THE IMPORTANCE OF CAPITAL MARKETS IN THE DEVELOPMENT OF INDUSTRIAL SECTOR (CASES OF TURKEY&SERBIA) ALI IHSAN DILER ISTANBUL STOCK EXCHANGE VI. International.

THE IMPORTANCE OF CAPITAL MARKETS IN THE

DEVELOPMENT OF INDUSTRIAL SECTOR

(CASES OF TURKEY&SERBIA)

ALI IHSAN DILERISTANBUL STOCK EXCHANGE

VI. International Belgrade Stock Exchange Conference

15-16 November - Belgrade

IMPORTANCE OF CAPITAL MARKETS

• Capital Markets provide– Long term capital for investments– Liquidity for the security holders– Elimination of term mismatch– Reputation for companies

• Availability of information for all market participants – Disclosure Policies – Corporate Governance

• Liquidity– Price Contiunity

• Price contiunity requires depth

• Minimal Transaction Costs

CHARACTERISTICS OF A GOOD MARKET

TURKISH EXPERIENCE

29,55%

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

30,00%

35,00% Agriculture

Industry

Construction

Trade

Transport &Communication

Sectorial Breakdown of Turkey’s GDP (% of GDP)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total IPO Amount Share of Industry

IPO Amounts ($ billion)

Holdings9%

Other11% Industry

15%

Financial Sector33%Communication

23%

REITs9%

Sectorial breakdown of IPO Amounts (1998-2007)

17,54

229,38

928,01

138,61

1.632,49

1.329,88

9,71

176,24

88,83

825,69

1.110,34

854,43

705,88

238,05

1.775,35

123,21

0,00

200,00

400,00

600,00

800,00

1.000,00

1.200,00

1.400,00

1.600,00

1.800,00

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total Secondary PO Amount Share of Industry

Secondary PO Amounts ($ million)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1999 2001 2003 2005 2007/9

MANUFACTURINGINDUSTRY

FINANCIALINSTITUTIONS

Others

Sectorial breakdown of Capital Increases (Rights Issues) in ISE (% of Total)

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

1999 2001 2003 2005 2007/9

MANUFACTURINGINDUSTRY

FINANCIALINSTITUTIONS

Others

Sectorial breakdown of Market Value in ISE($ billion)

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

1999 2001 2003 2005 2007/9

MANUFACTURINGINDUSTRY

FINANCIALINSTITUTIONS

Others

Sectorial breakdown of Trading Volume (# of Shares) in ISE (% of Total)

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

1999 2001 2003 2005 2007/9

MANUFACTURINGINDUSTRY

FINANCIALINSTITUTIONS

Others

Sectorial breakdown of Traded Value in ISE($ billion)

• Every year Istanbul Chamber of Industry makes a research for the first 500 Industrial Companies of Turkey.

• 105 of the first 500 industry companies are traded in ISE.

• 34 of these companies are in the first 100.

First 500 Industrial Companies of Turkey

41,91%38,06% 37,41%

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

Net Sales Net Assets ShareHolders' Equity

ISE Companies Others

Share of ISE Companies in the first 500 Industrial Companies of Turkey

• ISE was established in 1986

• No institutional investor at the beginning

• Few brokerage houses

• OTC was a big rival

Beginning Phase of the ISE

• Removing the restrictions from international capital movements (1989)

• For ISE Members, it is compulsory to make their transactions at ISE markets. (from 1986 onwards)

• Mutual Funds and Investment Trusts were began to be established and their revenues are exempted from taxes

• Listed companies have tax exemptions from their profit (till 1999)

Evolution of the ISE

• Also the capital gains obtained from the transactions on ISE were exempted from taxes till 1999.– Between 1999 and 2006, if the shares obtained from

ISE are held for 3 months or more the capital gains from the sale of these shares were exempted from tax.

– Since 2006 holding period was extended to 1 year.– Still only for individual foreign investors’ capital gains,

from trading equity shares on ISE, are exempted from tax.

Evolution of the ISE

• Privatizations are made through ISE Whole Sales Market.

• Privatizations increased the liquidity of the ISE markets.

• Privatization Administration – played a market maker role in early 1990s.– Still using ISE Whole Sales Market for public offerings– Also can sell small amounts of securities in available

market conditions

Evolution of the ISE

Block Sale65%

$ 14.64 billion

Capital Markets15%

$ 3.41 billion

Other20%

$ 4.57 billion

Privatization Sale Methods (2001-2007)

• Financial Sector takes the biggest stake from the Capital Markets, but they give them as credits.

• Banking sector’s standards was raised to International Standards after the 2001 crisis.

• This improvement has increased the credit volume by the help of the economic conjoncture.

Evolution of the ISE

• Alternative finance resources– Although the domestic saving rates are at low

levels, by the help of the banking reform in 2001, the banks and private sector could obtain loans from foreign banks.(Appreciation of Lira is the main driver)

• Informal Economy

Why is the stake of Industry not satisfactory in ISE?

• Strong real growth rates in last years

• Declining Inflation to single digits

• Appreciation of local currency RDS

4.80%

4.20%

2.50%

8.40%

6.20%

5.70%

7.80%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2001 2002 2003 2004 2005 2006 2007Q2

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

GDP (in USD million) GDP Growth

SERBIA

Source:National Bank of Serbia

Technology2%

Financial67%

Holding15%

Industry16%

Source: http://www.belex.co.yu/index-e.php

Sectorial breakdown of BELEX15

FEDERATION OF EURO-ASIAN STOCK EXCHANGES (FEAS) REGION

Not Replied 44%, (14) Replied

56%, (18)

Source: FEAS Research&Development Task Force Report “FEAS Region IPOs” (September 2007)

Number of Respondents

Incentive 41%

No Incentive 59%

Source: FEAS Research&Development Task Force Report “FEAS Region IPOs” (September 2007)

Incentives for Publicly Held Companies

Privatization without IPO

44%Privatization by

IPO56%

Source: FEAS Research&Development Task Force Report “FEAS Region IPOs” (September 2007)

IPO & Privatization

Positive Effect62%

No effect38%

Source: FEAS Research&Development Task Force Report “FEAS Region IPOs” (September 2007)

Effect of Privatization to Capital Markets

5 5

3

0

1

2

3

4

5

6

Very Important Important Not Important

Source: FEAS Research&Development Task Force Report “FEAS Region IPOs” (September 2007)

Macro Economic Conditions

1

8

4

0

1

2

3

4

5

6

7

8

9

10

Very Important Important Not Important

Source: FEAS Research&Development Task Force Report “FEAS Region IPOs” (September 2007)

Level of Domestic Deposits

2

1

8

0

1

2

3

4

5

6

7

8

9

10

Very Important Important Not Important

Source: FEAS Research&Development Task Force Report “FEAS Region IPOs” (September 2007)

Crowding Out Effect

13

21

0

2

4

6

8

10

12

14

Very Important Important Not Important

Source: FEAS Research&Development Task Force Report “FEAS Region IPOs” (September 2007)

Equity Culture

6

4

2

0

1

2

3

4

5

6

7

8

Very Important Important Not Important

Source: FEAS Research&Development Task Force Report “FEAS Region IPOs” (September 2007)

Fear of Losing Company’s Control

1

2

9

0

1

2

3

4

5

6

7

8

9

10

Very Important Important Not Important

Source: FEAS Research&Development Task Force Report “FEAS Region IPOs” (September 2007)

Taxes

3

4

6

0

1

2

3

4

5

6

7

8

9

10

Very Important Important Not Important

Source: FEAS Research&Development Task Force Report “FEAS Region IPOs” (September 2007)

Informal Economy

Very Important Important Not Important

Macro Economic Conditions

5 5 3

Level of domestic deposits

1 8 4

Crowding out effect

2 1 8

Equity Culture 13 2 1

Fear of losing company’s control

6 4 2

Taxes 1 2 9

Informal economy 3 4 6

SUMMARY TABLE