WM Market Reports

Taking Turkey Seriously As A Wealth Management Market

Tom Burroughes Group Editor London 26 September 2012

Taking Turkey Seriously As A Wealth Management Market

A recent visit to the exciting city of Istanbul reminded this publication that Turkey is already significant for wealth management, with potential to rise even further, despite some problems.

Turkey is a large country going through major changes and few can doubt that this nation of nearly 75 million people could generate considerable wealth – so advisors to high net worth individuals should take notice.

With recent strong growth and it having a pivotal location linking Europe and Asia, Turkey is an important country, albeit one with problems. A decade ago, the country’s economy was in free-fall and required International Monetary Fund assistance. And the army has played an important and controversial role in politics for many years; the country's human rights record is patchy.

Turkey has been nominally secular since the Ataturk regime replaced the remnants of the old Ottoman empire in the early 1920s; the populace, in terms of religious observance, however, is overwhelmingly Muslim and there is always the risk that such a country could head down a more radical path. To the East, there is a significant Kurdish population in the region bordering what is now Iraq, a fact that proved tricky for US-Turkey relations in the advent of the 2003 Coalition overthrow of Saddam Hussein’s regime.

A great deal can happen in a decade. Today, Turkey can reflect on recent robust economic growth, albeit at a less scorching pace in 2012 than in 2011; the country has chalked up an annual GDP growth rate of 4 per cent from 2001 to last year. In dollar terms, Turkey, with total GDP of $763 billion (source: International Monetary Fund), is now the 18th richest country in the world, ahead of Switzerland at $666 billion and behind Indonesia, at $834 billion. Even when converted into local currency terms, Turkey’s ascent is impressive.

Emerging

And there are signs of an emergent, prosperous middle class in Turkey. A number of Western banks with wealth management businesses already operate there, such as UBS, JP Morgan, Credit Suisse and Merrill Lynch. Local banks such as Işbank, Garanti and TEB (part of BNP Paribas) provide wealth management. HSBC Private Bank and HSBC Private Bank (Suisse) have offices in Istanbul.

So when your correspondent visited Istanbul to attend a series of briefings on the country by Threadneedle, the UK investment house, hearing the views of one of the country’s most important banks, Garanti, was particularly useful.

“Turkish wealth management actually has quite a recent history. It started developing in the early 2000s. This was the time when Turkey was radically changing its regulatory framework and the sector has since been very transparent,” Handan Sygin, senior vice president, investor relations, at Garanti, said.

“Turkey is a high growth country with potential growth rate of above 5 per cent. Its population is nearly 75 million and the average age is 29.The young and growing population means increasing wealth and thus high potential for wealth management business,” she continued.

Although estimates are difficult to establish clearly, the Turkey wealth management market could be worth up to $110 billion, Sygin said.

She proudly states that Garanti Masters Private Banking is “the first and only private bank in Turkey that offers a wealth management approach in the tradition of its Western European peers”.

The bank offers a variety of investment services to high net worth individuals, such as through capital guaranteed funds and structured products, she said.  

There are some hurdles to surmount, however. “In order to launch and promote new investment products to meet the growing demand for yield enhancement, capital markets legislation has to be modified. For example, there is a need for foreign exchange denominated products, however we can’t issue dollar-denominated mutual funds in Turkey - all the shares have to be denominated in TRY [Turkish lira]. We can only offer limited variety of investment products due to these restrictions,” she said.

Turkey is also not - yet - a member of the European Union, although given the recent fears that the eurozone could break up in disaster, Turkey's policymakers are probably counting their blessings at not yet having joined a club where the membership can prove so taxing. 

Amnesties and agreements

There is a lot of upside potential in Turkey.  Out of a “bankable” adult population of 52 million people, only 26 million have an account; a large chunk of wealth, which by definition is hard to measure, is “off the books” in cash and significantly, gold. Even if only a fraction of this undeclared money surfaces, that represents a significant market opportunity. (On some estimates, Turkish citizens hold up to TRY300 billion ($167 billion) of gold.)

The country, along with other major powers, has made noises about cracking down on tax evasion. For instance, Turkish finance minister Mehmet Simsek recently reiterated his commitment to squash tax evasion and to expand its network of tax information exchange agreements; it signed such a pact with Guernsey earlier this year, for example. The country also inked a TIEA with Switzerland, due to take effect from next January; other countries forging such agreements with Turkey include Malta, the Isle of Man, Luxembourg and Singapore. Further agreements with Gibraltar, the Cayman Islands, the British Virgin Islands, Barbados, the Bahamas and Panama are being worked on.

The country has used tax amnesties to tempt high net worth individuals to pull money back onshore, but so far, such measures have prompted a lukewarm response. Garanti’s Sygin noted that only about 10 per cent of an estimated $100 billion had been repatriated.

Tax rates in Turkey are still relatively high compared with some classic wealth management jurisdictions, so the vibrant city of Istanbul, for example, is unlikely to be the next Zurich or Singapore soon without reforms. The top income tax rate in Turkey is 35 per cent; on the other hand, there is no explicit wealth tax, but there are inheritance and real estate taxes. Trusts, as they are known in the Anglo-Saxon legal tradition, are not yet recognised but some contract-based structures are workable (Source: Law in Context, International Wealth Planning and Tax Structuring Guide 2012)

Strong numbers, some concerns

Turkey has shown strong economic growth in recent years, and according to Mark Lewis, senior resident representative in Turkey at the International Monetary Fund, this nation could even achieve every policymaker’s dream – the “soft landing”. If there are concerns, it is that the country’s relatively meagre savings rate – 12 per cent – means that a good deal of investment gets financed with foreign money, which raises fears about the current account deficit. 

“Turkey has seen an increase in leverage, but from a low base,” Lewis told the Threadneedle conference. There is a gross financing requirement for Turkey of almost 25 per cent of GDP, he said.

Red tape and bureaucracy remain a problem for Turkey relative to other countries; on the other hand, demography bodes well for growth, as the country has a low average age, said Lewis.

The country has been on a roller-coaster ride over the past 20 years and it would be a rash person to make any simple predictions on Turkey. But for the time being at least, this is a country that wealth managers should keep on their radar.

 

 

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