Turkey looks to break import addiction

By bne IntelliNews August 3, 2011

Justin Vela in Istanbul -

Research from the Turkish Exporters' Assembly showing that exports were up 23% in July from the year before is a healthy sign for Turkey's economy. However, experts say to close the trade gap Turkey needs to foster more value-added domestic production and end the habit of assembling products that other countries make more cheaply.

"[Turkey's] import dependency resembles a drug addiction," Zafer Caglayan, the new economy minister, stated recently, according to local media.

Indeed, according to TurkStat data, Turkish exports in June increased by 19.3% on the year to reach $11.4bn, but imports increased during the same month by 41.7% to reach $21.6bn. This resulted in the trade deficit rising 79.2% on the year to $10.2bn in June, the key factor behind forecasts that put Turkey's current account deficit at $83bn, about 10.8% of GDP, for the whole of the year.

The mushrooming current account deficit, along with 11% growth in the first quarter of the year, indicate that Turkey's economy is overheating and critically unbalanced. Domestic production is rising - in the first quarter manufacturing and industry was up 10.9% on year, construction up 14.8% and retail trade up 17.2%. But with Turkey so heavily reliant on imports, how that production is being fostered makes a big difference. "When you look at domestic production, it is growing very fast," says Ozgur Altug, chief economist at BGC Partners, a global brokerage house. "The issue is that whenever Turkey increases its production, the current account deficit widens."

This is a structural problem that won't be solved in the short term, Altug says. The country imports the vast majority of its energy - Russia is the main supplier - and is largely focused on assembly line production that requires a large number of imported parts. What ends up being made is "medium-technology products" that can be bought on the global market from other countries at more competitive prices due to lower labour costs.

Inside Turkey, the penetration of inexpensive Chinese products is having a large effect. According to Altug, almost 20% of the trade deficit is with China, which is the second largest source of imports after Germany. "There is a massive scarcity of value-added production," he says. "Turkey must increase its production of value-added products rather than simply increase output... It will be impossible to reduce the current account deficit to 5% of GDP in the short term."

Many analysts believe that a current account deficit of about 5-6% of GDP for rapidly growing Turkey is a far more sustainable level.

Short-term woes, long-term goals

To achieve this, though, deep labour market reforms are necessary, such as cost reductions, better education and training, and subsidies for research and development to not simply increase, but change the structure of domestic production in Turkey.

Experts say the government appears to understand the challenges posed by the current forms of domestic production. A government-sponsored analysis called the "Input Supply Strategy" is being conducted within sectors that are importing excessively. In a July meeting with the Association of Economy Reporters, Caglayan, who heads the newly formed economy ministry, which was created to deal with issues such as the current account deficit said that following the analysis, several subsidies and strategies will be established over the next months to increase competitive.

"When you say domestic production, you are taking about investment, intermediary and consumption products," says Professor Seyfettin Gursel, an economy expert at Istanbul's Bahcesehir University. He singled out intermediary products as the key sector for Turkey to increase production in. "This is most important. We must make them more competitive, but there is not one or two solutions on which every economist agrees."

Intermediary products, or goods traded between producers and suppliers such as steel and timber, have a lot of potential for growth in Turkey. In 2010, the country was 10th in the world of steel producing countries and Europe's second largest crude steel producer. In 2005, Erdemir, one of the country's top steel producers was privatised with hopes that production would rise from 5.2m tonnes per year of crude steel.

Gursel also points to the defense industry as a leader in domestic production. Aselsan, a defense firm, in June signed a $718m deal with the Turkish Undersecretariat for Defense Industries to develop low- and medium-altitude air defence systems. In July, the Hurriyet Daily News reported that Turkey began production of its own military grade rifle. In June, the state's Scientific and Technical Research Council of Turkey exhibited the country's first cruise missile. "The defence industry is quickly developing," Gursel says. "There will be some by-products for civilians industry."

The key component of the trade deficit is energy. Energy demand in Turkey growing alongside the booming economy. According to the Wall Street Journal, Turkey imports 87% of its petrol, 85% of its coal and 97% of its natural gas. The country is critically in need of alternative energy production. Altug points to nuclear energy programmes with Japan and Russia. The government is also giving investment incentives to wind and other alternative energy projects.

However, these projects are down the road. The question remains if Turkey will be able restructure in the short-term before the economy becomes too imbalanced. "In the medium or long term the solution is there. But now we need a short-term solution. 2016 or 2017 is too long," he says.

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