GENERAL ASPECTS OF THE TURKISH ECONOMY, 17.07.2012
GENERAL ASPECTS OF THE TURKISH ECONOMY
I) Assessment of Turkish Economy in the Pre-Crisis Period
The economic crisis that the world has been experiencing over the past three years, is definitely the worst since the World War II in terms of how the financial sector was globally affected.
Turkey initiated comprehensive structural reforms in the aftermath of the 2001 crisis which aimed at sustaining macroeconomic stability and improving national economy’s resilience, productiveness and efficiency. These reforms, without doubt, strengthened the macroeconomic fundamentals. Especially, the soundness of the banking sector provided a buffer against external shocks.
Significant steps were taken in order to restructure and rehabilitate the banking sector, which was once Turkey’s “Achilles Heel”. In this context, the government enhanced the financial structure of private banks, restructured state banks and improved the regulatory and supervisory framework.
The banking sector has achieved much healthier and more robust position through reinforcing its capital structure and implementing effective risk management. In the meantime, decline in the public sector borrowing requirement, thanks to the fiscal discipline, has considerably contributed to the improvement in banking sector’s balance sheet. Turkish banks gradually reduced the share of government securities in total assets and instead extended credits to the real sector and households.
Political stability, structural economic reforms, coupled with the prudent and tight fiscal and monetary policy have paved the way for uninterrupted growth till the end of 2008, when the global financial downturn first started. Turkey’s gross domestic product (GDP), which was 230 billion US dollars in 2002, more than tripled and reached 772 billion US dollars at the end of 2011. Moreover, the GDP per capita almost tripled to 10,444 US dollars in 2011. This astounding economic performance achieved in the last decade placed Turkey as one of the fastest growing economies in the world.
Determination of our country towards creating a stable and strong economy, has attracted both domestic and foreign investors. Turkey has emerged as a top investment destination due to the elimination of bureaucratic barriers to a large extent, improvement in tax system, facilitation of profit transfers and successful privatization programs. The total amount of foreign direct investment inflows in the last eight years have reached approximately 90 billion US dollars.
At present, Turkish economy is the 17th largest in the world and 6th largest in Europe. Turkey aims to be among the 10 biggest economies in the world by the year 2023, in other words by the 100th Anniversary of the Foundation of the Republic.
II) The Effects of the Global Crisis and the Recent Situation in the Turkish Economy
Due to the global crisis, majority of the emerging markets suffered a significant slowdown in economic activity. Being an open and free-market economy, integrated with the global economic and financial system, Turkey was no exception.
Turkey is particularly influenced from declining external demand and falling international capital flows.
Overall growth rates in 2008 and 2009 decelerated well below the remarkable performance that was achieved between 2002 and 2007. However, Turkey has achieved a growth rate of % 8,9 and % 8,5 in the years 2010 and 2011 respectively.
After the beginning of the global downturn, Turkish exports declined to 102 billion dollars in 2009, while it was 132 billion dollars in 2008. The most evident reason behind this drop was, of course, the general decline in external demand, due to the global financial troubles. A similar trend of decline was observed in the imports, due to the combined effect of weakening domestic demand and falling prices, especially of energy. The imports decreased to 141 billion dollars in 2009, from 200 billion dollars of 2008. Nevertheless, Turkey reached a trade volume of 300 billion dollars, with 114 billion dollars of exports and 186 billion dollars of imports in the year 2010. In the year 2011, Turkey achieved a total amount of foreign trade volume of 376 billion dollars, with 135 billion dollars of export.
On the other hand, in the last couple of years Turkey has introduced several regional trade development strategies towards neighbouring and surrounding countries, the Asia-Pacific region and the continents of Africa and America to ensure durable export growth and diversification of export markets. Those strategies produced successful results. A special priority has been given on increasing commercial relations with neighbouring and surrounding countries with which Turkey shares common history, geography as well as similar culture and traditions. Thanks to these policies, the adverse effects of the current contraction in Turkey’s traditional markets such as EU economies due to the crisis were kept in minimum levels.
With the new foreign trade strategy, Turkey aims to grab 1.6 % of the total global trade by reaching an export volume of 500 billion USD in 2023, the year which marks the 100th anniversary of the Foundation of the Republic of Turkey.
As regards foreign direct investments, Turkey’s dynamic economy, large internal market, competitive industry and skilled labour force offer numerous opportunities for foreign investors.
Turkey has changed its whole legal system in a liberal manner so that foreign investors can come and invest in Turkey without any hesitation. In this context, the rights and status of foreign investors were equalled with domestic investors. Furthermore, red tapes were eliminated to encourage foreign investments.
Consequently, foreign direct investment inflows which were only 1,1 billion $ on average between 1993 and 2002, increased gradually afterwards and reached 17,5 billion $ on average between 2006 and 2009. Despite the global downturn, Turkey still managed to receive 9,0 billion $ of direct foreign investment in 2010 and 15,7 billion $ in 2011.
The number of foreign companies was only around 5.000 in 2001 and this number steadily increased to more than 29.579 as of February 2012.
On the other hand, Turkish construction sector has secured more than 200 billion dollars worth of contracts in 94 countries by the end of 2011.
According to the “Top 225 International Contractors" list of the “Engineering News Record” magazine, Turkey is the second country in the world with its 33 firms.
As a touristic as well as cultural and historical center of attraction, Turkey received over 28 million and 31,5 million foreign visitors respectively in 2010 and 2011. Turkey is among top 10 countries in the world in terms of tourism income as well as number of tourists received from abroad. We aim to take a place among the top five tourism destinations of the world by the year 2023.
On the other hand, Turkey's privatization efforts have gained significant momentum in recent years. Privatization portfolio has included major state economic enterprises such as State Tobacco, Salt and Alcohol Enterprises, Turkish Electricity Distribution Company, Turkish Airlines, Turkish Telecom as well as iron and steel mills and sugar factories. The total revenue generated from the privatization of public assets between 2003 and 2010 has reached 48,2 billion dollars.
Consequently, the impact of the global financial crisis on the Turkish economy has been fairly limited thanks to the healthy banking sector, prudent fiscal and monetary policy stance, floating exchange rate regime and strong international reserves. The main difference between the Turkish economy and its peers is that Turkey did not transfer any public funds to the banking sector or change the deposit guarantee scheme.
The current crisis has revealed that the Turkish banking system is in a healthy state and well functioning with its strong capital base and improved risk management system. The absence of toxic assets also prevented the sector from experiencing write-downs.
While many western banks have lost billions in write-offs, sustained heavy losses and even some collapsed totally, Turkish banks have managed to keep troubles at bay during the global crisis and continued to realize substantial profits. Even foreign banks operating in Turkey posted record profits while their parent companies were busy with write-offs on unpaid loans and credits.
III) Measures Taken By Turkey to Mitigate the Adverse Effects of the Crisis
Thanks to the strong and resilient features of the Turkish economy which have been outlined above, the adverse effects of the global downturn have been limited as compared to the other countries in the western world which were severely affected.
Many measures have also been taken by our Government and the Central Bank in order to mitigate the adverse effects of the crisis. Besides lowering short-term interest rates, Central Bank of Turkey resumed its intermediary role in the Foreign Exchange Deposit Market, extended the maturity of foreign exchange deposits borrowed by the banks and reduced the lending rate.
Turkey has undertaken a series of initiatives, such as credit guarantee scheme for enterprises, as well as interventions in the sectors that are under increased pressures. In this context, Turkey has taken immediate action to stem the rise in the non-performing loans, especially loans extended to small and medium sized enterprises.
Value-added tax and special consumption tax on selected products have been cut temporarily so as to boost the domestic consumption and subsequently revive economic activities.
We have doubled the capital of Turkish Eximbank and made some adjustments in interest rates and maturities. In February 2009, "Credit for International Fair Attendance" program was introduced for the exporting firms attending international fairs abroad to market and promote their products.
Turkey has worked hard to limit the adverse effects of the global economic fluctuations and crisis on the exports, to achieve sustainable export growth and to ensure diversification in exporting sectors and export markets via successful market access operations and innovations. In 2011, Turkey's total exports increased to 134.6 billion $, marking a record in the history of Turkish Republic. In the years 2010 and 2011, Turkey’s exports realized a record-breaking rise destined to more than 60 countries including South America, Africa and Asia. The reason behind this success was Turkey’s ability to reorient some of its export capacity from traditional markets to new geographies offering untapped potential.
With regard to the labour market, Turkey has reduced the financial and non-financial burdens on employers and has widened the scope of unemployment insurance payments made by the Government.
Furthermore, we announced in 2009 a new investment incentive scheme which is quite comprehensive. It involves reduced corporate income taxes, low employment taxes and allocation of treasury land for investments.
A new investment incentive scheme was announced in April 2012. This scheme not only covers the positive aspects of previous investment incentive schemes but also amends them. We aim to boost investments especially in strategic sectors. We hope that, the new scheme will satisfy both local national and international investors.
On improving innovative capacity, one of the most important steps that we have taken was the introduction of a new and comprehensive Research and Development (R&D) Law in 2008. With this law, Turkey aims to accelerate both foreign and local R&D investments and develop a more conducive environment for innovation. The share of R&D in the general budget has increased 34 times in the last 7 years.
Positive impact of these measures has already been observed on the economy and are expected to continue in the upcoming period. Both our own forecasts and international institutions’ forecasts confirm that, the Turkish economy will return to its high growth trajectory once the global economic conditions improve.
While focusing on mitigating the threats posed by the crisis, Turkey is not losing sight of the long-term vision. With this in mind Turkey has taken the necessary measures that will strengthen country’s macroeconomic fundamentals.
In October 2011, the Government has announced the Medium Term Program which covers 2012-2014 period. Main purpose of this program is to sustain economic growth and reduce current account deficit, thus securing macroeconomic and financial stability.
Forecasts reveal annual growth rates of % 4, % 5 and % 5 for the period 2012 -2014 respectively. In parallel with this growth perspective we expect that our GDP will reach 952 billion US Dollars in 2014. Turkey aims at reducing the inflation rate to % 5 in 2014 which was % 10,4 in 2011.
On the other hand, saving deficit due to high investment of the private sector, increase in imports of intermediate goods and surge in energy prices have adversely affected the current account balance in recent years. We consider the correction of our current account deficit as a priority area for our economic policies. To this end, measures aiming to slow down the domestic demand and consequently the current account deficit via curbing credit growth have been taken by the Central Bank and the Banking Regulation and Supervision Agency (BRSA) since the end of 2010. Accordingly, the Central Bank implemented a monetary policy stance consisting of wider interest rate corridor and higher reserve requirement, backed by BRSA and other related authorities. As a result of these measures, current account deficit is expected to decrease according to the Medium Term Program.
Despite all the negative consequences of the global economic downturn, the Turkish economy has shown resilience and strength over the last period. Turkey enjoyed a recovery from recession, leaving behind the difficulties faced in 2008 and 2009 and reached a growth rate of % 8,9 and % 8,5 in 2010 and 2011 respectively.
As a G-20 member country, Turkey’s goal is to reach a trade volume of 1 trillion dollars and be among the top 10 economies in the world by the year 2023, when the 100th Anniversary of the Republic will be celebrated. By that time, we also wish to have 10 globally recognized Turkish brands.