Turkey ING Economics Department

Turkey on the move

Turkey March 2013 1

In our April 2011 publication, ‘Turkey: an economic pearl on the Bosphorus’, we highlighted the prosperous development of the Turkish economy. Turkey is well on track to resume its long-term growth path (5% per annum), leaving the euro zone far behind (growth rate of 1-2%). This will move Turkey up in the rankings of largest economies in Europe (number five by 2030). In this publication we focus on the sectors that contribute to this performance and the role foreign companies can play. Turkey is already a global player in sectors, such as textiles and clothing, food and beverages, agriculture, refined oil production, transport, paints and minerals. Iron and steel and automotive will follow soon. The Turkish govern-ment wants medium and high added-value products and services to play a more important role in the future development of the economy. This includes the automotive sector, con-sumer electronics and machinery, as well as the services sector and the construction indus-try. Foreign companies are stimulated to play a bigger role. The rapidly improving competi-tive position and a moderate increase of wage costs, can help attract more foreign inves-tors. The Fitch upgrade of Turkey’s rating to ‘investment grade’ in November boosted for-eign portfolio investments. Risks to favourable economic development are mitigated by consistent government policies and further improvement of the business environment.

Main observations - Based on its long term GDP growth rate of 5% Turkey will be 5th largest economy of Europe by 2030 - Almost 50 % of GDP growth will be generated by logistical, financial and business services - Upgrading of the Turkish manufacturing industry is reflected in its increased share in world output by the automo-

tive sector, consumer electronics and machinery. Turkey is becoming one of the most important automotive produc-tion locations in Europe (producing 1 million cars in 2013 and 2 million in 2023)

- The government strongly supports the transition to more high added-value production - Participation by foreign companies is required to speed up and partly finance this process

Figure 1 Fastest growing industry sectors in 2012-2016 and their share in global production

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6%

7%

8%Growth rate value added in real US$ share of value added in global total(RHS)

Source: Oxford economics

Figure 2 Ease of doing business in 2013, comparing scores for Turkey, Poland, Russia, India and the Netherlands

Source: World bank

Turkey March 2013 2

Figure 1 shows the fastest growing sectors are construction, metal and services, while the slowest are the traditional sec-tors. In-between are the sectors producing intermediate goods and consumer and investment goods. The latter, espe-cially, are often related to high productivity growth rates. These are the sectors the government wants to stimulate to grow. Foreign direct investors can play a more important role. Compared with the CEE countries, the stock of inward foreign direct investments (18% of GDP in 2011) was the lowest. More direct investments by foreign investors could speed up the process of increasing the production of higher added-value products. Further improving Turkey’s ranking – 71 out of 183 countries – in the ease of doing business could

help to increase the FDI inflow (Figure 2). There is room for improvement. Foreign investors bring new technologies, best practices examples and new management techniques.

Figure 3 Growth by sector and contribution to GDP Shares in GDP Avg. Ann % change

2012 2012-2021

Agriculture, forestry & fisheries 9% 2.5%

Industrial production 24% 5.0%

Extraction 1% 1.6%

Manufacturing 20% 4.9%

Consumer goods non durables 6% 4.2%

Consumer goods durables 1% 4.4%

Intermediate goods 10% 5.4%

Investment goods 3% 4.9%

Utilities 2% 4.6%

Construction 5% 7.1%

Services 62% 5.2%

100.0%

Source: Oxford Economics, ING calculations Service sector drives GDP growth Optimism about the growth potential may be reduced due to the slowdown of GDP growth last year to close to 3%, while the euro zone was still in recession (-0.5%). Turkey is well on track to resume its long-term growth path (5% per an-num) while the euro zone may show a maximum growth of 1-2%. Last year’s easing in monetary policy should feed

through into higher domestic demand, while the gradual improvement of the global economy should help exporters. Business and consumer expectations about the long-term prospects of the economy remain upbeat, underpinned by the large domestic market, a rising number of middle class consumers, strong trade links with rapidly developing re-gions, robust labour supply growth, expanding access to credit and a stable macro-economic policy. This assures Turkey will move up in the rankings of largest economies in Europe (number five by 2030, currently number seven). Which sectors will be the main contributors to future GDP growth? About 50% of GDP growth is generated by the commercial services sectors. This is similar to the Dutch economy. Transportation, distribution and communication, as well as financial services, facilitate the performance of the supply chain in other sectors of industry. In addition to the commercial services sectors, Turkey will increase its market share in global production, especially of capital goods, consumer durable goods and the construction indus-try. Foreign companies already play an important role in the automotive industry, the consumer electronics and the fi-nancial sector. Most of the FDI inflows from 2007 to 2012 are invested in the financial sector (38%), electricity, gas steam and air conditioning supply (15%), in the food & bev-erages industry (7%) and in wholesale and retail trade (6%) (Figure 4). There is room for more foreign participation in the non-services sectors. Government sector policy has a clear message The Turkish government’s focus is on stimulating production activities for local consumption, import substitution (inter-mediate goods) and regional exports. This should help to increase local employment and reduce the deficit in the trade balance and current account. According to the gov-ernment’s industrial policy (Turkish industrial strategy doc-ument 2011-2014), Turkey is targeted to become the pro-duction base of Eurasia in medium and high-tech products. Target sectors are manufacturing of motor vehicles, machin-ery, medical tools, sensitive and optical tools, air and space

Turkey March 2013 3

vehicles, electronics and pharmacy. More high added-value production is often linked to the creation of jobs requiring well-educated employees. This should trigger a return of young Turkish students studying abroad to help steer their country in the high added-value production sectors. Instruments used by the government to achieve these goals are:

• Privatisation • Liberalisation • Incentives for research activities • Incentives to establish in less developed areas • Incentives for establishing new production substi-

tuting imports and generating new export revenues • Incentives for large-scale investments focused on

improving technology and R&D capacity and providing a competitive advantage in the interna-tional arena.

Incentive measures available for large-scale investments are:

• VAT exemption • Customs duty exemption • Tax reduction (up to 90% in less developed regions) • Social security premium support • Land allocation

There is room for more foreign involvement. FDI inflow compared to GDP is substantially lower in Turkey (18%) than in other countries (Poland: 38%). Expenditure on R&D (2011: 0.86% of GDP) is also relatively low in Turkey. The government offers incentives to attract foreign investors that bring more knowledge, more R&D activities, substitute im-ports or stimulate exports. Foreign investors enjoy attractive FDI incentives:

• No approval requirement • No minimum capital requirement • National treatment • Guarantee to transfer proceeds

• Key expatriate personnel • Protection against expropriation • International dispute settlement

Figure 4 Foreign direct investment in Turkey by sec-tor

Sector

Cumulative 2007-2012

(mln USD)% Share

Financial and Insurance Activities 27572 38.1%Electricity Gas Steam and Air-conditioning Supply 10730 14.8%Manufacture of Food Products Beverages and Tobacco 5074 7.0%Wholesale and Retail Trade 4054 5.6%Construction 2786 3.8%Manufacture of Basic Metals and Fabricated Metal Products 2390 3.3%Manufacture of Chemicals & Basic Pharmaceutical 2631 3.6%Manufacture of Coke Refined Petroleum Products 1996 2.8%Real Estate Activities 1954 2.7%Transportation and Storage 1535 2.1%Manufacture of Computers Electronic-Electrical & Optical Equipment 1345 1.9%Human Health and Social Work Activities 1316 1.8%Manufacture of Other Non-Metallic Mineral Products 1333 1.8%Manufacture of Textiles and Textile Products 1114 1.5%Other sectors 6567 9.1%

TOTAL 72397 100% Source: Central Bank of Turkey, ING calculations Turkey most competitive growth of 59 countries. According to the ranking of the International Institute of Management Development in Lausanne, Switzerland World Competitiveness Index, Turkey’s competitiveness improved the most out of 59 countries in the period 2002-2012, rising by 241%. This certainly contributed to the strong growth in certain sectors of industry. That Turkey scored the best is due to a major improvement in the efficiency of companies and a high growth in productivity. Thanks to this rapid im-provement, Turkey is now approaching the position of Po-land and India.

Turkey March 2013 4

Turkey’s rapidly improving competitive position as indicat-ed by IMD and a moderate increase of wage costs, helps Turkey to safeguard its favourable production location, which has access to the EU and hub function for trade flows between Europe, Asia and North Africa.

Figure 5 World Competitiveness Index 2012

TurkeyPolandIndia

Russia

China

Netherlands

Hong Kong

40

50

60

70

80

90

100

110

0 50 100 150 200 250 300

% change WC index 2002 - 2012

WCI 2012

Source: IMD World Competitiveness Index 2012

The relative unit labour cost index indicates how Turkey’s unit labour costs in US dollars are developing compared to world unit labour costs. It is the combination of unit labour costs in local currency adjusted for currency developments. If the index is above 100 this indicates Turkey is less com-petitive against the world index.

Figure 6 Relative unit labour costs manufacturing

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125

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'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Advantage

Disadvantage

Source: Oxford Economics, ING calculations

High wage increases of 13.3% annually in the period 2010-2012, not offset by a depreciation of the Turkish lira, shows a diminishing advantageous labour cost development for Turkish exporters. In 2013, wage rates are expected to show a more moderate increase of 7% with a recovery of produc-tivity levels. The Turkish exchange rate is expected to stabi-lise. As a consequence, the deterioration of the labour cost position against its competitors will not continue this year. More support has to come from further improvements in the business environment, to be confirmed in a higher ranking in the ease of doing business index. Ranking 71 out of 183 countries is not on par with Turkish ambitions. A very posi-tive signal came from rating agency Fitch last year, which in November upgraded Turkey to BBB-. So far Fitch is the only rating agency to do so. This is the lowest investment grade rating. It means that the perceived risk of Turkey not being able to pay back its foreign loans diminished to a level that allows certain categories of institutional investors to keep Turkish paper in their portfolio. This will enlarge the possi-bilities for Turkey to tap the international financial markets and reduce the interest costs it has to pay. Room for improvement Although much has been achieved, there is still room for improvement in Turkey’s business environment. - Improvement in the infrastructure is required - Higher ranking in the World Bank ease of doing busi-

ness index. The current low ranking is due to various costly and time-consuming procedures and documents. Enforcing contracts in Turkey is a slow and expensive process

- There is a need to increase trust in the judicial system. - Dependency on short-term external financing needs to

be reduced - More productivity in the agricultural sector, food and

beverages and textiles - Alternative energy sources offer a long-term

solution to the problem of costly energy imports

Turkey March 2013 5

The following sectors will be addressed:

- Commercial services - Agriculture - Construction - Energy - Consumer non-durables - Consumer durables - Technology - Intermediate goods

Sector developments are compiled based on several publica-tions of Business Monitor International and data from the global industrial data base of Oxford Economics.

Commercial services facilitates

Commercial services contribute 47% to GDP growth. The rapid growth of GDP per capita and the high growth of pri-vate consumption, saw retail distribution and wholesale ac-tivities leapfrog to a 14% share of GDP in 2012. Growth of wholesale and retail trade in the three years growth is ex-pected to follow the overall GDP growth rate. The rapid in-crease of transport, distribution, and financial and business services, facilitates to operate the supply chain of the do-mestic manufacturing sectors. At the same time, these sec-tors play an increasingly important role for foreign compa-nies. Due to its unique location, Turkey is well equipped to serve all transport flows from and to Europe and Asia. We expect Turkey to profit from the high growth in transport movements between the two continents. New deep sea port facilities and train connections with Europe make Turkey an attractive alternative to Rotterdam for non-bulk goods.

In the next figure on emerging and potential distribution hubs, it is assumed that a 10% increase of export flows from the MENA region and developing Asia will flow via ports in Turkey. This could add an additional USD 90 billion to the Turkish trade flow to EU countries in 2017.

Figure 7 Emerging distribution hubs in Central East-ern Europe in 2017

Source: Sources: logistical info Colliers International, trade data ING

Participation by foreign companies in the transport and lo-gistical sector is rather limited if we look at the FDI inflow in Turkey. This can be explained by the good performance of Turkish companies. In the financial sector, after it was liberalised in 2007, foreign banks acquired large stakes in Turkish banks. There are still options to penetrate the bank-ing market. However, competition is fierce. More potential can be found in the insurance market. Pension and insur-ance services are still limited by size. This has a lot to do with existing government regulations. The government an-nounced plans to promote domestic savings with a focus on the pension sector by introducing government contributions to private pension schemes. This should help build up Tur-key’s nascent pension fund system, as was done in Poland. More deregulation is expected to stimulate private sector development in this area. The information and communica-

Turkey March 2013 6

tions sector has become an important part of the economy. The ICT market grew by 14% between 2002 and 2009 to USD 28.5 billion in 2009. At the end of 2011, the number of internet users exceeded 50 million, while broadband sub-scribers rose to 13 million and mobile phone subscribers reached 65 million. ‘Turkey’s Vision 2023’ sets ambitious ICT targets: reach 30 million broadband subscribers, 80% of the population computer literate, provide all public services electronically by 2019 and supply 50% of the ICT sector with domestic products and services. Agriculture: untapped opportunities

in US$ billion

2012

Size

in % of GDP% in global

production

Growth real

annual % change

2012 2016 2012 2016 2013-16

Agriculture, forestry & fisheries 87.0 9.3 8.4 3.6 3.6 2.3

The agricultural sector contributes 9% to GDP growth. However, measured by share of employment (27.3%), the figure is much higher. This explains why productivity in the agricultural sector is relatively low. While the importance of the sector for the domestic economy seems to shrink, its share in global production seems stable. There are many options to increase production. Productivity gains can be achieved by implementing new techniques and water distri-bution systems. This requires substantial investment in the sector. The government’s 2023 target for agriculture, forest-ry and fishing is also ambitious: sustain more than 9% aver-age annual growth in agricultural exports to USD 40 billion in 2023, pulling Turkey two steps up in the global agricul-tural production ranking to number five. Higher productivi-ty and more crops could help mitigate the impact of food prices on inflation rates. The potential for higher agriculture production is obvious due to the size of the country, which covers different climate zones.

Healthy outlook construction industry

in US$ billion

2012

Size

in % of GDP% in global

production

Growth real

annual % change

2012 2016 2012 2016 2013-16

Construction industry 84 5.0 5.4 1.1 1.2 7.4 The production outlook for the construction industry is healthy, with a long-term growth rate of 7%. This is under-pinned by a long pipeline of projects in Turkey and outside the country. Domestic plans include the third EUR 7 billion Istanbul airport, handling 100 million passengers (increas-ing to 150 million in 25 years), the USD 35 billion Sino-Turkish high-speed rail venture, the North Marmara high-way project, including a third bridge crossing the Bospho-rus, the Trans-Anatolian gas pipeline and various major power plant projects. In Iraq, Turkish construction compa-nies are rebuilding structures damaged by the war. In War-saw, a Turkish company is building a metro line. The out-look for new projects for Turkish building companies is fa-vourable. The construction companies can leverage on their remarkable flexibility to switch from country to country based on the project portfolio. High hopes energy sector Despite recent hopes of increased domestic production thanks to offshore drilling and shale gas explorations, Tur-key’s oil and natural gas production is well below the rising domestic consumption. This is weighing heavily on the country’s import bill. Business Monitor International fore-casts that oil production will fall from just over 62,000 bar-rels per day in 2013 to 56,440 b/d in 2016. Production will decline another 37% between 2016 and 2022. Natural gas production will fall to 1.8 billion cubic metres in 2016 and enter into a steady decline thereafter, running to 1 billion cubic metres a year between 2018 and 2022. Turkey’s state-owned Turkish Petroleum Corporation has discovered high quality oil in the onshore Magrip field, located in the prov-ince Siirt Kurtalan. Work is being carried out to determine the commercial viability of the discovery. The new field is adjacent to the Bati Raman oil field in Batman province. It is

Turkey March 2013 7

still too early to talk about a solution of the oil import bill problem, but it generates momentum behind further oil ex-ploration in Turkey. Oil and gas exploration is on the rise in Turkey. The country’s Dadas Shale will receive growing in-vestments this year. Anatolia Energy will conduct drilling campaigns across the area. Among others, in September 2012, Royal Dutch Shell announced it would proceed with shale gas exploration in Diyarbakir. Exxon Mobil is discuss-ing a licence adjacent to Shell. The offshore potential is be-coming increasingly prospective, particularly massive finds off the shore of Cyprus and Israel, as well as in the Black Sea. Recent exploration successes pose upside risks to the outlook for the Turkish oil and gas sector. Turkey has sub-stantial coal reserves (ranked 11 in the world) that are al-ready in production. There are high hopes for the contribu-tion of renewable energy sources like wind, solar and geo-thermic energy. The country possesses a number of rivers and lakes, which will offer opportunities for small scale en-ergy companies. Turkey ranks 14 in the world as regards geothermal energy potential. With its high potential in agri-culture and installed capacity in biodiesel and bioethanol, Turkey can be the bio-fuel supply centre for Europe. Cur-rently Turkey ranks first in the world in terms of highest growth in wind energy investments. It will take many years before these sectors will play an important role in Turkey’s energy production. The power industry is highly dependent on the energy re-sources available. Due to Turkish economic outperformance in the region, power consumption will show a high growth rate of 6.4% annually between 2012 and 2022. The already high exposure to oil and gas prices played a cardinal role in plans to produce at least 30% of its electricity from coal-burning power plants. With global coal prices taking a hit following the US shale gas revolution, the potential use of imported coal appears much more appealing, especially since Ankara wants to reduce its dependence on expensive gas imports from Russia and Iran. Substantial investments in new generating capacity will be needed, attracting tradi-

tional players in the market, but also emerging companies. Tenders for new power plants will go ahead this year. A new law on the electricity market was presented to parliament in January, including the creation of a Turkish energy ex-change, which will operate as a spot market and eventually also allow trading in futures. Consumer non-durables

in US$ billion

2012

Size

in % of GDP% in global

production

Growth real

annual % change

2012 2016 2012 2016 2013-16

Food, beverages & tobacco 79 2.7 2.6 1.5 1.5 3.3Textile, leather & clothing 30 1.1 1.0 3.7 4.0 3.6Printing& recorded media 36 1.1 1.1 1.7 1.8 3.5Pharmaceuticals 24 0.7 0.8 1.3 1.4 5.1Soaps, detergents etc. 13 0.3 0.3 1.3 1.4 5.1 The more traditional lower value-added products are be-coming somewhat less important due to their low produc-tion growth rate. Still, the food & beverages and tobacco industries deliver a major contribution to GDP and a re-spectable 1.5% share in global production. The same goes for the textiles, leather and clothing industry, which is be-coming less important in terms of percentage of GDP. How-ever, in this case, Turkey’s share in global production in-creases. Apparently other countries are reducing their pro-duction growth much faster than Turkey, resulting in a big-ger share for Turkey. This development can also be ex-plained by a shift of production to Turkey from low-cost producers in Asia, due to the importance of the time-to-market, or to benefit from Turkey’s membership of the EU common customs union. It is remarkable that while in 2001 import quotas by the EU for textile and clothing from China were abandoned, the Turkish sector shows a growth in its share of the global textile and clothing production. Turkey’s health and pharmaceutical industry is expected to register a growth rate comparable to the GDP growth rate (5%). The government provides incentives to foreign and local pharmaceutical firms that conduct research and devel-opment activities in the country. Turkey is already a manu-facturing country well known for its good practices. Plans to

Turkey March 2013 8

improve the overall quality of pharmaceutical products will improve the country’s competitive advantage in production and exports. The government is planning to set up special pharmaceutical zones to make the country a drug develop-ment and production hub. These zones will focus on re-search, development and production of medicines to miti-gate the negative trade balance in external trade of medi-cines. Consumer durables

in US$ billion

2012

Size

in % of GDP% in global

production

Growth real

annual % change

2012 2016 2012 2016 2013-16

Domestic appliances 15 0.5 0.5 3.3 3.0 4.5Consumer electronics 19 0.4 0.4 2.1 1.9 4.6Furniture manufacturing 7 0.2 0.2 1.1 1.1 3.5Other manufacturing 9 0.3 0.3 1.1 1.1 3.6 The turnaround in Turkey’s economic development in 2000/2001 triggered a high growth rate in the consumption and production of domestic appliances and consumer elec-tronics. Foreign companies established production facilities or outsourced (white labelling) to Turkey the production of TV screens and white goods at lower costs. Currently Ar-celik/Beko and Vestel are strong local producers. Thanks to Turkey’s membership of the EU common customs union, these white label products can be sold in the EU without tariff barriers. Most TV screens produced in Europe come from Turkey. As a consequence Turkey is part of the group of most important global producers of domestic appliances and consumer electronics. Technology industry

in US$ billion

2012

Size

in % of GDP% in global

production

Growth real

annual % change

2012 2016 2012 2016 2013-16

Consumer electronics 19 0.4 0.4 2.1 1.9 4.6Rubber & plastic n/a 0.9 1.0 1.5 1.6 6.0Other electrical equipment 3 0.1 0.1 0.6 0.6 5.6Electric components & boards 2 0.0 0.0 0.0 0.0 3.5Metal products 21 0.8 0.8 0.8 0.9 5.7General purpose machinery 4 0.1 0.1 0.2 0.1 5.5Special purpose machinery 4 0.1 0.1 0.2 0.2 5.5Computers & office equipm. 2 0.0 0.0 0.1 0.1 3.2Motors, generators eo 6 0.2 0.2 1.4 1.3 5.0Telecom equipment 3 0.1 0.1 0.3 0.2 3.5Precision & optical instruments 5 0.1 0.1 0.1 0.1 2.3

Motor vehicles & parts 52 1.3 1.3 1.0 1.1 5.8Other means of transport 3 0.1 0.1 0.2 0.2 6.3

The technology industry is becoming more important within the manufacturing sector. Technology contributes 4.2% to GDP and is growing at a rate similar to GDP. The automo-tive industry is a dominant contributor to this. Over the last five years it grew 7.4% annually. With a one percent share of the world production of automotives, Turkey is becoming an important producer. It was ranked 17 globally among automotive manufacturing countries in 2011, producing more than one million vehicles and domestic sales of 800,000 (ranked 6 in the EU). Government targets for the automotive industry include producing two million units in 2023 (ranking 10 in the world) and export volume of USD 50 billion, employing 600,000 workers. Several large inter-national car brands have production facilities in Turkey. Its location is a bridge between Europe, the Middle East and Africa. The lack of a strong domestic supplier network used to be main threat to the successful development of the Turk-ish car sector, but the presence of many suppliers from dif-ferent countries, including Asia and Brazil, this seems a problem of the past. Turkey currently has a solid network of nearly 250 foreign car part makers. Japan offered to help Turkey develop its own national branded vehicle. The Turk-ish government is keen to encourage R&D investment in the sector and to stimulate the production of electric vehicles (EV). Turkey is expected to be one of the most competitive EV production bases in Europe. It has an attractive sales market as three quarters of households don’t yet own a car, and the population is relatively young with rapidly increas-ing spending power. The only downside is a special con-sumption tax and VAT, which raises the purchase price of a vehicle by 60-100%. For electric vehicles the government reduced the consumption tax to 3-15%. Some expect the consumption tax to be waived for at least five years. Tur-key’s biggest automotive export markets (70% of domestic production) currently are France, Italy, Germany, the UK, Spain, the US, Romania, Belgium, Algeria and Russia. The machinery industry has grown at a rate of nearly 20% since 1990. It distinguishes itself from other countries by its

Turkey March 2013 9

high domestic component (85%) and the important role of small and medium-sized companies. Machinery production takes up an increasing portion of the country’s exports (8.3%). Main export destinations are western European countries. Due to the high growth of capital investments, machinery imports are two times higher than exports, leav-ing a negative trade balance. Main suppliers of machinery imports are from China and Germany. By 2023, the machin-ery sector is targeted to export USD 100 billion. The solar cell manufacturing industry will be boosted by the opening in Istanbul of the first Chinese solar cell manufac-turer, China Sunergy. The facility was established with a Turkish partner, Seul Energy Investment, a photovoltaic (PV) system provider and installer. CSun announced it will shift 200 megawatts of additional capacity from its Shanghai facilities to the plant in Turkey in the first quarter of this year. Solar energy use in Turkey still has to commence on a commercial scale. This is largely due to the high cost of generating solar energy. This is set to change with the pro-duction of solar panels and as equipment prices fall. Another incentive is the government’s introduction of feed-in tariffs, whereby users of solar panels can deliver surplus energy to the grid. German companies such as Phoenix Solar and Gehrlicher Solar are also making moves into Turkey. Besides satisfying the local demand, CSun will use Turkey as an ex-port hub for the region. It will allow the company to bypass possible tariffs, sanctions and allegations of dumping by the European Commission. CSun profits from the fact that Tur-key is member of the EU customs union. Turkey has the largest medical devices market in the region but by western standards spending is low (USD 31 per capi-ta), comparable to Mexico and Jordan. A small portion is domestically produced (15%). Domestic production is taken care of by a large number of small-scale manufacturers fo-cusing on low-technology products. Siemens and Fresenius are the only multi-national manufacturers with a local man-ufacturing plant. Nevertheless, Turkey exports more medical

equipment and supplies than most neighbouring countries, and the total is rising (USD 252 million in 2011). Top desti-nations for these exports are Germany, France and Iraq. The trade deficit in medical equipment and supplies stood at USD 1.7 billion in 2011. The steel industry proved to be robust in the face of external headwinds. But some segments are facing increased pressure as a result of decreased manufacturing activity in the EU. In 2013, steel production is expected to grow by 6%, reaching just over 36 million tonnes. Until 2017, the growth rate will be close to 6% on average due to increased investments in the infrastructure and construction sectors. Meanwhile, Tur-key is increasingly self-sufficient in a broad range of steel products as a result of increased capacity and moderate growth in domestic demand. Turkey is expected to continue to attract investors, increasing steel production to 48 million tonnes. ThyssenKrupp is constructing its second production plant in Kocaeli province. The plant will produce chassis and frame components for the automotive industry. The plant is likely to lead to a considerable fall in Turkish stain-less steel imports. Intermediate goods production

in US$ billion

2012

Size

in % of GDP% in global

production

Growth real

annual % change

2012 2016 2012 2016 2013-16

Coke & ref.petroleumproducts 415 4.2 4.3 5.7 6.2 4.8

Basic metals 65 1.3 1.5 1.2 1.3 6.2Non-metallic minerals 23 1.3 0.2 2.4 2.6 6.9Other manufacturing 106 3.3 4.4 n/a n/a 5.2 The production of coke and refined petroleum products has become an important sector, not only by national standards but also on a global scale. With its share in global produc-tion at 5.7%, which is expected increase to over 6% in 2016, illustrates the hunger for oil and oil products by the fast-growing economy. Basic metals and non-metallic minerals are mainly suppliers to other sectors of industry (construc-tion and automotive). High growth in these sectors is re-flected in similar figures in both intermediary production sectors.

Turkey March 2013 10

Main attractions to participate in Turkish develop-ment: 1. Rapidly developing local market 2. Attractive production location for domestic and regional

markets 3. Turkey as a hub, also of energy Rapidly developing local market The large population of 75 million puts Turkey in the top 20 in the world. After Russia and Germany, Turkey has the third largest population in the region. The population is ex-pected to continue growing over the next four decades, achieving its maximum size of 93.5 million in 2050, after which it will gently decline. Although the growing popula-tion is still young, it is ageing. Within the next 20 years, Turks older than 65 will make up more than 10% of the to-tal population. This is mainly due to decreasing birth rates and improvements in health care. Growth in prosperity in the country and the shift towards middle-aged consumers increases private consumption and causes a shift in the con-sumption pattern. The wealthiest among the age groups, middle-aged adults, rose to 17.7 million. There is a huge and fast-growing demand for housing, transport, health goods, medical services, alcoholic beverages and tobacco. Turkey’s export profile and role as service provider The shift in Turkey’s production profile is reflected in its changing export profile by commodity, services and destina-tions. Export of services by the transport and logistical sec-tor will continue to generate substantial income for Turkey. The financial sector and business services are projected to show a similar positive development. The shift in Turkey’s export package follows the changes in its production profile. The following figure illustrates the increased share of machinery and transport equipment (21% in 2000 and 28% in 2011). The automotive industry and TV screen produc-tion are well-known examples. The entry of foreign

Figure 8: Expenditure by category 2010-2020 (volume %)

3,8383.5Total

3,124,8Misc goods and services

4,125,0Hotels and catering

6,05,5Education

-2,2

3,4

5,2

6,2

2,8

5,9

-3,1

6,8

0,8

CAGR 2010-2020

14,3

21,0

48,6

16,1

25,5

89,3

15,4

15,8

82,2

2010 (€ bn)

Leisure and recreation

Communications

Transport

Health goods and medical services

Household goods and services

Housing

Clothing and footwear

Alcoholic beverages and tobacco

Food and non-alcoholic beverages

3,8383.5Total

3,124,8Misc goods and services

4,125,0Hotels and catering

6,05,5Education

-2,2

3,4

5,2

6,2

2,8

5,9

-3,1

6,8

0,8

CAGR 2010-2020

14,3

21,0

48,6

16,1

25,5

89,3

15,4

15,8

82,2

2010 (€ bn)

Leisure and recreation

Communications

Transport

Health goods and medical services

Household goods and services

Housing

Clothing and footwear

Alcoholic beverages and tobacco

Food and non-alcoholic beverages

Source: National statistics, OECD, Eurostat, Euromonitor, ING

Figure 9: Export profile of Turkey by commodity 1%

10% 31%

21%

28%

2%2%

4%

1% 0%

30%

28%

16%

9%

5%

5%3% 3% 1%0%

Source: UNCTAD, ING companies into Turkey to establish local production facili-ties helps to continue the upgrade of Turkey’s production and export package. Offshoring to Asia seems to be inter-rupted and moving to countries closer to Europe, such as

CAGR 15.6 %

CAGR 18.7 %

CAGR 9.9 %

2000 $ 27.8 billion

2011 $ 134.9 billion / CAGR 15.6

Manufactured goods by material Miscellaneous manufactured articles Machinery & transpor t equipment Food & live animals Chemicals & related products. Crude materials, inedible, exc. fuels Beverages and tobacco Commodities & transactions. Mineral fuels, lubr icants Animal & vegetable oils, fats & waxes

Turkey March 2013 11

Turkey (textiles and clothing), which seem to be profiting from this trend. The more traditional manufactured goods by material (like textiles) clearly outnumber the other ex-port sectors with destination MENA. Turkish export destina-tions changed rapidly in 2000. Then western Europe ac-counted for 57% of Turkish exports, in 2010 this was re-duced to 45%. The reduction of the EU share was compen-sated for by an increase of the share of exports to countries in the Middle East and North Africa (MENA) and emerging Europe. In 2000, MENA accounted for 10% of total exports and in 2012 for 34%. MENA is a fast- growing border re-gion. Main destinations within MENA are Iraq, United Arab Emirates, Iran and Egypt. Unrest in some of the MENA coun-tries temporarily reduces export growth to these regions. Nevertheless, it remains a fast growing area to which Turkey generally has excellent access. As soon as things settle in the region Turkey’s exports will profit from the recovery phase.

Turkey March 2013 12

Sources Business Monitor International, several publications Oxford Economics, global industry database IMD, World Competitiveness Index 2012 Turkish Ministry of Industry and Trade, 2010 Turkey’s industrial strategy document 2011-2014 Turkish Ministry of Energy & Natural Resources Disclaimer The information in this report reflects the personal views of the analyst(s) and no part of the compensation of the analyst( s) was, is or will be related, directly or indirectly, to the inclusion of specific recommendations or views in this report. The ana-lysts that contributed to this publication comply with all the requirements laid down by their national supervisors for the performance of their duties. This publication has been prepared on behalf of ING Bank N.V., established in Amsterdam, solely for the information of its clients. ING Bank N.V. is part of ING Groep N.V. This publication is not investment advice or an offer or solicitation for the purchase or sale of any financial instru-ment. This publication is purely informative and may not be regarded as advice. ING Bank N.V. secures its information from sources it regards as reliable and has taken all reasonable care to ensure that the information on which it based its view in this report are not untrue or misleading at the time of publication. ING Bank N.V. makes no representation that the information used by it is accurate or complete. The information in this re-port is subject to change without notice. Neither ING Bank N.V. nor any of its of directors or employees accepts any liability for any direct or consequential loss arising from any use of this publication or its contents or mistakes in the printing and set-ting of this publication. Copyright and database rights protec-tion exist in this publication. Information in this publication may be used as long as the source is mentioned. In the Nether-lands ING Bank N.V. is registered with and supervised by De Nederlandsche Bank and the Financial Markets Authority.

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With many thanks for their comments on this document to: Sengül Dağdeviren (Chief Economist, Turkey) Muhammet Mercan (Senior Economist, Turkey) Omer Zeybek (Economist, Turkey)