n a glittering and packed conference room in Washington last week, a group of thought leaders, bankers, asset managers and regulators gathered to discuss the ambitions of Asia Minor and its plan to rebuild its business capital, Istanbul, as a finance center.
Turkish Deputy Prime Minister Ali Babacan delivered a confident entry on the achievements so far and on how “fiscal prudence” would still be the highlight in the years to come. His message was clear: Turkey is fully-committed to a financial reform program that will structure Istanbul as a regional hub.
Discussants in a following panel rolled out the pros and cons, with a majority appearing bullish that Istanbul stands a big chance. This is despite challenges.
If one starts from what has been put in place, there is a long list. The country now has a renewed framework for corporate practice, entrepreneurship, banking and capital markets. This is due to fundamental changes in legal pieces that were believed to hamper market efficiency.
Within a day, a start-up can be registered and put up for business. This simple procedure used to last months in the former mechanics. Corporate governance has become a standardized practice even for non-public enterprises. This is cherished by private equity investors who have recently poured billions of dollars of direct investments into the country. Taxation is conducive and incentivized for blossoming businesses. Corporate levies are flat and competitive. International corporates are blinked in by being offered a near-zero tax environment. The government has announced that it will embark on a broader tax policy overhaul. Growth has been sustained and job creation is firmer. Fiscal balance is continuously achieved. The public debt stock is almost half of what many European countries run. Banking is a high-return business practice with larger growth potential. The thriving middle class is the primary leverage to drive financial services further in depth and size.
Such facts and results are evidently playing into the hands of Istanbul. Turkey earned its long-awaited investment grade earlier this year. Istanbul has leapfrogged some other regional competitors on the global financial centers index and jumped in ranking this year to 44rd from 74th in 2010.
There is, however, a spring of whole-hearted nominees striving to be the frontrunner in this neck-to-neck contest that scoops a vast region from the London-Frankfurt frontline to the backdrop of Singapore-Hong Kong. Such challenges are fully charged, and is ubiquitous via ongoing policy actions.
Moscow has developed a broad mandate, as has Dubai. Warsaw is capitalizing on its initial listing breakthrough. Vienna relies on its business friendly environment.
Despite action, issues are also omnipresent. The Moscow Exchange, after a meticulously engineered merger, suffered a soft blow in its IPO that was kept buoyant by a covert governmental buy-out. The Vienna Exchange has announced a derivatives market switch-off due to unfavorable competition.
Warsaw is hanging on the pensions that are bound to have more leniency for non-equity investments. Dubai has seamless infrastructure; yet not-very-strong liquidity in the secondary markets points to a challenge to be addressed.
Istanbul presents a marketable case; this appeared the consensus in the crowd. “Things are being done at an enormous pace. This is what we bought in,” a Nasdaq representative argued, referring to the investment of his group in Borsa Istanbul which came to birth earlier this year after a powerful drive to consolidate marketplaces. The Nasdaq solution will expectedly shore up the new capital markets strategy to facilitate cash and derivatives trading along with post-trade. The Borsa Istanbul chairman has a long-shot for his targets. “We are number 6 in turnover among the emerging markets, and 4th in fixed-income trading globally. Financial and commodities derivatives, which are partially under construction, will only help us carry on up the rankings. The goal is to join the top-ten financial centers club in ten years,” Mr. İbrahim Turhan loudly expressed in the meeting.
Notwithstanding the enthusiasm, various issues remain to be prescribed. The current account deficit, thanks to energy imports, embeds downside risks on growth efficiency. Low savings are not helpful – however, recently introduced pension incentives might prove a workable cure for this conundrum. Currency moves are also under watch by jittery investors.
A separate point of concern in the discussion was noted as domestic political agenda that has recently turned to be an interest for international media. It was argued that Turkey requires a fence-mending crescendo to attain to more buy-ins for its internal polity. Mr. Babacan put preemptively forward that his government is conscious of the developments. “Democratic reforms will remain paramount,” he reasoned. “The number of foreign visitors to the country has gone up compared to the same period last year; a reliable indicator displaying an upbeat foreign environment.”
There is arguably no Wunderland for investors to land in when it comes to financial centers. Based on such premise, Istanbul has a cogent case alongside notable others. The more certainty is that Eurasia will end up drawing more spotlights, given the particular progress in financial services as well as the ambitions to further them in this part of the world.
*Mustafa Baltaci is secretary general at the Federation of Euro-Asian Stock Exchanges, a member-based international non-profit representing 35 exchanges in the broader Eurasia region