IN THE MIST

Turkey 2012 | DIPLOMACY | YEAR IN REVIEW

Turkey's growth story continued unabated over 2011, and 2012 is shaping up to be another important chapter in its goal to become one of the world's top 10 economies by 2023—the centennial year for the Republic of Turkey. Following strong economic growth of 8.5% in 2011, Turkey is expected to settle into a more sustained long-term growth trend, reaching an average of 6.7% between 2011 and 2017 as the economy returns from post-crisis recovery to stable, long-term growth.

Turkey's growth story continued unabated over 2011, and 2012 is shaping up to be another important chapter in its goal to become one of the world's top 10 economies by 2023—the centennial year for the Republic of Turkey. Following strong economic growth of 8.5% in 2011, Turkey is expected to settle into a more sustained long-term growth trend, reaching an average of 6.7% between 2011 and 2017 as the economy returns from post-crisis recovery to stable, long-term growth.

Political stability has been the anchor of this economic success following Turkey's 2001 financial crisis. This trend is likely to continue following the re-election of the Justice and Development (AK) Party in June 2011. The AK Party, in power since 2002, was able to form a single-party government for the third time, news that was well received by the international investor community. The government is now looking to launch a new constitution for the country, to replace the much-amended 1982 version.

Turkey's FDI potential has been made more attractive this year as a new Commercial Code comes into effect in July 2012. The framework aims to incorporate internationally accepted accounting standards into domestic legislation, increase the transparency of enterprises, and bring Turkish legislation in line with corresponding EU legislation, setting the country up for its long-awaited accession to the EU.

Following the exchange rate volatility Turkey experienced as a result of the financial turmoil in Europe in 2H2011, the Central Bank of the Republic of Turkey (CBRT) has delivered strong monetary tightening, widening the interest rate corridor upwards and maintaining higher reserve requirement ratios (RRRs). While the mix has been viewed as unorthodox in its prescription, the interest rate corridor and measures to keep a lid on the current account deficit have so far appeared successful in reducing exchange rate volatility without constricting growth. The main goal, according to CBRT Governor Erdem Başçı, is price stability combined with financial strength as a supportive tool.

Turkey also achieved an upgrade from Standard and Poor's in 2012 on its local currency sovereign credit rating, rising to an investment-grade BBB. Although the country's foreign currency rating remains BB, the upgrade has been taken as a positive signal by the markets that has been reflected in bond spreads. The new Commercial Code will also bring about changes in the capital markets, improving the regulatory tools available to the Capital Markets Board, and providing additional safeguards for minority shareholders. The IPO market has begun to return to life, with 12 companies listing on the stock exchange in the first half of 2012, and another 13 waiting to launch IPOs. Turkey's economy continues to be buoyed by a robustly capitalized banking system. Turkish banks boast a capital adequacy ratio of 16.6%, much better than the ratios of those in the eurozone. Turkish banks have seen their profits squeezed over the first half of 2012 with the oncoming implementation of the Basel II regime for the sector, though the increasing use of the local currency bond market is reducing their reliance on foreign syndication loans. In the real economy, growth is being driven by increasing agricultural output, an expanding industrial sector, and the sustained strength of the construction sector, which grew 11.2% in 2011. Turkey's construction and contracting sector is now the second largest export generator in the world after China.

Tourism numbers are reaching record highs, with 25.6 million visitors in 2011. By 2023 the country hopes to have doubled arrivals to 50 million, thereby becoming one of the world's top five tourist destinations.

Leveraging its strategic geographic positioning and huge market access, Turkey is also becoming a hub for the world's leading companies. Coca-Cola, for example, manages its operations in 90 countries throughout Eurasia and Africa from its Istanbul headquarters.

Strong domestic demand for cars and favorable industrial investment conditions have made Turkey a particularly attractive base of production for the global automotive industry. As a result, the Turkish automotive sector and spare parts segment have become highly dynamic industries, and the government has recently laid out an industry road map that ultimately sees the creation of a Turkish branded automobile. Turkey's export expectations index rose by 17.1 points in 2Q2012 from 97.9 to 115, with Economy Minister Zafer Çağlayan saying the country will be able to achieve $150 billion in exports. As Europe reels from another round of the financial crisis, and Turkey's EU membership prospects become less certain, the Republic is looking further afield for economic opportunities. Turkey is looking to diversify exports away from its traditional EU partners, shifting toward increased trade with South America and Africa.

Turkey's ever-increasing economic strength has also helped the country continue to grow in its role as a regional diplomatic leader. Turkey is now pursuing a more proactive foreign policy, and in the wake of the Arab Spring, many eyes were looking to Turkey as a potential model of secular democracy in the region. With its geographic position and friendly engagement with countries ranging from the US to Iran, Turkey remains an important player on the international stage, both politically and economically.