Of late, the term “financial center” has become a buzzword for emerging markets gearing themselves towards undertaking hefty projects in financial industries and real estate.
Tax incentives, legal system overhauls, rebates for businesses and labor market reforms are at the top of the to-do list for these emerging market countries in an effort to entice foreign institutions to divert funds in their direction. Another tool, the so-called investment promoters, usually funded by governments, utilize their significant budgets to liaise with key CEOs, bank officials and fund managers in order to secure long-term resources for their clients. These efforts seem to be producing results. Shored up by foreign investors, private equity markets in these countries are building up momentum. Local banking is enjoying an influx of capital, and securities markets as a result take on both diversity and liquidity. From the heights of virtual reality the outlook appears to be quite favorable. The flipside, however, points to economic ups and downs as well as rivalry and stiff competition among peers in the not so distant future.
Vicious vs. virtuous circle
It goes without saying that the strength of a financial center is inextricably intertwined with global as well as local economic circumstances. Once indicators turn bullish on economic prospects, inflows of capital and resources are quickly initiated. When negativity rules the markets with a sense of mistrust, a simultaneous feeling of lagging confidence emerges and a sell-off commences. Stability and the rule of law add to this recipe a pinch of flavor that can either sustain the financial center in times of crisis or precipitate its downturn.
History is full of examples that illustrate this example all too clearly. Yet the recent economic downturn is far too artificial. The financial recession has held back economies from posting positive growth rates. Countries are dismayed with rising unemployment, soaring deficits, growing debt and inertia in commercial activities. Banks have gone under or been bailed out by taxpayers’ money. Central banks have been called to attention. In most cases, they have opted for the lesser of two evils and pumped in liquidity to rekindle businesses. The misty skies of economic uncertainty have obscured our vision and as a result, commotion and confusion have become widespread.
The financial centers that managed to accumulate both liquidity and trade within them have just striven to stay afloat. Even some of these global cities with high-rises and luxury malls have faced the threat of being deserted by investors. The peril was so immense that the financial debacle has taken a toll on global trading. The United Nations Conference on Trade and Development (UNCTAD), in its notorious World Investment Report, estimates that the global flow of direct investments will bounce back to $1.5 trillion, its pre-crisis level, only in 2013. It will still take valuable time to make up losses suffered within this period unless the tremor is still far from over and there is yet more to come.
Emerging markets, however, have resisted the slump with their intrinsic ability to ramp up for a faster pace of economic growth. This does not necessarily mean that the emerging countries are bullet proof to financial recession; yet, they have evidently been more able to counter the negative effects by scrambling onto the fiscal robustness provided by this higher level of growth. The International Monetary Fund (IMF) reports (World Economic Outlook, 2011) that core advanced states have been extremely busy with cleaning up the mess “in house” so that global growth is still resting on the shoulders of emerging countries. Sovereign risk in the euro area has blown all future forecasts as government debts are becoming detrimental to the member countries’ economic outlook. Rating agencies have recently become persistent in pursuing these once high-flying countries that now create risks for sustainable investments. These are only a few raisons d’être for institutions to consider injecting more funds into the emerging market space.
An international consultant’s analysis delivers the following prospects to investors: The global financial assets today total around $200 trillion and emerging markets constitute 21 percent of this total. By 2020, they will have a 30 percent share of the projected total value, $370 trillion (McKinsey, December 2011). The trajectory is fascinating and very much in line with 2011 World Investment Report estimates on foreign investments where it is stated, “Developing and transition economies together attracted more than half of global foreign direct investment (FDI) flows.”
Emerging markets are literally emerging onto the stage; they are growing in prospects and rising in perception. Against all odds, the financial slump has turned out to be a virtuous circle for these countries as it coincidently ushered in a vicious cycle for most of the advanced countries.
The stakes justify the competition
Scaling up on the development trend, emerging markets have taken on the added responsibility of catering to the needs of investors. They elicit experiences from global financial centers such as London and New York and put up lenient structures to govern financial transactions. What is at stake cannot be dismissed. If McKinsey is right on target, $100 trillion of assets is what the emerging countries are competing for in the decade ahead.
The question is: What does it take to become a financial hub? London-based rating firm Z-Yen has a long list. Taxation, business environment, market access, regulation, a level playing field, human resources, governance and infrastructure are only a few of the items which come to the fore to make a financial center competitive. This grocery list of to-dos, however, remains supportive only of the essential characteristics which focus around liquidity, capital flows, international banking and securities trading. It is interesting to see that the US as well as China has more of the 100 largest corporate enterprises than Britain, but London is by far the leading financial center on many counts. A bit of stereotyping might be at work in this context. Money attracts money. It likes frequent activity for better value and predictability coupled with ease of doing business. It is that simple, and a hopeful financial center will need to subscribe to this mantra if the desire is to become more competitive; the stakes are so high that it literally justifies the stiffest competition.
As those who travel often to developing countries will know, there are many places in these parts of the world endeavoring to create a higher level of inflow of global funding. Sao Paolo, Singapore, Seoul, Mumbai, to name but a few. The merits of these various locations are within close proximity to one another as regional dynamics play a key role in presenting advantages. Another raw impression is how flock theory applies at a fascinating pace for these locations. A lead-lag relationship is in play among bankers, money managers and equity investors to follow each other to invest in one place or another. Apparently, İstanbul has not been called upon in these circles as frequently as some other cities. Instead, it has a reputation for historic and geographical gems such as the enchanting Bosporus, Blue Mosque, Topkapı Palace, Grand Bazaar and Hagia Sophia.
There are still fairly good reasons to buy into the fact that this will soon change. First, give the numbers a once over. There are 13 million people living in İstanbul and the median age of the country’s population is 29, which is amazingly young vis-à-vis its European counterparts. The city of İstanbul itself is the 45th largest economy in the world. A quarter of the total Turkish domestic output is produced in and almost half of the total exports and imports are conducted out of İstanbul. A total of 48 banks are active in Turkey, and all but a few are headquartered in this financial capital. İstanbul Ataturk Airport is the eighth busiest transfer hub in Europe. İstanbul was a 2010 European Capital of Culture, and it hosts more and more international gatherings every year.
The overall country’s economic progress is what can only be termed as outstanding in light of the current world economy. Turkey, an advanced emerging economy as recently indicated by the FTSE Group, posted 8.9 and 8.5 percent GDP growth consecutively in 2010 and 2011. Sovereign investments are a safe bet, whereas the debt to income ratio is below 40 percent. Banks are profitable and sitting on cash. Capital adequacy has been off the scorecard for almost a decade. Turkey did a great job by not kicking the can in the post-2001 confusion in the markets. Instead, it took its homework seriously and cleaned up the bad assets undermining the balance sheets of the banks and set very high standards for the industry.
As for securities, the İstanbul Stock Exchange (İMKB) leads the region in equity trading as two-thirds of the free float is logged into by foreign investors. The fixed income market is the eighth largest organized venue globally, as announced by the World Federation of Exchanges. A very active repo trading market is proof as to why investors place their confidence in the exchange markets. Partnerships with regional and global exchanges add further color and tone to the picture. The İMKB management created an alliance with the national regulator by targeting more blue chips for public listing as the retail side of demand has been given priority of their own through financial literacy programs. It is clear to see that these programs are bearing fruit; the İMKB hosted 27 initial public offerings (IPOs) in 2011, and had 50-plus corporate bond issuances.
Furthermore, the government has an ambitious plan to consolidate spot and derivatives trading leading up to an all-inclusive platform of multiple asset classes in large volumes. The plan has recently been further endowed via tax incentives for equity funds and rebates for pensions that have a major potential to boost institutional investment. The Treasury is spearheading efforts focused on Islamic investment by embarking on sovereign “sukuks.” The new commercial code comes with a reforming agenda to extend the use of corporate governance and international financial standards.
When we take a look at political and societal ownership, we see it is also reaching new heights. The newly created Ministry of Economy is fully dedicated to foreign trade policy. Government members along with large groups of Turkish entrepreneurs fly to even the tiniest countries to investigate business opportunities. Chambers and business clubs such as the Turkish Confederation of Businessmen and Industrialists (TUSKON) are diligent in their efforts to build conduits from China to Argentina, Malaysia and Nigeria. The Foreign Economic Relations Board (DEİK), a non-profit arm of Turkish Union of Chambers and Commodity Exchanges (TOBB), organizes interactive meetings around the world. A broadening range of visa-free countries as well as bilateral tax agreements are vivid examples of the new style of efforts being made to reach out internationally. The investment promotion agency is home to 12 different languages available to take any call regarding business advice. It should be clear enough to say that the commitment is in place and these actions warrant full attention. Turkey is aware of what it takes to become a financial center and is ready and willing to face it. This is the Turkish way, and at its heart is İstanbul. The city banks of the past have seized the moment and are looking to the future. İstanbul ostensibly has more than the promise of a regional and historic gem. It is passing on a provocative invitation for those seeking a high return on an investment. In other words: There is a sweepstake deal being offered for a five-star, all-inclusive resort, and the Orient Express to the resort is departing shortly. You’d better hurry before every seat and every room is sold out.
*Mustafa Baltacı is executive vice chairman at the İstanbul Stock Exchange.