Trade and Project Financing in Turkey

A Hot Tip about Banking and Finance in Turkey

Posted on: 22 Dec 2009

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GENERAL FINANCING AVAILABILITY

Traditionally, Turkish corporations have satisfied most of their financing requirements through the banking industry. Corporate/banking relationships are close. However, given the continuing gap between Turkey's extensive needs and its limited internal resources external financing of public and private project investment is a crucial factor in the and coming years. Exporters are advised to provide financing for their exports. In addition to short and medium-term credits available from commercial banks in local and foreign currencies, lower-cost TL credits are also available from Turkish Eximbank.

 

HOW TO FINANCE EXPORTS AND METHODS OF PAYMENT

Letters of Credit (LCs) are traditional import instruments for private-sector transactions. LCs should be irrevocable and confirmed by a prime U.S. bank. As Turkish importers develop long-term contacts and prove their credit-worthiness, suppliers may be willing to accept documents against payment (d/p) or documents against acceptance (d/a). Deferred payment schedules are not common except in cases of large transactions where supplier financing plays a role.

Turkish banks continued to have seen some tightening in their access to international credit, though the major banks borrow internationally. Suppliers should consider unconventional project financing packages (e.g., forfeiting, factoring and utilization of third-country export credits) when bidding on major government infrastructure projects. Exporters should be flexible and try to accommodate customers' needs, building any additional associated cost into the offer price.

Firms bidding on GOT contracts should pay careful attention to the way proposals are prepared and should strictly follow the administrative specifications. Financing costs and foreign exchange rate risks, wherever applicable, should be factored into the bid price. Bids, which do not comply with administrative specifications (which include financial criteria), are generally rejected. Generally, validity of a proposal is required to be 3 to 6 months from the bid date. Government tenders often involve bid and performance bonds. Bid bonds are normally equivalent to 3 percent of the value of the tender, while performance bonds are usually equivalent to 6 percent of the contract value. The government only calls these bonds in cases of substantial non-performance. All bonds have to be counter-guaranteed by a Turkish national bank.

A number of leasing companies operate in Turkey, most owned by Turkish banks. They finance purchases of expensive capital goods such as aircraft, auto fleets, construction equipment and other special equipment. Turkish financial leasing in capital expenditures still only accounts for a fraction of capital expenditures in developed countries. The terms of leasing are usually four years, with a balloon payment at the end. Turkish leasing companies are eager to work with U.S. counterparts.

Turkish factoring companies (again, usually offshoots of banks) generally belong to the International Factors Group based in Belgium. Like leasing companies, all factoring and forfeiting companies are having funding difficulties. Both factoring and forfeiting maximize cash flow, reduce transaction risks, and may enhance competitiveness by offering flexible payment terms to the buyer. All U.S. banks active in Turkey know and deal with at least one of the major leasing and factoring companies.

 

How Does the Banking System Operate

The banking sector plays less of a financial intermediary role than one would expect in an economy of Turkey’s size and sophistication. The three state -owned commercial banks plus the six largest private banks hold nearly a two-thirds share of total bank assets (information on banks, the listing of banks licensed in Turkey and statistics on the Turkish banking sector . Turkish banks engage in core banking services, securities brokering and other businesses. In terms of trade finance, treasury operations, electronic banking, and information management, the dozen leading Turkish banks are as sophisticated as their other OECD counterparts.

The Istanbul Stock Exchange, formed in 1986, is becoming one of the major players in the capital market. In 1995, the Istanbul Gold Exchange opened for trading. The Capital Market Board, based in Ankara, is responsible for overseeing the activities of capital markets. The Central Bank of the Republic of Turkey is headquartered in Ankara and together with Turkish Treasury is responsible for the integrity of the banking system. In 1994, the Central Bank became an autonomous body but is not independent.

The Central Bank and BDDK (Banking Regulating and Auditing Commission) supervises bank activities in order to guarantee that they meet liquidity requirements and operates in a responsible fashion. While the Central Bank's Bank Supervision Division acts as the government's supervisory authority, the Undersecretariat of the Treasury is responsible for the enforcement of banking laws. The BDDK also determines the disposition of insolvent banks.

Recently as the Turkish Government decreased taking loans from national banks, the banks have turned towards the general public to offer credit for homes, private vehicles and general expenditures. Small business loans are also in the rise. The recent major share buyouts and total buyouts of three major banks in Turkey proved the trust in the financial system by international investors.

The continuous wave of privatization and mergers from 2005 to late 2006 helped raise the rate of direct investments. In 2006, net direct investment inflows realized as USD 19.2 billion. The high-rated increase in direct investments as non-debt capital inflows remains important for securing the sustainable financing of the current account deficit.

Suitable economic figures resulted in an increase in direct investments to Turkey as direct foreign investment hit a record-high in the last two years. Net foreign direct investment inflows amounted to USD 20.1 billion in 2006 and approximately USD 20.0 billion in 2007.

The largest single foreign direct investment capital inflow in 2006 came from the transfer of Telsim’s assets to Vodafone in May, with a USD 4.7 Billion-worth capital investment. Another significant direct capital inflow in the communication sector was Oger Telecommunication’s USD 1.5 billion installments for its acquisition of 55% stake in Turk Telekom.

Capital investments prevailed in financial sector. National Bank of Greece acquired 46% stake in Finansbank, resulting in a USD 2.8 billion direct capital inflow, and in October and December of 2006, Dexia acquired 75% of the shares of Denizbank, producing a USD 3.2 billion capital inflow. Another highlight of 2006 noted the partnership deal between Turkey’s Akbank and one of the largest global financial institutions, U.S. owned Citi. Citi purchased 20 percent of Akbank shares at a cost of $3.1 billion. Guler Sabanc?, CEO of Akbank, speaking briefly with the press, stated “the partnership stands as an example for the businesspeople of the United States and Turkey”.

The majority of direct foreign investments in 2006 were much attracted to services sectors such as transportation, communication, wholesale/retail trade and financial intermediation. 90.1% of the capital inflow was directed to investments in services, 8.5% in manufacturing (particularly chemicals and food), 0.7% in mining and quarrying, 0.6% in electricity, gas and water supply and 0.03% in agriculture.

A great deal of investments originated from EU member states, supported by a significant volume of capital inflow from the Gulf and the United States. Five years ago foreigners only had a three percent share in the banking industry in Turkey, which suffered a massive economic crisis in 2001. The following years after the 2001 crisis and implementations of the International Monetary Fund (IMF) and the single-party rule brought stability to the economy, thus, appealing to the growing interests of foreign investors in the banking sector.

 

Foreign-Exchange Controls

There are no foreign-exchange limits placed on importers by the GOT, and there are no restrictions on the transfer of funds in or out of the country. Although the Yeni Turkish Lira (YTL) is fully convertible, most international transactions are denominated in U.S. dollars or Euros due to these currencies' universal acceptance. Banks deal in foreign exchange and to borrow and lend in foreign currencies. Foreign exchange is freely traded and widely available. Foreign investors are free to convert and repatriate their Turkish lira profits.

 

U.S. Banks and Local Correspondent Banks

U. S. and U.S.-affiliated investment and commercial banks present in Turkey include Citibank, JP Morgan Chase, American Express, Wachovia and the Bank of New York. The Turkish banking sector continues to undergo significant industry consolidation.

 

Project Financing

The Export-Import Bank of the United States (Eximbank) is open for business in Turkey and offers a variety of credit facilities to U.S. firms exporting to Turkey as well as providing project financing for U.S. investments. Eximbank does not have a ceiling for Turkey as long as a Treasury guarantee is provided (for the public sector). For the private sector investments, Eximbank considers the financial records of the Turkish company or the ability of a project to generate enough revenue to pay back the loan. The U.S. Trade and Development Agency (TDA) is active in financing pre-feasibility and feasibility studies and pre-design work for major government projects and private sector projects, while the Overseas Private Investment Corporation (OPIC) insures and provides investment credit financing to many U.S investments in Turkey. U.S. firms may also compete for contracts financed by the World Bank. Most major government tenders still require suppliers' credits.

USDA’s Commodity Credit Corporation offers three-year GSM-102 export credit guarantees for imports of a wide range of agricultural products. Seven-year GSM-103 guarantees are available for imports of breeder cattle and poultry. USDA copntinues to facilititate Credit Guarantee Program for sales of U.S. manufactured goods and services to improve existing agricultural related facilities.

 

AVAILABILITY OF PROJECT FINANCING

Project financing is available through a multitude of sources including Turkish and foreign commercial banks and investment banks. OPIC is another source for project financing for U.S. investors. Interested U.S. companies should note that American banks active in Turkey are among the leaders in project financing.

 

TYPES OF PROJECTS RECEIVING FINANCING SUPPORT

Turkey offers numerous major project opportunities in telecommunications, energy, transportation, and building of infrastructure projects such as dams, airports, harbors, roads, and water and sewerage systems. Supplier financing is the key to winning these large projects. U.S. Eximbank financing, along with OPIC and TDA programs, are available to U.S. suppliers. The World Bank /International Bank for Reconstruction and Development continues to fund major projects in Turkey

 

SMALL BUSINESS SUPPORT

The Overseas Private Investment Corporation (OPIC) has established small business centers to assist qualified small businesses the opportunity to utilize OPIC’s resources with improved customer service and easier access through a streamlined approval process. OPIC stands ready to assist small and medium sized business grow through investments in over 150 emerging markets around the world. The Small Business Centers will support the financing and political risk insurance needs to eligible small business.

To support small and medium sized business enterprises in their international trading activity, the United States Commercial Service and the Overseas Private Investment Corporation entered into a partnership that combines the strength of the Commercial Service’s network of 105 offices in the United States and 150 offices overseas with the investment finance and political risk insurance support of the Overseas Private Investment Corporation. This cooperation agreement has been established to better assist small and medium sized business enterprises. These businesses account for ninety-seven percent of all U.S. exporters, and small business continues to be the bulwark of the U.S. economy.

Leasing issues and licenses are regulated via the Banking Regulating and Auditing Commission also known as the BDDK. Presently there are 75 leasing firms in Turkey. Leasing firms can only offer leasing and are not allowed to make any other financial transactions. There are no limits on foreign investment or international leasing firms provided they obtain a license to operate in Turkey from BDDK

Leasing terms are 4 years and in very exceptional cases 2 years. The equipment leased will be owned by the leasor after the period of the lease. A definite advantage of the leasing process was the VAT reduction from 18% to 1% during the lease time. However, recently the government has raised the rate back up to 18%. Industry groups have complained about this change and are seeking to overturn this decision and at a minimum be to 8%.

 

 

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Posted: 22 December 2009

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