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FASTEST GROWING ECONOMY IN EUROPE: TURKEY

25 February 2013Luxembourg University – Yeditepe University

Yavuz Canevi

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Turkey had lived through four “Restoration” periods:

1. 1923 ,Republic2. 1946-50, Democracy (Turkish Spring)3. 1980’s, Global integration and market orientation through

liberalisation and deregulation (Tatcherism & Reganism)4. 2000 plus, Economic, Legal, Political and Structural

Restoration

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TURKEY: GREAT ACHIEVEMENTS TO BE PROUD OF

In recent years, the Turkish economy and political agenda has undergone crucial developments. In addition to the progress made on the lines of Copenhagen criteria for democratization and rule of law, the economic fundamentals show an honest improvement. Yet the change in Turkey is so overwhelming and the structural transformation so rapid, that there is much that escapes the eye.

In fact, Turkey has turned from shaky into a solid emerging market country.

Turkey’s economy has displayed unprecedented growth since the beginning of the 2000s, and incredible durability and stamina in these past few tumultuous years. A carefully thought-out macroeconomic strategy as well as prudent fiscal policies and major structural reforms in effect since 2003 have all combined to help Turkey assimilate its economy into the globalized world.

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Over the past decade, Turkey has emerged as one of the world’s most dynamic economy. Turkey’s GDP expanded at an average rate of 4.5% from 2000 to 2011. The co-existence of electoral democracy and a Muslim-majority population is a distinguishing characteristics of Turkish politics.

It is no surprise that Turkey is being re-catagorized as one of the Global Swing States along with Brazil, India and Indonesia.

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PILLARS OF GROWTH

Population 75m, labor force 27m, households 19mAverage age 29, Golden demographic eraEmerging middle class

Single party government since 2002, High fiscal discipline Market friendly government institutionsPro-Privatization, pro-reform government

16th largest economy (PPP based), GDP US$1.0 trillionSound banking industry, with 18% tier-1 Capital Adequacy Ratio Manufacturing hub for Europe80% domestic driven economy, Low indebtednessTrading partners with EU,US,Middle East,CIS,Russia,CIS, OECDEasy access to energy resources

Developed telecommunication, transportation, education, healthcare and financial systems compared to other emerging marketsLegal framework mostly completed in line with EU membership

Demography

Politics

Economy

Infrastructure

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Changes in Turkish Economy in the Last Decade

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Further Structural measures will enable currency stability

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DURING THE CRISIS CENTRAL BANKING MEANS MORE THAN PRICE STABILITY

Capital inflows are highly welcomed but also require a careful management. Therefore CBRT introduced some “unorthodox” policies such as reserve requirement, credit growth, exchange rate monitoring with the objective of “Financial Stability” and “CAD” control.

Reserve Requirements

Macro-prudential

Tools

Credit Policy

Weekly Repo Interest Rate Policy

Interest Rate Corridor

Funding Strategy

Liquidity Policy

Price Stability

Financial Stability

Expectations

Credit Growth

Exchange Rate

Central Bank’s Multiple Instruments & Objectives

INSTRUMENTS KEY INDICATORS OBJECTIVES

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Structural measures address external imbalances

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1995-2001 2002-2010 2011 20120

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50

60

70

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Average CPI in inflation Periods

Source TURKSTAT,Treasury

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This is almost the first recession (2008+) in which Turkey did not have a crisis. Thanks to our “home made” crisis in 2001 Turkey embarked upon a series of structural reforms which enhanced the resiliency of the country and raised Turkey’s profile in the eyes of multinationals.

In reaction to the 2001 crisis Turkey successfully managed to make the following reforms:

• Consolidation and strengthening the banking industry• Institutionalisation of the financial sector: Independent Central

Bank, Independent Supervisory Authority, Capital Market Board, Competition Board etc.

• Macro-Prudential Policies• Policies to absorb external shocks

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As far as the banking sector is concerned today, on top of the current strong position, with CAR around 16-18% and very low NPL level and loan to deposit ratio, potential to grow vertically and horizontally is very high. In fact, 26 million adults do not have yet bank accounts in Turkey. That means penetration rate is about 50%, therefore there is plenty of rooms to grow. No wonder we observe new entries to the market from Russia, Qatar, Lebanon, China, India.

Despite the current asymmetric and multipolar global developments Turkey’s reformist challenge has been continuing.

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As we can observe from the table, FDI surged from $ 1.1 billion in 2001 to $ 22 billion in 2007 and continued to be around $15 billion every year.

In 2010, the Financial Times noted that half of the 19000 foreign companies operating in Turkey chose to situate their regional headquarters in Istanbul. On the other side, foreign institutional investors own two thirds of the total volume of ISE which was the most profitable “exchange” globally in 2012. Today, Istanbul is rapidly moving towards its goal of becoming an important regional financial center if not global.

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In retrospect, behind this impressive performance there is a new and hardworking entrepreneurial power of SMEs (small and medium enterprises) called “Anatolian Tigers”. This segment of the economy creates 78% of the employment, 60% of the exports, 55% of the value added production and 15% of the total R&D expenses.

In 2002 the number of the SMEs in the export sector was only 3000, today this number is 50.000, by 2023 is expected to be 70.000.

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Therefore, we must not fail to recognize that the “Rising Turkey” story rests on its youth and its demographic advantage. It is the past global crisis era that created a “Revolution of Perceived Possibilities” that has made our entrepreneurs venture out aggressively and successfully in every corner of the world, including AFRICA.

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Turkey, so far, is and will be one of the rare countries with a recovering growth and declining inflation story in CEE (European Economic Cooperation Area). In fact it is the only country, during recent global crisis, who had an upgrading.

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Imminent investment grade status

RATING SCALE

Current Ratings and Outlook

. Fitch: Investment Grade . Moody’s : One notch below Investment Grade

. Standard & Poor’s: 2 notches below Investment Grade

Turkey’s longstanding dream of being upgraded to the “Investment grade” (IG) finally came true in November, 2012 thanks to the rating agency Fitch

Moody’s S&P Fitch

Aaa AAA AAA

Aa1 AA+ AA+

Aa2 AA AA

Aa3 AA- AA-

A1 A+ A+

A2 A A

A3 A- A-

Baa1 BBB+ BBB+

Baa2 BBB BBB

Baa3 BBB- BBB-

Ba1 BB+ BB+

Ba2 BB BB

Ba3 BB- BB-

B1 B+ B+

B2 B B

B3 B- B-

Caa1 CCC+ CCC+

Caa2 CCC CCC

Caa3 CCC- CCC-

Ca CC CC

C C C

Outlook FC LT Debt Outlook FC LT Debt Outlook FC LT Debt

Europe

Turkey POS Ba1 STABLE BB STABLE BBB-

Czech Republic STABLE A1 STABLE AA- STABLE A+

Hungary NEG Ba1 STABLE BB NEG BB+

Poland STABLE A2 STABLE A- STABLE A-

Romania NEG Baa3 STABLE BB+ STABLE BBB-

Russia STABLE Baa1 STABLE BBB STABLE BBB

Ukraine NEG B3 NEG B+ STABLE B

Africa and Middle East

South Africa NEG Baa1 NEG BBB NEG BBB+

Asia

South Korea STABLE Aa3 STABLE A+ STABLE AA-

Thailand STABLE Baa1 STABLE BBB+ STABLE BBB

Latin America

Argentina NEG B3 NEG B-u NEG CC

Brazil POS Baa2 STABLE BBB STABLE BBB

Mexico STABLE Baa1 STABLE BBB STABLE BBB

Investment Grade

Moddy’s S&P Fitch

Source:Bloomberg

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It is likely that, by 2015, emerging economies called BRIC plus, that Brazil, Russia India, China, Turkey and Indonesia will be major contributors to global growth. That means the world economy is the midst of a transformative change.

It should be underlined that after 50 years of Ankara Agreement while EU still remains Turkey’s top foreign policy priority, it is not the only one. Turkey’s own national interests, political and economic, combined with the regional and global responsibilities in this new and volatile world order requires and imposes upon new roles to play. Turkey is prepared and well equipped today to play that role at the G-20 platform, in achieving a global, sustainable and balanced growth.

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For those who still view Turkey in Europe as an asset rather than liability;

– An even larger single market encompassing a dynamic market economy with stronger positive spill over effects on the southern European economies,

– Particularly its geo-strategic positioning with respect to being an energy hub for oil and gas transportation from the Caspian Sea and the Middle East to EU

– Potentially deeper cooperation on defense and security issues,

It is now time to make a start.

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In addition let me remind you that Turkey and EU is so much interlinked, interconnected and interdependent. But regretfully this relationship has been the hostage to the European domestic politics and Brussels bureaucracy. In fact it has a meaning of deeper and wider than it looks.

• 38% of our export is with EU. (This was 60% before 2008)• 60% tourism revenue comes from Europeans• 80% the medium and long term financing comes from EU

Banks• 80% of the FDI comes from EU countries• On the other side, surprisingly, today within the EU there are

140.000 active entrepreneurs and they employ 640.000 European citizens in their business.

That is why we have a saying in Turkey: “If EU walks, Turkey runs”.

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To understand “the perspiration and inspiration” behind Turkey’s continued efforts to stay as an island of growth and stability is important. Perspiration means hard work and dedication, inspiration means creativity and innovation to move up the value curve. Let us admit that the conditions in Europe where fundamentals are getting weaker, at least for a period and policy cupboard is almost empty while confidence has been subject to erosion. However, in Turkey, the fundamentals are still intact, the policy cupboard is almost full and confidence is likely to prove resilient. This is why time is right if not too late to eliminate the “perception gap” on both EU and Turkey camps about each other. Those fifty years since the 1963 Ankara Agreement should be more than enough to justify a “make-up” action now.

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As Kemal Derviş puts it: “The economic basis for successful Turkish membership in the EU has developed very significantly over the last decade. It is now time for politics to catch up with economics, exactly when Europe as a whole is searching to define its own future. If the EU countries and Turkey have the courage to join forces in this search and build a common future within very flexible European institutions, a great historic opportunity will have been seized.” There is no doubt that profound challenges and transformational opportunities are ahead of us.

It seems, “For some advanced economies those good years are behind, for Turkey yet to come” (NY Times)

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Short- and long-term challenges for Turkey

• Short term challenges:

₋ Risks coming from the euro zone as the main trading partner₋ Challenges magnified by Turkey’s large current account deficit,

which makes Turkey vulnerable to sudden capital outflows

• Longer term challenges:

₋ Raising the savings rate (reducing the current account deficit)₋ Boosting export strength and higher value content by redesigning

industrialisation policy₋ Reducing dependence on oil, boosting alternative energies₋ Attracting more FDI to one of the most diversified economies of all

emerging markets₋ Investing more in education and “human capital” to boost further

democratisation and state of Law.

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Turkey has come up with an attractive and motivating anchor recently. That is VISION-2023, 100. Anniversary of the Republic. Not only the official sector but private sector equally, may be even strongly, committed to this anchor so that Turkey is promoted to the “Premier League Economies”.

After years of “being the next big thing”, Turkey’s time has come. For years there was once a sarcastic saying “Turkey has a future and will remain that way”. That is no longer true. Turkey is the new kid on the block. As Mr. Cameron said Turkey has become the BRIC of EU. For the last ten years with a solid and motivating “2023 vision” Turkey is already on the way building her future. In the past, that is at least until 1980’s Turkey had been a region that international business people would usually just fly over from west to east or from east to west, on their way home. Now, particularly after 2001, the country is exactly the kind of place when investors can take advantage of Turkey’s consumer boom as much as her regional “hub” position.

Overall, Turkey appears very well positioned to master the future, given its huge potential and unique position and determination of the private sector.

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Yavuz Canevi, Chairman Türk Ekonomi Bankası (TEB), Turkey

Mr. Canevi began his career by earning a B.S. from Ankara University and a M.A. in Economics from the University of Southern California. He has done postgraduate studies and taught at the Georgia State University, Atlanta, Georgia. In 1960 he began his career as an Inspector of Finance within The Ministry of Finance and from 1981 to 1983 he was appointed as Vice Governor of the Central Bank of Turkey. Subsequently, he was named Governor of Central Bank of Turkey. In 1986 he became Undersecretary of the Treasury and Foreign Trade.

He is presently the Chairman of the Board of Directors of a privately owned commercial bank, namely, TÜRK EKONOMI BANKASI (TEB/BNP Paribas J.V.). He is also sitting on the board of several prominent corporations, professional organizations and NGO’s including, FNSS Defense Systems, TUSIAD (Turkish Industrialists’ and Businessmen’s Association, IKV (Economic Development Foundation), and Turkish Industrial Development Bank (TSKB)(1993-2012), Chairman of Forum Istanbul.

Publications:Several articles and research papers published in different

newspapers and journalsInternational Publication: Political Economy of the Policy Reform Ed.by J.Williamson Institute for International Economics, 1994

Awards: Chevalier dans l'ordre du Merit, 1995 given by the French Government

Honorary Inspector of Finance, 1978 given by the Council of Ministers