İEGY May 2010
GENERAL ASPECTS OF THE TURKISH ECONOMY
I) Short Assessment of Turkish Economy in the Pre-Crisis Period
*The economic crisis that the world has been experiencing over the past two years, is definitely the worst since the World War II in terms of how the financial sector was influenced.
* Turkey initiated comprehensive structural reforms in the aftermath of 2001 crisis which aimed at sustaining macroeconomic stability and improving national economy’s resiliency, 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 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 741 billion US dollars at the end of 2008. Moreover, the GDP per capita almost tripled to 10,436 US dollars in 2008. This astounding economic performance achieved in six years placed Turkey as the second fastest growing economy among the OECD member countries.
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* 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 four years have reached to 70 billion US dollars.
*On the other hand, the total amount of the direct investments by Turkish businessmen and entrepreneurs abroad has reached to 17,3 billion dollars during the last ten years.
* At present, our economy is the 17 th largest in the world and 6 th largest in
Europe. We aim to be among the 10 biggest in the world by the year 2023, in other words by the Republic’s Golden Anniversary.
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 rate in 2008 decelerated well below the remarkable performance that we achieved between 2002 and 2007. GDP growth slowed down to 1,1 % in 2008, from an average of 4,5% during 2002-2009 period, despite the negative effects of the global financial crisis, prevailing during the last two years. However, we are expecting around 4-4,5% of growth rate in the year 2010.
* Our exports declined to 102 billion dollars in 2009, while it was 132 billion dollars in 2008. The most evident reason behind this drop is, of course, the general decline in external demand, due to the global financial troubles.
* We observe a similar trend of decline in our imports, due to the combined effect of weakening domestic demand and falling prices, especially of energy.
Our imports decreased to 141 billion dollars in 2009, from 200 billion dollars of the previous year.
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* However, in the last couple of years we have introduced several regional trade development strategies towards neighbouring and surrounding countries,
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 our commercial relations with our neighbouring and surrounding countries with which we share common history, same geography and similar culture and traditions. Thanks to these policies, the adverse effects of the current contraction in our traditional markets such as EU economies due to the crisis were kept in minimum levels.
*With our new foreign trade strategy, we aim 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.
*When it comes to foreign direct investments , our dynamic economy, large internal market, competitive industry and skilled labor force offer numerous opportunities for foreign investors.
* We have changed the whole legal system in a liberal manner so that foreign investors can come and invest in Turkey without any hesitation.
*Foreign direct investment inflows which were only 1,1 billion US dolar on average between 1993 and 2002, increased gradually afterwards and reached to
20,1 billion US dolar on average between 2006 and 2008. Despite the global downturn, Turkey still managed to receive 7,7 billion $ of direct foreign investment in 2009. The total amount of FDI is 85 billion $ between 2002-2009.
*The number of foreign companies was only around 5.000 in 2001 and this number steadily increased to about 23.500 in the year 2009. We have registered a 25,5% increase in the number of foreign companies during the last two years despite the global economic downturn.
*On the other hand, by the end of 2009, Turkish construction sector has secured more than 161 billion dollars worth of contracts in 81 countries so far.
Although 2009 was a difficult year for the construction sector in the global scale, Turkish contractors engaged in many projects abroad, the total amount of which is about 19 billion dollars.
According to the “
Top 225 International Contractors " list of Engineering News
Record magazine, Turkey is the second country in the world with its 31 firms.
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*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, iron and steel mills and sugar factories. The total revenue generated from the privatization of public assets between 2002 and 2009 is more than 31 billion $.
* Consequently, the impacts of the global financial crisis on the Turkish economy have 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 we 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.
* Despite that, many measures have 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.
* We have undertaken a series of initiatives, such as credit guarantee scheme for enterprises, as well as interventions in the sectors that are under increased
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pressures. In this context, we have 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 the 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.
*We are still working hard to limit the adverse effects of the global economic fluctuations and crisis on our exports, to achieve sustainable export growth and to ensure diversification in exporting sectors and export markets via successful market access operations and innovations.
*With regard to the labor market, we have reduced the financial and nonfinancial burdens on employers and we have widened the scope of unemployment insurance payments made by the government.
*Furthermore, we have announced a new investment incentive scheme which is quite comprehensive. It involves reduced corporate income taxes, low employment taxes and allocation of treasury land for those investments which will start before the end of 2010.
*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 impacts of these measures have 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.
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In this respect, the Government has announced the Medium Term Program .
This program, which covers the 2010-2012 period, outlines fiscal targets for the following three years, exit strategy and forecasts of major macroeconomic variables.
* Main purpose of this program is to establish a framework that will enable
Turkey to achieve a sustainable growth rate in the aftermath of the exit from the crisis and to raise the welfare of the society. With this Programme, Turkey has revealed some forecasts pertaining to the key macroeconomic variables.
* According to the Medium Term Programme , the following measures are to be taken to mitigate the adverse affects of the global downturn on the Turkish economy: a) Public investments will be directed to priority areas and made more efficient. b) A comprehensive industrial strategy based on technological innovations will be introduced. c) The resources to transform production structures towards advanced and information technologies will be increased. d) Reforms in public expenditure policies will be continued. In this regard, health services and expenditures will be made more efficient. e) Tax base will be extended, and losses and frauds in collecting taxes will be reduced. f) Training will be accelerated in accordance with the demands of business.
* Given the global economic contraction in 2009, deteriorating domestic and foreign demand and financing facilities, our GDP declined by around 4,7% in
2009. Since it will take time for trade flows and global economy to rebound, recovery in economic activity is expected to be gradual.
* Forecasts reveal annual growth rates of 3.5%, 4% and 5 % for the period
2010-2012, respectively.
* In parallel with this growth perspective we expect that employment will increase by 1.25 million over the following three years. This translates into a certain decline in the unemployment rate by 2012 compared to the level of 14% in 2009.
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IV) Conclusion
Despite all its negative consequences, the Turkish economy has shown the resilience and strength in face of the global economic downturn.
Since September 2008, when the first signals of the global crisis appeared, the international rating agencies have downgraded the credit notes of 37 countries, while upgrading the credit notes of 17 countries. Among these 17 countries,
Turkey is the only country which has received credit rising for four times.
This is yet another proof that Turkey has pursued the right economic policies during the period of global crisis. In the year 2010, we will enjoy a full recovery from recession, leaving behind the difficulties faced in 2009. IMF and OECD projected a growth rate around 4% for Turkey in 2010. But we believe our economy will achieve higher growth rates than this figure.
As a G-20 member country we will continue to work harder to further strengthen our national economy and make Turkey one of the leading industrial nations in the world during the next decade.
Our goal is to reach a trade volume of 1 trillion dollars by the year 2023, when we celebrate the 100th Anniversary of our Republic and be in the top 10 economies of the world.
By that year, we want to have 10 Turkish brands that are known all across the globe.
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