Turkey takes centre stage

By bne IntelliNews September 27, 2010

Global Business Reports on behalf of bne -

The World Bank went on record in June to say that Turkey, alongside Russia, would drive the economic recovery in Europe, upgrading the country from a peripheral wannabe EU member to a central player in the future prosperity of the Continent.

By recent standards, and especially in relation to its Western neighbours, Turkey's recent performance has been excellent. With first-quarter annual growth of 11.7% and second-quarter growth of 10.3%, it is easy to see why the country is currently being hailed as a "shining star" in the region. Indeed, Turkey is currently the second fastest growing country in the G20, after China. "Compared to other emerging countries, Turkey has fared quite well during the global crisis. This is because of the crisis that we have been through in 2001. The reforms that were brought forward thereafter have produced a more resilient economy with improved risk management skills and a more diverse portfolio," observes Yapi Kredi Chairman Tayfun Bayazit.

The country's financial meltdown in 2001 saw almost half of Turkish banks being taken over by the government. As a result of the crisis, the country introduced tighter regulation, auditing reforms and full transparency in the banking sector, which ensured that Turkish banks were largely unscathed by the recent crisis, having little exposure to bad debts or exotic instruments.

Other post-2001 reforms include making the central bank independent, floating the Turkish lira and making interest rates, as opposed to the currency, the anchor for inflation. These have laid the foundation for an unprecedented period of economic stability. The privatisation of many public companies and introduction of non-governmental regulatory boards for key industries rounded off the reforms. Political stability has also been a key factor for the country's growth. In power since 2002, the Justice and Development Party (AKP), while by no means universally popular, has been supportive of the finance industry. Crucially, having a single-party government for the last eight years has allowed for the speedy introduction of new legislation.

Not immune but strong

The economy has seen impressive growth over the last eight years as the country has moved away from the boom-and-bust cycle of the 1990s. Foreign direct investment (FDI) increased by 76% between 2004 and 2006, and the FDI stock stood at $77.7bn as of 2009. Between 2002 and 2009, exports increased by 183% to $102bn. Most significantly, the country has managed to bring inflation under control; at 45.2% in 2003, inflation had dropped to 8.33% as of August.

Even so, the Turkish economy wasn't immune to the global economic downturn. The country entered a painful recession at the end of 2008. Unemployment hit 13% in June of the following year. In a bid to counter the downturn, the government introduced an economic stimulus package worth TRY5.5bn (€2.8bn) in March 2009, while the central bank cut interest rates.

In the face of falling exports ($101.6bn in 2009 compared with $115.3bn in 2007), the country's recovery and strong current performance has largely been led by strong local consumption and the ability of the banks to continue to lend - a star contrast to the West, where debt levels are high and consumption anaemic. "In Turkey there is no leverage. The public sector debt/GDP is 40% and the consolidated budget deficit/GDP 4.5%. Total loans/GDP, which is two or three times more in the UK and USA, is 36% and household debts are extremely low, so we can immediately continue to spend," argues Garanti Bank Executive Vice President Tolga Egemen.

This has fed through to the stock market. The Istanbul Stock Exchange put in the second highest growth after Argentina's in 2009, showing the continued interest and faith investors have in the country. And in a sign of growing international confidence, both Fitch Ratings and Moody's Investors Service have upgraded Turkey's rating this year.

A key growth factor for the country lies in the people themselves. Compared to ageing populations elsewhere, Turkey will have a young dynamic workforce and strong consumer base. "Nearly two-thirds (64%) of the population is in the 15-59 age group. According to UN projections, by 2050 Turkey will have the youngest average age of any country in Europe," observes Is Asset Management CEO Gürman Tevfik.

Occupying a strategic position between Europe and Asia is another major and unique advantage. The country is an excellent base for both local and international companies from which to expand operations into Eastern Europe, the Caucasus and the Middle East. With established markets to the west and new markets to the east, the country is taking advantage of its manufacturing and service skills as it develops capabilities in high-tech industries such as automotive and airplane parts.

Turkey is also set to become a hub for energy distribution, linking suppliers from the east to consumers in the west through projects such as the Nabucco gas pipeline.

Challenges ahead

The country does, nevertheless, face some challenges. The government recently announced the delay of legislation that would bind the government into meeting certain fiscal targets and was designed to substitute a new agreement with the International Monetary Fund (IMF). The fiscal rule, originally slated to become effective in 2011, will now only be applied after next year's general election. and there is a worry government spending could increase prior to then.

With the budget deficit a crucial consideration for investors, the delay has almost certainly jeopardized a pre-election rating upgrade to investment status for the country, while further delays could damage longer-term investor confidence. Similarly, if next year's election produces a coalition or instability, there could be ramifications in terms of market confidence and the new government's ability to rule effectively

The current strength of the lira is also proving a problem for exporters. "The complaint by Turkish exporters is a real one and we don't deny it. The cross rate between the euro and dollar went against the lira, and 50-60% of exports go to the European market, so it has had a negative impact on Turkish exports," concedes Central Bank Governor Durmus Yilmaz. Combined with reduced demand from the EU, traditionally Turkey's main export partner, manufacturers are hurting. While many are looking to develop new markets in the Caucasus, Middle East and North Africa and local consumption is also growing, it's questionable whether this demand, especially for more high-tech products, will be enough.

A growing current account deficit, $24.2bn for January to July, compared with $7.8bn for the same period of 2009, while currently manageable, is a worry and shows the importance of Turkish exports for the economy. While unemployment has fallen, it's still high. Some question the veracity of current official figures, citing hidden unemployment and underemployment as concerns.

The biggest concern is, of course, when the recovery will happen in the rest of the world. While Turkey has arguably decoupled from the current crisis, it's not an isolated economy. Dependent as it is on trade, a double-dip recession in the West could prove disastrous. While Turkey's internal market has helped the country get out of recession, local consumption is certainly not sufficient to support long-term growth.

For 2010, the country's better-than-expected GDP figures so far have led many analysts to upgrade their growth predictions for the year to around 7% with inflation at around 6%, though the consensus is that growth will slow in 2011 to around 4%. Experts say the key to maintaining strong growth is the same factors that have enabled Turkey to perform so well over the past decade: political and economy stability.

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