Special report: Turkey: Markets offer a bumpy but profitable ride

"NOT FOR the faint of heart," is how John T McCarthy, ING Barings' Turkey Country Manager, describes the equity market on the Istanbul Stock Exchange (ISE). Nevertheless, since it opened in 1986, the ISE has grown impressively. It has two main markets: equity and bonds and bills.

There is also a small international stock exchange with duty-free trading in hard currency and there are plans to open a futures and derivatives market soon. There is also a small gold market outside the jurisdiction of the ISE.

In 1986 the average daily trading value on the equity market was $50,000; in the first five months of 1998 it was $350m, according to ISE figures. "In the last 12 years we increased the market capital from under $1bn to $60bn," says Huseyin Erkan, Executive Vice Chairman of the ISE. "Think how good it could have been with political stability."

Although the general trend is upward, the market is volatile. The ISE says foreign investors hold 53 per cent of the stock, but only account for 10 per cent of daily trade, because they generally make longer-term investments than locals.

The Turkish government's high borrowing requirement crowds out the domestic borrowing market and offers high yield on treasury bills: 15-30 per cent a year in dollar terms. According to the ISE, the average daily trading value on the bonds and bills market up to the end of May was $1.7bn. Over 75 per cent of daily trade is made up of reverse-purchase agreements by which the buyer agrees to sell back the bond after a set period, usually overnight.

The government wants to lengthen the maturity of its debt, and is trying to shift more of its borrowing onto bonds. Foreign investors are present but are in the minority.

Overall foreign investment in Turkey climbed drastically between 1987 and 1991 as Turkey's market opened up: annual direct receipts soared from $171m to $910m, according to government figures. They fell in 1993 and in 1994's financial crisis but rose again and since 1995 have remained steady around the $900m mark. Foreign investment is largest in the car, banking, trade and food sectors.

Turkey's efforts to draw foreign investment into its state enterprises have had a history of frustration. The country tried to attract private capital to its energy and infrastructure projects via the build-operate- transfer model, where an investor builds a facility and operates it for a set period of time to recoup investment and make a profit, before ownership reverts to the state.

This was successful in attracting Turkish private capital, but was severely limited as a lure for foreign investment when the constitutional court ruled that international arbitration over contractual disputes was illegal. The government insists projects still attract some interest.

Turkey's other scheme to attract private investment is to sell off some of its extensive state-owned sector. Privatisation has been on the agenda since Turgut Oal's reforms in the Eighties, but progress has been very slow in the face of numerous political and legal challenges.

But political opposition seems to have fallen away, and legal difficulties seem to have been overcome for now. So far this year, the government has already broken all records for privatisation revenue.

In April, two licenses to operate mobile phone networks were sold for a total of $1bn. In May, state-owned shares in Is Bank, the largest private bank, were sold for over $600m. Next on the agenda are stakes in THY, the national airline; Turk Tolekom, the land-line telephone company; and Petrol Ofisi petrol supplier. The Treasury says the petrol sale could be "in the billions".

One problem which remains with privatisation is the government's policy of retaining stakes in some enterprises. This exposes investors to the risk of being involved in an enterprise managed for political rather than economic ends. And Turkish governments don't have a good record. As Mr McCarthy puts it: "You're in for a ride with a driver whose proven to be a drunk driver".