turkey country report 2009

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    TSPAKB The Association of Capital MarketIntermediary Institutions of Turkey

    CAPITAL MARKETSSeptember 2009

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    TURKISH ECONOMY & CAPITAL MARKETS

    Edited by Alparslan Budak

    Written byEkin F k rkoca

    Contributed byEfsun Aya De ertekin

    Print: PrintcenterTel.: (212) 371 03 00Fax: (212) 280 96 04

    Istanbul, September 2009

    TSPAKB Publication No. 43

    ISBN-978-975-6483-23-7

    For online version please visit TSPAKBs website at www.tspakb.org.tr.

    This report has been prepared by TSPAKB for information purposes only. TSPAKB exerts maximum effort toensure that the information published in this report is obtained from reliable sources, is up-to-date andaccurate. However, TSPAKB can not guarantee the accuracy, adequacy or integrity of the data orinformation. Information, comments and recommendations should not be construed as investment advice.TSPAKB does not accept any responsibility for any losses or damages that could result from the use of anyinformation in this report. This report may be used without prior permission, provided that it is appropriatelyquoted.

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    TSPAKB 1

    TABLE OF CONTENTS

    TURKISH ECONOMY ............................................................................................3

    PUBLICFINANCE ....................................................................................................................3MONETARY ANDEXCHANGER ATE POLICIES............................................................................... 4INFLATION ............................................................................................................................5GROWTH ANDEMPLOYMENT.................................................................................................... 5FOREIGN TRADE ANDFOREIGN DEBT........................................................................................6

    TURKISH CAPITAL MARKETS...............................................................................9

    R EGULATORY STRUCTURE OF THEFINANCIALS YSTEM.............................................................. 10R ECENTDEVELOPMENTS INC APITAL M ARKETS........................................................................ 12

    1. Equity Market ......................... .............................. .............................. ................................ 12 2. Bonds & Bills Market............ .............................. .............................. ............................. ....... 13 3. Futures Market......................... ............................. .............................. ................................ 14 4. Money Market .......................... .............................. .............................. ............................... 14 5. Asset Management... ............................ ............................. ............................. ..................... 15

    AGENDA OF THE TURKISH CAPITAL MARKETS.................................................. 16

    INTRODUCTION OFNEW PRODUCTS....................................................................................... 16H ARMONISATION WITH THE EU R EGULATIONS......................................................................... 16ISTANBUL AS A FINANCIALCENTRE......................................................................................... 16

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    2 TSPAKB

    ABBREVIATIONS

    Term Definition

    AIRCT The Association of the Insurance and Reinsurance Companies of TurkeyBAT Banks' Association of TurkeyBRSA Banking Regulation and Supervision AuthorityCBRT Central Bank of the Republic of TurkeyCMB Capital Markets BoardCRA Central Registry AgencyFDI Foreign Direct InvestmentGDP Gross Domestic ProductIGE Istanbul Gold ExchangeIMF International Monetary FundISE Istanbul Stock ExchangeMCap Market CapitalizationMoF Republic of Turkey Ministry of FinancePBAT Participation Banks' Association of TurkeyTakasbank ISE Settlement and Custody Bank TL Turkish LiraTreasury Republic of Turkey Prime Ministry Undersecretariat of TreasuryTSPAKB The Association of Capital Market Intermediary Institutions of TurkeyTurkDex Turkish Derivatives ExchangeTurkstat Turkish Statistical Institute

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    TSPAKB 3

    TURKISH ECONOMY

    This report begins with an analysis of the performance of the Turkish economy in the last decade,continues with recent developments in the capital market, and finally lays out the prospects for the

    market.The Turkish economy has undergone significant changes during the past three decades. It hasmoved from a protected state-directed system to a market-oriented free enterprise system.Reforms initiated since 1980 have largely reduced the role of the public sector in the economy,liberalized foreign trade, removed capital transfer and exchange controls and encouraged foreigninvestment. A customs union with the European Union came into force in December 1995.

    A new set of reforms were undertaken starting from end-1999, as a new economic stabilizationprogram anchored in the stand-by arrangement with the IMF was initiated and the country wasgranted candidate country status by the EU. However, the overvaluation of the Turkish Lira (TL)and weak financial sector led to the abandonment of crawling peg exchange rate regime inFebruary 2001 and the TL was left to float. The Turkish Lira devalued sharply, pushing up inflationto around 80%. Amidst the uncertain economic outlook, GDP contracted by nearly 6%, whileunemployment jumped above 8% in 2001.

    A new economic program, still backed by an IMF stand-by agreement, was launched under thefree-floating exchange rate regime. The program aimed to restore confidence and stability byrestructuring the public sector and further liberalising the economy. Comprehensive structuralreforms were undertaken, especially in the banking sector. 22 banks, out of 80, were nationalised.The rest were recapitalised and later some merged. Currently, there are 46 banks in the market.

    The new government formed by the Justice and Development Party (AKP) in the November 2002elections pursued the IMF programme aiming at the liberalisation of the economy. Meanwhile, theEuropean Council decided to open membership talks with Turkey in December 2004 and accessionnegotiations started officially in October 2005. The AKP government was re-elected in November2007. The IMF program has ended in May 2008; however the government is still negotiating for anew program with the Fund.

    Turkey has benefited from the increased foreign investors interest like many emerging countriesover the last few years and attracted significant capital flows, both in the form of directinvestment, as well as portfolio flows. While inflation was tamed, the economy grew by an averagerate of 7% during 2002-2006. However, the unemployment rate remained high during the sameperiod, and rose further in 2009, as the economy contracted significantly amidst the global crisis.

    Although Turkish economy was not exposed directly to the sub-prime market, the global financialcrisis affected the Turkish economy through the deterioration in external financing conditions,weakening foreign trade and destabilized confidence.

    Public FinanceStrict fiscal policy was a main pillar under the macro-economic programs backed by the IMF. Fiscaldiscipline coupled with important privatisation efforts led to a significant improvement in thebudgetary primary balance between 2001 and 2006. Reduced interest payments mirroring adecline in risk premia also helped the decline in the central governments budget balance.However, the fiscal policies were loosened in 2007, during the year of general elections. Thedeterioration continued in 2008 and the primary balance to GDP ratio fell to 3.5%, down from 5-6%.

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    4 TSPAKB

    Budget Balances (%)

    -12-10

    -8-6-4-2

    02468

    1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

    Primary Balance/GDP

    Budget Deficit/GDP

    Source: MoF

    0

    10

    20

    30

    40

    50

    60

    70

    2 00 1 2 002 2 00 3 2 00 4 2 00 5 20 06 2 007 2 00 8

    Net Public Domestic Debt/GDP

    Net Public External Debt/GDP

    Net Public Debt (%)

    Source: T reasury

    In the first half of 2009, the primary surplus declined considerably to US$ 3 billion from US$ 18billion in 2008, while the budget deficit already exceeded that of the whole year of 2008 reachingUS$ 15 billion.

    Public sectors debt had increased sharply after the 2001 crisis when many banks were nationalisedand taken over by the Savings Deposit Insurance Fund. It has declined gradually to 28% of GDPby the end of 2008, from 66% in 2001. However, there is an increase in nominal terms in the year2009 in the public sector debt, in line with deteriorating budget balances.

    Monetary and Exchange Rate PoliciesIt has been a general policy of the Central Bank of the Republic of Turkey (CBRT) to permit thedevaluation of the Turkish Lira in line with the inflation rate until the 1999 stand-by program. Theinitial program consisted of a crawling exchange rate peg, coupled with limits imposed on growthof monetary aggregates.

    After the collapse of the exchange rate regime, Turkey adopted a free-floating exchange rateregime and moved gradually to an explicit inflation-targeting policy. Six zeros were removed fromthe currency at th