Turkey wealth fund looms large over finance industry

Turkey’s sovereign wealth fund has solidified its position as the biggest player in Turkey’s finance industry after a slew of takeovers during the coronavirus pandemic.

The fund, chaired by President Recep Tayyip Erdoğan, became the largest shareholder in Vakıfbank after acquiring a 36 percent stake from the Treasury on May 11 as part of a 21 billion-lira ($3.1 billion) capital injection for state-run banks. It also took over six insurance companies previously owned by government banks and other shareholders in April.

Turkey set up the wealth fund in 2016 to help spur economic growth in the country and provide stability to financial markets. But its day-to-day operations are opaque, with few details known about how it influences the lending practices of the state-run banks it controls or how it operates in Turkey’s currency, bond and stock markets.

The fund also owns Ziraat Bank and Halkbank, Turkey’s two biggest state-owned lenders. The banks have become increasingly influential in the finance industry and now control almost half of the loan market. The growth of the firms has caused unease among private banks, including several large foreign firms who bought stakes in local companies over the past 15 years.

The capital injection plan for Ziraat, Halkbank and Vakıfbank, to be financed via Treasury bond sales, is aimed at allowing the banks to continue with their growth strategies and to render them more resilient to the COVID-19 outbreak, the fund said in its May 11 statement.

Ziraaat, Halkbank and Vakıfbank now control 48 percent of the loan market compared with 30 percent in 2014, Reuters reported this week. Profit growth at the companies is also outstripping the private sector. A lending splurge this year helped their combined net profit jump by 83 percent annually in the first quarter of 2020. That compares with an increase of just 9 percent and 4 percent for private and foreign banks, respectively.

Bank professionals and analysts are also eyeing warily the role that the three banks play in the foreign exchange and bond markets.

Zafer Sönmez, chief executive officer at the wealth fund, said on May 21 that the fund would play an increasingly active role in Turkey’s financial markets over the coming years, pointing to the bond market in particular. There, state-run banks play a key role as primary dealers in Treasury debt sales.

Meanwhile, Turkey’s central bank has been engaging in cross-currency swaps with the three lenders to help bolster the lira’s value. At the same time, it has cracked down on trading between private banks and foreign investors in the offshore swaps market.

The size of the swap trades between the central bank and the state-run lenders was thrown into the spotlight this week by official data showing that the central bank increased its foreign currency borrowing from local banks by $5.9 billion to a record $35.5 billion in April.

The banks’ interventions in the currency market have continued in May, helping the lira strengthen from an all-time low of 7.26 per dollar on May 7.

The sovereign wealth fund has also established a firm foothold in Turkey’s insurance industry.

The fund announced on April 23 that it had bought all the shares of Turkey’s six state-owned insurance companies for 6.54 billion liras. It said the acquisitions were made to increase savings and to further develop the financial services industry.

The insurers controlled by the fund now include Ziraat Hayat & Emeklilik, the biggest life insurer in Turkey. It has also acquired Halk Hayat & Emeklilik and Vakıf Emeklilik & Hayat Sigorta, ranked seventh and eighth in the market, respectively, along with Ziraat Sigorta, which is one of Turkey’s top 10 non-life insurance companies.

Insurance companies around the world typically invest their revenue in bonds, stocks and other securities. The acquisition of the companies therefore raises further questions about just what investment policies the sovereign wealth fund will be following in Turkey’s financial markets.

The wealth fund also owns stakes in Turkey’s biggest state-owned enterprises including Turkish Airlines and telecommunications giant Türk Telekom.

Unlike the world’s largest sovereign wealth funds, the Turkish version cannot draw on liquid assets such as revenues from oil or reserves of foreign currency. Turkey imports nearly all the oil it consumes and the central bank’s foreign currency reserves of some $50 billion are meagre at best, especially when subtracting its liabilities, which include the aforementioned foreign currency swaps.

The Norway Government Pension Fund Global is the world’s largest sovereign wealth fund with almost $1.2 trillion of assets, according to rankings published by the Sovereign Wealth Fund Institute. The Norwegian state established the fund to invest surplus revenues of its petroleum sector.

The China Investment Corporation, the world’s second-largest wealth fund with $940 billion in assets, was set up in 2007 to diversify China’s holdings of foreign exchange. The Abu Dhabi Investment Authority, the world’s third-largest fund, manages the Emirates excess oil reserves, estimated to be around $800 billion.

The COVID-19 outbreak has slashed the revenues of many of the companies in the Turkish wealth fund’s portfolio, which is worth around $200 billion. Turkish Airlines, hit hard by restrictions on travel, is a case in point. Therefore, the fund’s ability to wield influence and financial firepower through its ownership of such assets is severely limited.

But not so when it comes to the finance industry, where cash-strapped companies are hungry for loans and state-run banks, backed by the Treasury, are best placed to provide them.

So long as the Treasury, run by Erdoğan’s son-in-law Berat Albayrak, can keep supplying the fund’s banks with capital through regular bond sales and other means, their influence over the finance industry, and therefore of the fund itself, will continue to grow.

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.