Following years of growth up to 2008 as a result of measures taken to strengthen the finance sector after Turkey’s 2001 banking collapse, GDP contracted in 2009 as a consequence of the global financial crisis, only to show an exceptional growth rate of 8.9% in 2010 to reach $741.85 billion as exports returned to normal. Although the agriculture sector still accounts for 30% of total employment, and the textiles sector accounts for one-third of industrial employment, a diversifying industrial base and dynamic services sector are contributing to economic growth and a more sophisticated export mix, in which automotive and electronics exports have surpassed textiles. This increasing sophistication has also been boosted by an extensive privatization program in basic industry, transport, communications, and banking, opening up the economy to more diverse competition. Another positive effect of economic expansion has been a drop in the unemployment rate by 2.1 percentage points to 11.9% in 2010 over 2009 in a country where unemployment has been a perennial issue. The government now expects the figure to fall below 10% over the course of 2011. Inflation also continues its decade-long fall, reaching 3.9% in March 2011.
As Turkey turned to its neighbors to counteract the lack of demand for its products in Europe over the course of the global financial crisis, it saw its exports rise in 2010 to a value of $113.9 billion, an 11.5% increase, whereas imports increased by 31.6%, hitting $188.5 billion. In 2011 exports are anticipated to reach a value of $127 billion, while imports are expected to come in at $199.5 billion. These figures put Turkey on track to reach $132 billion in exports, the value achieved in 2008.
Increasing exports, however, have not been enough to close Turkey’s widening current account deficit, which reached 6.6% of GDP in 2010. This has been blamed on a lack of long-term investment and the prevalence of “hot money” inflows, or short-term purchases of stocks and bonds. To counteract this process, the Central Bank of Turkey (CBT) unexpectedly cut interest rates to 6.25% in January 2011, and greatly increased the reserve requirement ratios (RRRs) of the banks, a move aimed at easing the effect of the interest rate cut and dampening rampant credit growth.
FDI levels were also positive over 2010, with the total stock value of FDI in the country reaching $174 billion. Despite a slowdown due to the continuing effects of the global financial crisis, further economic and judicial reforms, including the implementation of a new commercial code, are expected to boost Turkey’s attractiveness to foreign investors. Total FDI in 2010 reached $8.90 billion, up from $8.41 billion in 2009, but still far from the record $22.05 billion seen in 2007. The sectors that continued to attract the most investment included manufacturing, electricity, gas, water supply, and finance, with EU member states contributing the most in terms of investments. The largest FDI in 2010 was Spanish BBVA’s purchase of 24.9% of Garanti Bank for $5.8 billion.
The AK Party government has also announced plans to cut the budget deficit to TL33.5 billion in 2011, with spending expected at around TL312.5 billion. Tax revenues are predicted at TL232.2 billion, while other income will be generated from non-tax revenues, special revenues, and regulatory and supervisory organs. In addition, a further 70,000 civil servants will be hired. If all goes to plan, the overall budget deficit will come in at 2.8% of GDP, while in 2010 the figure was 4%. The largest spending area was forecast to be current transfers, with the aim of financing current goods and services. This will be key for the AK Party in the post-election environment, as it increases the allocation of funds to the Social Aid and Solidarity Fund. “Health Aid” also features on the budget, with TL4.7 billion allocated to providing treatment for those on low incomes. Overall health spending will rise 23.7%, and education spending will hit TL34 billion, an increase of 20.8%.
Prime Minister Recep Tayyip Erdoğan used the election build up period in 2011 to give further details of his bold “Vision 2023” program, which includes a number of grand targets to be reached before the Republic’s centenary in 2023. Turkey taking its place in the top 10 economies in the world is the backbone of the plan, with other targets in the realms of foreign trade, per capita income, unemployment, infrastructure, and foreign policy. Foreign exports are estimated to reach $500 billion, while total foreign trade will break the $1 trillion mark. A further 500,000 homes will be built by the Turkish Housing Development Administration (TOKİ), and major infrastructure projects will see Turkey’s highways, railways, and ports boosted through extensive expansions. The Prime Minister also announced plans to construct a water passage to the west of Istanbul, linking the Black Sea to the Marmara Sea and reducing the traffic burden on the Bosphorus.
STRENGTH IN NUMBERS
In a year that saw most of its neighbors’ economies shrink, the Turkish economy grew as a result of robust resilience across every sector, the backbone of which was the banking sector, posting a growth rate of 8.7% to hit $13.9 billion in profits in 2010. As the sophistication of retail banking improved, loans and deposits also grew, with 33% and 19.9% growth respectively over 2010. To leverage this growth banking sector assets also rose 20.8% to TL1 billion, according to the Banking Regulation and Supervision Agency (BRSA).
FDI also continued to fuel growth, with a total $94 billion invested in Turkey over the past eight years. The United Nations Conference on Trade and Development also ranked Turkey the 15th most attractive destination for FDI for 2008-2010. This is a tribute to Turkey’s sound economic policies, tight fiscal discipline, strong financial structure, and resilience to and recovery from the global financial crisis.
Manufacturing is key to Turkey’s economic development, and rapid developments in the industrial sector are transforming its export base. Of the total $113.98 billion of exports in 2010, $105.57 billion came from the manufacturing sector, the top three export categories of which are automotive, electronics, and textiles. The next largest contributors to total exports were agriculture and forestry products, at $4.94 billion, followed by mining and quarrying products at $2.68 billion. Growth in manufacturing exports is also continuing, with $29.23 billion worth of exports over the first three months of 2011 compared to $24.02 billion in the same
period in 2010.
Generous R&D incentives offered by the AK Party government, as well as increasingly sophisticated vehicles to promote and facilitate FDI, are aiming to reduce imports as well as increase exports. Current imports totaled $185.5 billion in 2010, of which the manufacturing sector had the lion’s share with $145.37 billion. Mining and quarrying was next with $25.93 billion, and agriculture and forestry was in third place with $6.46 billion. A strong increase in manufacturing sector imports was also seen over the first three months of 2011, with $42.60 billion worth of imports seen compared to $29.96 billion over the same period in 2010. It is hoped that government spending, R&D projects, as well as FDI will help to boost exports directly, and improve the country’s transport and ICT infrastructure—already huge growth sectors—to try and improve the business environment.
AS FOR THE CAD
Turkey’s current account deficit widened by a massive 247% in 2010 to reach $48.6 billion as domestic demand soared and imports outstripped exports. In February 2011 the deficit doubled in year-on-year terms to hit $6.13 billion, reaffirming concerns that the economy is overheating. Rising oil prices in the region caused by turmoil in the Middle East have also increased Turkey’s import bill, as the country imports 95% of its crude and gas needs. Of the country’s $48.6 billion-wide deficit in 2010, an estimated $7.1 billion was financed by direct international investments, while the remainder was mostly financed by short-term foreign investments, or so-called “hot money”.
The CBT’s radical policy of lowering interest rates while increasing RRRs is expected to begin taking effect in 2Q 2011. Government expectations are for the deficit to represent 5.4% of GDP at end-2011, down from 6.6% in 2010. External predictions, however, suggest it could top 7% as investors lose confidence as Turkey becomes more susceptible to external factors.
CBT policy has, however, begun to be positively reflected in the inflation rate, which has begun to decrease, reaching a 41-year low of 6.4% in 2010, according to TurkStat. While the Consumer Price Index (CPI) was at 6.4%, the Producer Price Index (PPI) came in at 8.87%, signaling a continuation of the downward trend in inflation over the last decade. Unprocessed food products, energy, alcoholic beverages, tobacco products, and gold were the biggest drivers of inflation, though omitting them from the core statistical basket the CBT prefers to use puts the CPI increase at only 0.15%. Turkey also began 2011 well, with inflation dropping to 3.9% in March.
On the back of the nominal $1 trillion foreign trade target expected to be reached in the coming years, Vision 2023 is the AK Party’s plan to see Turkey achieve a nominal GDP of $2 trillion by 2023 and take its place amongst the top 10 economies of the world. Although Turkey is currently ranked 16th in GDP tables, it is 57th in GDP per capita rankings at $10,399, according to the IMF. Vision 2023 sees this figure reaching $25,000, as well as reducing unemployment to 5%, and increasing the workforce to 30 million. The government’s foreign trade targets also highlight the commitment of officials to balance the current account deficit, with targets of $500 billion for both exports and imports.
Energy is also a key component of Vision 2023. The government hopes to have built three nuclear power plants, as well as have 20,000 MW installed capacity for wind energy and 600 MW installed capacity for geothermal energy. Up to 20% less energy will also be used, according to the plan, through the more efficient utilization of energy resources.
Other sectors set to receive boosts include health, in which the government targets full universal health coverage, with the number of doctors to increase to 210 per 100,000 people. Transport infrastructure will also receive a boost, with 11,000 kilometers of new railway lines, including an expanded high-speed train network. In addition, 15,000 kilometers of divided highway will be built, and a Turkish port will take its place amongst the top-10 largest ports in the world. Furthermore, the plan outlines the vision of Turkey producing its own airplane, unmanned aerial vehicle, and even a satellite. In the all-important field of tourism, 50 million visitors are targeted by 2023, making Turkey the fifth largest tourist destination in the world. Such increases would yield $50 billion in revenue for the sector.
Istanbul is likely to receive a large share of investments as a part of the Vision 2023 plan, including a third airport in the city and a shipping canal, with four times the capacity of the Panama Canal, being built to the west of the city, connecting the Black and Marmara seas. It is planned to be between 45 and 50 kilometers in length and will be 150 meters wide at the surface. The aim is to relieve congestion in the Bosphorus Strait and also reduce the chances of an environmental disaster as tankers carrying oil and gas from Russia and Central Asia pass through
© The Business Year