Cablegate: Stock Exchange Chief Eager to Make Istanbul An

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SENSITIVE
C O R R E C T E D COPY (PARA 09)

SIPDIS

E.O. 12958: N/A
TAGS: EAGR ECON EFIN EINT ETRD PREL TU
SUBJECT: STOCK EXCHANGE CHIEF EAGER TO MAKE ISTANBUL AN
INTERNATIONAL FINANCIAL CAPITAL

1. (U) Summary. During a January 27 meeting with
Ambassador Jeffrey, Istanbul Stock Exchange (ISE) Chief
Huseyin Erkan offered his views on how Istanbul can become a
major financial center for Turkey and the region. Erkan
emphasized that commercial banking alone, even with an
offshore component, is not sufficient; in order to build a
true financial center Istanbul needs to enhance its capital
markets infrastructure. Erkan ultimately sees Istanbul both
as the center of a country-wide financial "regime" in Turkey
and as a major international center in its own right.
Crucial to this new regime would be a fully developed
commodities futures market which would serve to securitize
key Turkish commodities like hazelnuts, gold and fuel and
thus give Turkish producers a more rational price than that
given by the state agency and foreign markets. The
Ambassador and Erkan also exchanged views on the U.S.-Turkish
bilateral commercial relationship, and discussed the
potential for partnership in the capital markets sector. End
summary.

WERE YOU LONG TURKISH STOCKS IN 2009?

2. (SBU) Commenting on the ISE-100's more than 100 percent
appreciation in 2009, Erkan observed that the index is
heavily weighted in the financial sector (52 percent), and
that early in 2009 the market began to discount the strength
and profitability of Turkish banking, and also the likelihood
that an economic recovery in Turkey would begin later in 2009
and continue into 2010. Also contributing to last year's
stock surge were the global wave of financial liquidity and
the fact that Turkish stocks had been hammered mercilessly in
2008, leaving them at a low base. The ISE head was still
optimistic about stocks in 2010, noting that the ISE's
price-to-earnings (P/E) ratio is about 16, well below that of
many other emerging markets. Tempering this optimism
somewhat was Erkan's view that unemployment in Turkey will
remain high this year, thus threatening the sustainability of
both the economic recovery and the bull market in stocks.
FINANCIAL PARTNERSHIP

3. (SBU) Regarding potential coordination and partnership
between American and Turkish financial markets, Erkan
reported that he communicates regularly with the New York
Stock Exchange and the Chicago Board Options Exchange. The
ISE, he added, needs international partnerships to introduce
new technology for trading and clearing transactions, and to
expand its financial product menu. It would welcome closer
cooperation with U.S. exchanges in this regard.

THE ISTANBUL STOCK EXCHANGE

4. (U) Chairman Erkan also noted that the ISE needs a
greater number of listed companies (Note: Only 120 of
Turkey's largest 1000 companies are listed with the ISE, with
banks heavily represented in the mix. Also, the free float
of these companies is very small -- only a few have made more
than 50 percent of their shares available to the public. Of
the remaining 880 companies, many are family owned or
represent cooperatives, such as the sugar beet industry. End
note).

ISTANBUL: INTERNATIONAL FINANCIAL HUB?

5. (SBU) Chairman Erkan stressed that banking alone will not
make Istanbul a true financial center. He envisions Turkey
in the future as a country-wide financial regime, with other
cities like Izmir and Adana as key districts and Istanbul as
the epicenter (think New York vis-Q-vis Chicago, Houston,
etc.). Presently missing from the financial mix, the bourse
chief noted, are commodities, which need to be "securitized."
For example, Turkey is the world's leading producer of
hazelnuts, but the price of hazelnuts is set in Hamburg, and
this puts local producers at a disadvantage. He emphasized
that a modern, electronically connected spot and futures
derivatives market with standardized contracts would lever
the financial system and release economic potential. Erkan
postulated a financial leverage ratio of 10-to-1, which would
create a large pool of liquidity and foreign exchange that
industrialists could use to expand their businesses. He
noted that gas, oil and electricity all have potential as
traded commodities in Turkey.

NEEDED: TAX INCENTIVES AND LICENSED STORAGE FACILITIES

6. (SBU) To stimulate activity in Turkey's numerous --

roughly 100 - but largely inactive commodity exchanges, Erkan
asserted that Parliament needs to complete the new tax law
with incentives for commodities futures trading. Futures
contracts in Turkey are subject to a withholding tax as well
as taxes on banking and insurance operations. The futures
industry in Turkey hopes that a new tax bill would eliminate
these transactions charges, but given the government's tight
fiscal constraints it is not certain that this will happen,
according to Erkan.

7. (SBU) Integral to Istanbul's future as a financial
epicenter would be a modern trading infrastructure and a
comprehensive national expansion and privatization of
Turkey's licensed storage system, Erkan maintained. (Note:
A licensed storage law has existed for some time, and the
government recently provided new tax incentives which exempt
licensed warehouses from corporate and income tax until 2014.
Most of the large storage facilities in Turkey are owned by
the government, but they do not serve as licensed warehouses
in the sense that they have no contract with a spot commodity
exchange or a derivatives exchange. Statistics about the
capacity of existing warehouses in Turkey are not readily
available, but industry sources believe there is still room
for additional storage facilities and that there is potential
for private sector investment, especially if the new
warehouses were to be integrated into a modern functioning
capital market. End note).

8. (SBU) According to Erkan, TOBB (Union of Chambers and
Commodity Exchanges) is a player in licensed storage in
Turkey, and along with TMO (Toprak Mahsulleri Ofisi, the
Turkish Grain Board) would almost surely be involved in this
process: Erkan likened TOBB and TMO to "two dinosaurs" that
have to be accommodated. TMO is the leading institute in
cereal marketing, acts as a buffer stock agency to stabilize
producer and consumer prices, and provides storage capacity
for agricultural products such as grains. Erkan stated that
TMO does not price agricultural products competitively, a
situation which hopefully the new financial regime would
correct.

9. (SBU) Comment. One of Turkey's success stories has been
the effectiveness of BRSA, Turkey's Banking Regulation and
Supervision Agency created after the 2001 crisis, in holding
Turkish banks to a high standard of capital adequacy and
creditworthy lending. BRSA set Turkey's required capital
adequacy ratio at 12 percent - 50 percent higher than
international Basel standards - and banks in the Turkish
system now average about 14 percent. BRSA regulation, the
cleanup after the 2001 crash and the nascent state of the
mortgage market in Turkey kept Turkish banks out of the
inadequately regulated derivatives trading and distribution
that crippled Western banking in recent years. Erkan's
desire to bolster Istanbul's role as an international
financial hub complete with stronger commodities markets will
require the Turkish financial system to get into commodities
trading, and necessitate a new system of regulatory checks
and balances for these markets that is as effective as BRSA
has been in banking, including the creation of a commodities
futures trading authority. New legislation would be required
to create true futures trading and, even more important, to
guarantee that the government would not use TMO's purchasing
authority to distort commodity price discovery. End comment.
WIENER

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