Turkey. On the trot?

Economic dynamism overcomes regulatory slackness

LAST December's nod from the European Union towards Turkey's eventual membership may have been the long-awaited catalyst for foreign direct investment (FDI) in the country. This week Fortis, a Belgo-Dutch bancassurer with plans all around the Mediterranean, agreed to pay $1.3 billion for Disbank, Turkey's tenth-biggest bank - more than all the FDI in Turkey in 2003. The deal is only one of several under way. France's BNP, Italy's UniCredit and the Netherlands' Rabobank are all expected to own big stakes in Turkish institutions by the end of this year.

Disbank is acknowledged to be one of Turkey's sounder banks. Moody's, a rating agency, says it has “above average financial fundamentals for a Turkish financial institution”. It is part of the Dogan group, headed by Aydin Dogan, an Anatolian tycoon who made his first fortune dealing in Ford trucks in the 1970s.

Among other things, the group owns Hurriyet and Milliyet, two of Turkey's bestselling newspapers. In 2002, with a partner, it paid the government $1.2 billion for a majority stake in Petrol Ofisi, a fuel retailer. Petrol Ofisi announced a steep fall in profits this week. With its media properties facing fierce competition and Petrol Ofisi in need of further investment, the Dogan group will find good use for the cash from the bank sale.

The group owns only 89.3% of the bank; the rest is traded on the Istanbul Stock Exchange (ISE). In a rare example of even-handedness, Disbank's minority shareholders are to be offered the same deal as the Dogan group. Minority shareholders are generally given short shrift in Turkey, where most quoted companies are still controlled by their founding families: a single shareholder controls a majority of the votes at 45% of the companies listed on the ISE.

This week the Institute of International Finance, an association of financial institutions, published a report on Turkish corporate governance. Edward Baker, chief executive of Alliance Capital, who headed the group that prepared the report, said “protection of minority shareholders' rights is crucial to fostering investment... voluntary guidelines are insufficient to push corporate-governance practices to the extent needed” to attract investment. The report finds “little evidence to suggest compliance with CMB [Turkey's Capital Markets Board] principles by listed companies.”

Foreign investors will have to balance this against the continuing good news on Turkey's economy. This week the government reached agreement with the IMF on the terms of a three-year $10 billion loan - considered vital if high growth and low inflation are to persist. Jean-Paul Votron, the boss of Fortis, says it was this economic dynamism that attracted him to the country. Will others be similarly enticed?

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