term, “but in the long term, no”, says Kutman.
Competition for Global’s market position is increasing. Other firms are playing up the virtues of tighter ethics, better research, better-run asset management and more intelligent corporate finance. No firm yet beats Global on all these counts, but a few excel in one department or other.
There is also the race for the domestic retail market in securities. Is Bankasž has a head start with its nationwide branch network. But Global has eight branches and three rep offices and intends to have 13 branches and 20 rep offices by the end of 1997. Finansbank has been opening branches in the east recently and now has a total of 23 of which 12 are corporate and commercial branches and 11 for private banking. Eczacžbasž Securities, the oldest securities firm in Turkey, claims 40,000 domestic clients, but has only four branches and two agencies.
If ethics were the only criterion then TEB would lead the market, as indeed it headed Euromoney’s poll last month for the most trusted investment bank or broker in Turkey. So strict are its rules that the bank will not execute sell orders on behalf of clients, in case they become liable for capital gains tax. TEB Research is a separate company in a separate building with no access to the bank’s credit analysis or corporate loan data. It was set up to supply research to Morgan Stanley Asset Management and its first Turkish investment fund, launched in 1989. General manager of TEB Research Zeynep Türkeri says she had a shock herself, moving from the Turkish Industrial Development Bank (TSKB) six years ago, to find that she no longer had access to corporate loan data. Says a source at Türk Ekonomi Bank: “We don’t even tell TEB Research what IPOs we’re doing. It’s an independent think-tank operation.” TEB has supplied the market with some outstanding talent in recent years.
Perhaps next in ethical standards is Garanti Investment Bank (Garanti Yatžržm Bankasž GYB). It insists on Chinese walls between its domestic and foreign business, asset management, and proprietary trading. Employees may trade on their own account only outside stock exchange hours and even then must use another broker. “Our aim is to be the JP Morgan of Turkey,” says general manager Mustafa Gürtin. GYB has been put together as a full-service investment bank. Now, because of the CMB’s new ruling, equity trading must be put through a revitalized Garanti Securities GYB’s 12 stock exchange seats will be added to Garanti Securities’ three. “We think we’re one of the market leaders in equities,” says Gürtin, “particularly in brokerage for foreign clients.” But he doesn’t mean in transaction volume, which he regards as “simply leverage for more meaningful investment banking”.
Eczacžbasž Securities is trying to build itself into a full-service investment bank and sees Global as its chief competition. Coskun Akdeniz, assistant general manager, lost eight of his staff to GYB earlier this year. “Morale was low,” he recalls, “but I came back in six months.” Eczacžbasž Securities, a subsidiary of the Eczacžbasž chemicals group, was established in 1976 and lived through the corporate bond crisis of the early 1980s. In 1994 it began to build its reputation as a research house, benefiting from the input of Atilla Yesilada, formerly of Global, now back as head of research at Global. Eczacžbasž Securities is reckoned to have the best research on Turkish companies: certainly Cüneyt Demirgüres, director of equity research, is regarded as the best stock-picker in Turkey. He came to Eczacžbasž Securities in March this year from TEB, via ING Barings in Istanbul. He believes in brief, up-to-the-minute reports easily digested by busy fund managers. “Investors don’t have time to read extensive reports unless they’re going to buy a majority,” he says. He aims to have a report out within a week of visiting a company and to keep it updated. Eczacžbasž Securities also has a macroeconomic model, run jointly with Bosphorus University “a vector auto-regression model”, says Demirgüres. “Some people are using CapM (capital asset pricing model) but that’s difficult in an inefficient market like Turkey.”
Eczacžbasž has “been around for years”, comments a rival. “They have a lot of small retail clients, they and the mother company have a good name, but they’re not innovative and they have no corporate finance.” Akdeniz is determined to build that up, however, which probably means poaching a team from another firm.
Jumpy market
There are 169 brokers in Turkey, but most are small-scale operations, some set up by market players just to trade their own account. Only about 30 firms have a broad base of retail or institutional clients. Foreign asset managers typically deal through three or four favoured brokers, spreading their orders to avoid moving the market. In such a jumpy market the local players are always watching what the foreigners are doing. “Whenever we buy something,” says Mehmet Akkent at Citicorp Securities, which has three seats on the exchange, “people think it’s going to go up. That’s our disadvantage.” Other brokers that buy mostly for foreign clients, such as Garanti, Koç and Alfa, experience the same problem. The phenomenon explains why Turkish speculators might go through foreign brokers if they wanted to push up the THY stock price.
Research is probably the strongest factor in choosing a Turkish broker. Global led the way. It still has more and better-paid analysts than any other house. Atilla Yesilada, who was at Global until June 1993 and returned there in November 1995, is regarded as perhaps the best writer on Turkey’s macroeconomy. “A good interest-rate call on one T-bill auction can pay Atilla’s salary,” comments a London broker who uses his research. But connoisseurs believe Global’s output has lost its edge recently. They regard TEB’s research as more rigorous and Eczacžbasž’s as more “direct and to the point”.
Ata Securities, a subsidiary of the Ata construction group, produces research in English, Turkish and Japanese. It believes that when Japanese investors become familiar with Turkey there will be a flood. “Nomura has just launched a new open-ended fund for Turkey, in Tokyo,” says Mehmet Sami, senior vice-president at Ata Securities. Ata also opened an office in New York this year and has a marketing arrangement with worldwide brokerage agency Auerbach Grayson & Co of New York. Started in 1991, the 100th Turkish broker to be founded, Ata now has 150 people and according to its own reckoning has ranked second in fixed income and equity trading since 1992. It was the first broker to establish an equity fund, in 1993, and has made a name managing domestic Type A investment funds, which must be at least 25% invested in equities and are tax-exempt, and Type B funds (tax-exempt for retail clients). It will also manage own-label funds for local insurer Isviçre Sigorta.
But the newest kid on the block is Alfa Securities, started by Aziz Karadeniz and his team from Interbank in July this year. “Two weeks ago we were number 11 in equity trading, and this week we were 19th,” said Karadeniz excitedly in early October. Since Alfa trades only for clients it cannot push itself up the league tables with own-account trading. Karadeniz took 30 people from Interbank after suffering too many changes in senior management there. For finance he went to Halit Cžngžllžoglu, who controls Demirbank, which is also active in the securities markets. “Alfa has nothing to do with Demirbank,” Karadeniz insists. “It’s more of a venture-capital investment for Mr Cžngžllžoglu.” Cžngžllžoglu has also invested in Global Securities.
Alfa trades equities and government bonds “our bond desk is already among the top five securities houses,” says Karadeniz and it employs 59 people. Its premises are in the luxury shopping and office complex Akmerkez, in the Etiler district of Istanbul. Rivals wonder how the operation can hope to cover its costs, particularly in sluggish markets. “We calculate,” says one, “that Aziz would need to be turning over 7% of the market just to break even. No securities house does even 5%.” But Karadeniz is bullish: “We’re covering more than 90% of monthly expenditure,” he said in October. “We’re far ahead of our business plan. Our problem is to decide whether we should jump on the bandwagon and grow.” Alfa has TL500 billion ($6.5 million) in capital. Its licence cost around $1.25 million and it needed around $1 million working capital. Karadeniz says recurring costs are around $300,000 a month.
And this is in the teeth of a commission war. Finansbank, which was a leading player in equities until it lost a swathe of people to other firms, has been boosting its volumes for the last four to five months by charging little or no commission. “That’s put them in the top five for equity trading, but I can’t see that they’re making money,” says a rival. Finansbank chairman Hüsnü Özyegin is regarded as perhaps the smartest mind in the market. A commercial banker by training he was general manager of Pamukbank at 32 he set up his own bank in 1991 and was fantastically successful in 1993 and 1994, being the driving force behind the Type A funds. But in 1995 there was an exodus from Finansbank. Traders, researchers and corporate financiers left for jobs in London; half a dozen of its renowned treasury team also left. Finansbank is now trying to broaden its retail base in Turkey, by opening provincial branches. “Hüsnü is very good, very opportunistic, but he doesn’t delegate,” says a rival broker. Kutman at Global owes him a favour. When he was starting out in 1990 and 1991, only Özyegin understood his business and gave him a credit line. “Without him Global wouldn’t be here today,” says Kutman. “I regard Hüsnü as a big brother. He became a shareholder, and he probably made a lot of money from the line.”
The temptation for banks and securities houses in Turkey is to forget their customers and play the game of shorting the dollar and buying Turkish T-bills for their own account at a real yield of 25%. Players of this game were caught out in 1994 when the lira plummeted. But risk managers don’t expect that kind of crisis in the near term because of the very predictable stabilization policy of the treasury and the central bank, and the government’s need to roll over its domestic borrowing. Money supply is carefully monitored and fine-tuned through T-bill auctions while the lira is steadily devalued in step with the inflation rate at present around 85%.
But financial managers with an eye beyond today’s quick profit are concerned with ensuring an income stream once the short-dollar game ends, as it surely will.
Commissions from brokerage are not enough. The future lies in privatizations, IPOs and corporate finance. The PA is shying away from its previous market-driven approach, which was to unload chunks of state-owned companies via block sales. “I believe an equity offering is not the right vehicle for privatization,” says Yalçžn Atlž, vice president at the PA. Such an offering, he says “can be used as an instrument by politicians and bureaucrats. I would rather resolve the problems of the companies with the ministries and municipalities before doing an equity offering. Then the shares would float at close to their value.”
Ugur Bayar, who as privatization chief unloaded the more marketable small companies, such as cement plants, and residual state holdings in already listed companies, wrote recently that he now favours a pause in the programme while the politics are sorted out and the public are properly informed. But the augury is not good. Successive coalition governments have eyed privatization as a one-time source of revenue, but have also fought for patronage of the 50 or so companies whose management they can hire and fire. The public has come to see this as a cynical game which is getting the country nowhere. According to the latest government programme, Etibank, Erdemir, and Türk Telekom are next in line. Six consortia have been invited for the second time to make proposals on Türk Telekom. But left-wing politician Mümtaz Soysal is poised to block the sale again in the constitutional court.
Corporate finance teams looking for a flow of deals may have to go elsewhere for a time. There are plenty of private Turkish companies wanting capital. The Turkish Industrial Development Bank (TSKB) is the envy of many for its combined project finance and corporate finance team. TSKB, a small consortium bank owned by Is Bankasž and the Sabancž group and others, has 60 analysts including 15 project engineers. It concentrates on IPOs and financial restructuring for unlisted companies. “We don’t publish equity research on listed companies,” says Metin Ar, executive vice-president at TSKB. Because TSKB is also a lending bank, “our corporate finance is eating some of our lending business”, Ar admits, “but that’s better than letting Global do it.” TSKB employs 360 people and has a loan book totalling around $300 million. TSKB’s pitch to clients is not to maximize proceeds from stock offerings but to build up shareholder loyalty. It particularly likes deals that involve an IPO and financial restructuring, such as an offering for fruit-processing firm Konfrut Gžda. The IPO was accompanied by a medium-term loan to pay off some burdensome short-term debt, bringing TSKB more business and making the company more attractive to investors. The bank believes it will have done the biggest volume of IPOs of any Turkish house this year.
TSKB hasn’t decided how it will comply with the CMB’s requirement to separate the equity business. It already owns 57% of high-volume securities house Yatžržm Finansman, of which Is Bankasž also owns 30%. “Yatžržm Finansman is pretty active domestically,” says Ar, “but it has no international relationships.”
Is Bankasž may eventually find TSKB and Yatžržm Finansman too serious competition to remain part of the group. TSKB has a well-identified niche and could happily shed its majority shareholder.
But banks such as Is Bankasž, Koç Bank and Akbank which each sit in a cluster of related listed companies, have difficulty persuading the market that they are truly independent. Some investors believe their investment funds carry too high a proportion of listed stocks of companies of their own groups. Others would go further and say inside information is almost bound to be passed between companies of the group. “How can you prevent the flow of information between all the bits of Is Bank and its affiliates?” asks one stock analyst rhetorically. This use of internal company information is so natural in Turkey it is hardly thought of as unsporting.
A possible example occurred with Sabah Yayžncžlžk, which owns Sabah, the very newspaper that took a swipe at Global and Ugur Bayar. In summer 1995 there was a flood at the paper’s printing works in Istanbul and the share price fell 12% to TL800. A local broker reported the following sequence of events: soon after the flood Sevket Bilgin, a member of the Bilgin family, which controls Sabah, began to build up a block of shares totalling 5.8% of the company’s capital. This was dutifully reported in the stock exchange bulletin. Two months after the flood, the bulletin also reported that the printing plant was insured the company had received a TL83 billion insurance payout. Bilgin bought 2.9% more of the stock as this news was absorbed and the share price rose to TL1,250, then sold 4.3%. In March the Bilgin family sold a further 2.7% of its Sabah stake.
Headline: Revolving door at the central bank
Turkey has had four central bank governors in as many years. Before that, during his six-year tenure, Rüsdü Saracoglu went through three presidents, five prime ministers and eight or nine treasury ministers. The post is precarious and surrounded by precarious people.
Today, Saracoglu and one of his successors, Yaman Törüner, have become politicians because, they argue, you can’t change things as central bank governor. Present incumbent Gazi Erçel would agree. His job is to keep the lira and the monetary aggregates stable, coaxing market-driven interest rates ahead of the 80% inflation that he can do nothing about.
It is politicians at the moment an incongruous coalition of religious fundamentalists, Refah, and the right-of-centre True Path Party (DYP) led by foreign minister Tansu Çiller who must implement a macroeconomic stabilization programme to tackle the country’s structural problems and bring down inflationary expectations. The central bank and the treasury’s technicians are just mountain guides, keeping the economy on a slow descent and ensuring it doesn’t fall off a precipice.
“My monetary policy mainly depends on the exchange rate, interest rate and monetary aggregates,” says Erçel. “Any deterioration of the current account could put us in an enormously risky position. If your trade balance is out of control, that’s when your reserves will just disappear in a very short time.
“My monetary programme is on the right track, designed unfortunately according to 80% inflation. I’d always prefer single-digit inflation, but today I’m indifferent if inflation is 70%, 60% or 100%. The most important thing is to establish stability.”
According to bankers and businessmen in Istanbul, the central bank and the treasury are doing a superb job, coordinating the auctions of treasury bills with the central bank’s monitoring of the money supply and control of liquidity through open market operations. They would say that wouldn’t they, carp the cynics. In this inflationary environment, with 25% real interest rates in lira, relative to its stable descent against the dollar, banks and big companies can make good money buying Turkish T-bills with borrowed dollars. They don’t need to lend to customers or invest in industrial growth. What this is doing to the long-term future of the economy is another story. Again, the Istanbul businessmen say the private sector is immune to what the weak government in Ankara is or is not doing. It has its own sources of finance. Meanwhile the black economy trade with Russia and the former Soviet Union, smuggling in the south-east, and drug trafficking is pumping an invisible $10 billion a year into the visible $20 billion trade gap. But think what the country could achieve with strong economic leadership in Ankara. “The situation is unsustainable,” admits a treasury technician. But for the central bank and the treasury team the only sensible course is to maintain stability until a credible medium-term programme begins to bite.
Erçel has learned crisis management the hard way: “First the test, and then the lesson,” he recalls. One crisis came in the first week of July, when the new Refahyol coalition announced a 50% increase in state sector wages, and rolled over one of the
T-bill auctions. “That created extra liquidity in the market,” says Erçel. “We observed that in two days the currency in circulation had increased 60%. We reacted with open market operations and sold dollars in three days I sold $750 million and together with open market operations soaked up about 80% of the increased liquidity. Then we slowly absorbed the remaining 20%. The market at least saw the ability of the central bank to absorb the highest possible liquidity, plus they understood it is firm about the implementation of market policy.”
There have been other flurries in the bond market, such as for example, when Abdullah Gül, Refah’s senior economic minister of state, said the abolition of interest rates was among his party’s goals. Cognoscenti remembered that his party had signed a protocol with its coalition partner to uphold free market principles for the life of the government. The flurry was short-lived.
The technicians at the treasury, in the present climate of cooperation, are happy with the independence of the central bank. But it wasn’t always like that. With a treasury minister or a prime minister determined to force down interest rates or cut government borrowing, the relationship can turn nasty.
That happened to Saracoglu and his immediate successor Bülent Gültekin. Saracoglu points to a chart (see left) which logs the level of central bank advances to the treasury to finance the budget deficit. In August 1991 when prime minister Mesut Yžlmaz opted for early elections the austerity belt was loosened and advances began to rise. Süleyman Demirel, then head of the DYP, came to power with Çiller as his economy minister. Saracoglu was put under enormous pressure by Çiller to finance the budget and lower interest rates. “It took Demirel until May 1992 to see the light,” says Saracoglu, pointing to how the advances then declined, until August 1993 when he had had enough of Çiller and resigned.
Next man in, Bülent Gültekin, could not halt the demand for new advances as Çiller who became prime minister in 1993 when Demirel became president attacked interest rates again, cancelling treasury auctions, which had the effect of flooding the market with liquidity. Then in January 1994, the lira was devalued by 30%. At the same time Moody’s downgraded Turkey’s medium-term debt from Baa3 to below investment grade. Foreign investors withdrew from the T-bill market, Turkish banks and investors rushed to cover their short dollar positions, and the economy was in crisis. Later, three Turkish banks were allowed to fail. The rest had their deposits guaranteed by the government, but they were nevertheless starved of liquidity.
Erçel remembers this time well as chairman of Tütünbank. “For about five months it was a nightmare,” he recalls. “Every day when I woke up I was happy for about five seconds, until I realized I was facing another day. My bank had $600 million in foreign exchange deposits and about 250,000 deposit-holders. Slowly and surely people were coming to withdraw their foreign exchange, and Turkish lira, from my bank. It was very difficult to supply the liquidity, because liquidity was very short, even though the deposits were guaranteed. We had to supply the deposits, whatever the cost. Some days we earned money, some days we lost.”
“Gültekin resigned five days after the devaluation,” recalls Saracoglu. “He should have resigned before.” The root of the problem then and now, says Saracoglu, is the excessive power of the treasury minister. “The discretionary powers given to the minister are way too broad. They have been used to do actions which are politically motivated,” he says. Saracoglu, who was a minister of state in the previous ill-fated coalition of his Anavatan (Motherland) Party and the DYP has plenty of ideas for reforming the central bank, the banking system, insurance, social security and the privatization process. For the banking law, “getting rid of the phrase ‘minister’ would be a huge step forward”, he says. “Banks have to be regulated by a technical body, not a politician.”
Gültekin’s successor Yaman Törüner did strike a couple of blows for central bank independence: “I made two conditions before taking the governorship,” says Törüner, “to change the law to limit central bank advances to the treasury; and to free foreign exchange and interest rates.” He became governor in February 1994. In a month and a half he had changed the law: for 1994 the central bank could finance only 15% of the budget, for 1995 the limit was 12%, this year it is 10%, next year 6% and in 1998 it must hit 3%. A glance at Saracoglu’s chart shows that advances declined steeply until March 1995 then rose somewhat before the December 1995 election. Törüner also congratulates himself for bolstering the central bank’s reserves from a low of $3 billion to around $18.5 billion at the time he left, in November 1995.
Törüner says he resigned “because I decided to become a politician. I did whatever I could do at the central bank, but reducing inflation is the problem of politicians.” He’s now a parliamentary deputy for the DYP. Opponents suggest unkindly that he was found a safe seat to give him parliamentary immunity from attack through the courts. Almost every high-profile figure in Turkey is facing a court action for corruption, brought or threatened by political opponents. Çiller has two hanging over her, involving allegations of self-enrichment while in office, and interfering with public tenders. Prime minister Necmettin Erbakan has also been accused of self-enrichment. Saracoglu is under investigation for abusing the privileges of office. Most pragmatists see these cases as a game of tit-for-tat: whether there was or was not any corruption is incidental. “If these people are seen to be doing their job effectively, the accusations soon run out of steam,” says a senior Turkish banker.– DS Test of independence central bank advances to finance the budget
Headline: Little stability, lots of profit
Source: Euromoney
Date: November 1996
Author: Metin Munir
Old Turkey hands reckon you can’t judge investment prospects from outside. Once in, you are likely to perform well, they say. But the country’s image is so bad that new inward investment is at a standstill. Metin Munir reports.
There are few countries which have as bad an image among foreign investors as Turkey, but it fits badly with reality. Viewed from a distance the country seems to be wreathed in a mist of bad news and misconceptions. According to foreign businessmen who live there this is probably the single biggest reason why so little foreign direct investment is being made and why the trickle has been dwindling recently because of political uncertainty.
Markos Komondouros of SBC Warburg, who has been living in Istanbul for nearly three years, says: “Turkey has a serious image problem. Its image does not reflect the reality of Turkey but it is keeping investors away”.
“Never have I heard a good story told worse,” says David Edgerly, Istanbul general manager of Alliance Capital Management. “Looked at from the outside everything is blurred by political instability, macroeconomic imbalances, corruption and police over-reaction. But you have to look at the whole mosaic, which reveals itself only when you live here for a while.”
One crucial part of this is that foreign multinationals operating in Turkey have always managed to turn a profit. The fact that the average per capita income is $2,000 is misleading. The distribution of wealth is uneven and one-fifth of the population enjoys an average income adjusted for purchasing power of $14,000. There’s a great deal more wealth about than is made public: tax evasion is common and vast undeclared resources which do not get calculated in the nation’s accounts are spread throughout society. The market is large and dynamic and just beginning to enjoy a consumer boom. Of the population of 60 million, 60% are aged between 15 and 30. There are 11 million households and almost a million marriages a year. The inception of the customs union between Turkey and the EU at the beginning of the year has enhanced the country’s strategic position as a bridge to Central Asia, the Middle East and the Black Sea.
“Turkey is a country for those who want to make money,” says Edgerly. “It is like riding a rocket ship. If you want stability invest in Switzerland where they will make you pay for the privilege. If you want to make money come to Turkey.”
Relatively few have heeded this call: the inflow of new investment has been small considering Turkey’s market size. Countries with GNPs of Turkey’s size in Latin America and east Asia attract foreign investment of between $5 billion and $15 billion a year, says Yavuz Canevi, one of Turkey’s most respected bankers and chairman of the Foreign Investors Association (Yased). Turkey, by contrast, attracts a paltry $1 billion, less than 1% of GNP. Canevi laments that the hopes created by customs union have been dashed by political instablity and that new foreign investments in Turkey are at a standstill.
Yased calculates that the ratio of new foreign investment to total foreign investment has been declining rapidly since 1994, when it was 43%. The figure was 11.5% in 1994 and 6.5% in 1995. For the first time this year there was also a decline in overall permits issued by the prime minister’s office. At the end of August authorized investments stood at $1.04 billion compared with $1.33 billion at the same time last year. In addition to this, some companies already operating in Turkey have started postponing or suspending renovation and expansion plans.
“The incessant crisis situation and instability are the causes of these negative deveopments,” says Canevi. “They attest that there is no confidence left in Turkey’s current structure. It is impossible to expect foreigners to invest in a country where the chairman of the Confederation of Employers Union has gone on record as saying that his members have got no appetite left for investment.”
Because there is a lot of suspicion and uncertainty surrounding the intentions of Necmettin Erbakan, the country’s first Islamist prime minister, the situation is unlikely to improve in the short term. His visits to Iran and Libya, two countries ostracized by the West because of their alleged support for terrorists, have worsened an already bad image in the West. His messages concerning the economy are paradoxical and often nonsensical. Despite pronouncements to the contrary, Erbakan does not have the political clout to realign Turkey’s foreign policy or dismantle its free-market economy. His fundamentalist Welfare Party won 22% of the popular vote and has only 159 seats in the 550-member national assembly so his government can survive only as long as he toes the line drawn by his coalition partner, the pro-west and liberal former prime minister Tansu Çiller. His pre-election promises for example, abolishing interest on loans and deposits in line with Islamic principles, quitting the EU customs union and introducing an Islamic dinar to replace the Turkish lira have no chance of being fulfilled.
Springboard
For most Turks the question is not whether Erbakan will turn Turkey into another Iran but whether he will be able to avert the lurking economic crisis and press ahead with much-needed structural reforms. Not many people have confidence that he will achieve much here. He does not understand how the modern world works and is ignorant of the workings of the Turkish economy.
Businessmen in Turkey Turkish and foreign have learnt to live with constant political uncertainty and macroeconomic imbalances and prosper under the most adverse conditions.
“Turkey is a phenomenon,” says Christoph Urban, general manager of the operations of German electrical engineer Siemens in Turkey. “When you are far away you don’t see the strengths. You don’t see that you can do business very well under these circumstances.”
According to Urban, prospective foreign investors look at the general political and economic picture in Turkey rather than studying the records of sucessful companies operating there. Siemens has been trading in Turkey since the 1920s and manufacturing there since the 1950s. It has never lost money. “Siemens Turkey, in terms of relative profit, is one of our most profitable operations in Europe,” says Urban. “Invest, invest, invest is our motto.”
In 1994, when Turkey was hit by one of its worst economic crises, Urban was negotiating to buy one of Turkey’s largest household appliances companies. The takeover, which cost Siemens-Bosch $140 million, was completed last year.
“For us Turkey is not just a large market with 60 million-odd people but a springboard to all these regions beyond,” says Urban. “It was not Siemens AG Germany that built the new offices in Kyrgyzstan, Uzbekistan, Kazakhstan, Azerbaijan and Turkmenistan. We have done it and do it from here. Part of the Middle East, Bulgaria and Romania, where a joint venture has recently been started, is also under the aegis of the Istanbul operation.This is our Eurasian dream. It has already started and I think we are on the right track.”
Siemens’ experience is not unique. Companies as diverse as Citibank, Tetra Pak and Sheraton have also succeeded there. One of the latest to make a flying start was Telecom Finland, which is the biggest shareholder in cellular telephone operator Turkcell. Turkcell became the fastest-growing of Telecom Finland’s investments as soon as it started operating in Turkey.
On the other hand, Telecom Finland’s experience of investing in Turkcell (see box) throws light on why some companies are not keen to even consider investing in Turkey. In general terms, there are many other countries which, if not as profitable, are less hassle to invest in and easier to understand. For mostpotential investors the mist of political instability and macroeconomic imbalances covering Turkey is too impenetrable. This seems to be true even for Siemens when it seeks to persuade its German principal that further expansion is justified. “When I ask my corporate office for another Dm100 million to invest in Turkey,” says Urban, “they look at me and say: ‘Don’t you know there is competition?’ And I see my German colleagues flying past Turkey, going to the Far East, to Malaysia, to Singapore and to China.”
Headline:Turkcell’s line goes dead
Source: Euromoney
Date: November 1996
Author: Metin Munir
Turkcell was one of the world’s fastest-growing cellular telephone networks when last August the Turkish government forbade its making new sales. This was ostensibly because Turkcell a Turkish, Finnish, Swedish joint venture which has accounted for more than 10% of investments made in Turkey in the past decade had not fulfilled its contractual obligations. It had allegedly sold more licences than its infrastructure could handle, thereby causing hardship to its customers. Unfortunately these included communications minister Ömer Barutcu. Industry sources say the real reason was political.
“I was horrified when I heard the news,” says Leena Suhonen, the Turkcell board member who represents Telecom Finland, the biggest partner, with 34% of the equity. Turkcell’s other shareholders include Ericsson Telecommunications (15%), Çukurova Holding owned by reclusive Turkish billionaire Mehmet Emin Karamehmet (15%), and Turkish businessman Murat Vargi (14%).
There were good reasons for Suhonen’s reaction: Turkcell had captured nearly 70% of market share and was selling between 30,000 and 40,000 licences a month just before new sales were suspended, compared with 10,000-15,000 the previous year. “In 1994 I laughed a little when I heard the estimates of my Turkish colleagues,” says Suhonen. “But that year Turkcell became number one in sales in Europe. Similarly, at the beginning of 1995 their estimates were high. But by this time I knew more about Turkey and the Turks, so I wasn’t laughing.”
By August this year Turkcell had 445,000 subscribers and was the world’s sixth-largest cellular telephone company. But on the 14th, Turkish Telecom (TT) wrote to Turkcell general manager Cüneyt Türktan informing him that there would be no new subscriptions because Turkcell had outgrown its infrastructural capacity. Industry sources say TT, a state agency awaiting privatization, wrote the letter under pressure from Barutcu. One source says the minister wanted to give Turkcell’s less successful rival Telsim a chance to catch up.
In the 1980s, when the Turkish government opened the market to cellular telephones, it was decided that licences would be given to two companies. International bids were invited and licences were awarded to Turkcell and Telsim. Telsim is owned by a consortium led by the local Uzan family (the Rumeli Group) and includes Simko Detcon (Deutsche Telekom’s consultancy arm), Siemens and Alcatel. Presently, though, the Uzans’ stake is more than 90%.
The Uzans are a much-feared, secretive clan who own a diversified conglomerate that includes TV networks, banks, hydroelectric dams and cement companies. They achieved international notoriety when they gained control of the privatized Çukurova hydroelectric plant and started hiving off funds. The foreign institutional investors who had large holdings in the company kicked up a fuss, but to no avail.
Last year the government suspended Telsim’s telephone licence sales, claiming that it was attempting to defraud TT of its share of revenues TT received 65% of revenues in 1994 and 33% in 1995. It’s probably no coincidence that this came in the wake of a lengthy smear campaign conducted by an Uzan network, Star TV, against then prime minister Tansu Çiller and her businessman husband. Nor is it insignificant that the decision to halt Turkcell’s sales came soon after Star TV halted its tirade against the Çillers.
Turkcell’s Turktan concedes that at about the time of the ban there were isolated infrastructure problems but, as Telecom Finland’s Suhonen points out, there will always be holes in a developing cellular network it’s true even of relatively well established systems in Scandinavia.
A senior Turkcell executive says that after Telsim resumed operations: “Word reached us again and again that it was our turn to be shut down. They wanted to let Telsim bridge the gap between us and them and they extracted a political price from the Uzan group for this.”
In just over two years the partners in Turkcell had put in $350 million, making it the biggest single foreign investment since 1994. When the ban came into effect a further $350 million investment was in the pipeline. After it, Turkcell petitioned TT to conduct an inquiry and produce a report on its infrastructure. TT’s report, according to Turkish daily Hürriyet, was positive but did not impress Barutcu. “Reports don’t impress me,” Hürriyet quotes him as saying. “My method is to pick up the telephone and ring. If I can get through I will be satisfied and lift the ban.”
Last month the government told Turkcell it could resume selling licences. There was, however, another shock for foreign investors when Barutcu said he would not recognize the agreement signed by his predecessors. Under this the two operators have options to buy licences for 25 years at $500 million to be paid in four instalments over two years. Barutcu now says the companies must pay the full $500 million up front.
