A challenging and new business climate
...
Summary
Turkey has been able to achieve macro-economic
stability under the AKP government and
started accession negotiations with the
EU on 3 October 2005. The government signed
a new three year stand-by agreement with
the IMF in May this year. The IMF and
EU anchors have helped record substantial
increases in FDI inflows this year.
Growth
The Turkish economy has recovered remarkably
quickly from a financial crisis in 2001.
The economy grew by 7.8% in 2002, 5.9%
in 2003 and 9.9% in 2004. The Turkish
economy recorded the highest growth rate
among OECD countries in 2004. Economic
growth slowed down to 4.3% during the
first half of this year, but full year
growth is expected to reach 5%, which
is in line with official projections.
The main drivers behind growth in the
last two years were an increase in private
sector investment and domestic demand.
IMF Programme
The government has established a strong
track record over the last four years
in implementing its IMF reform programme,
which was replaced by a new $ 10 billion
Stand-By Arrangement in May. Turkey will
make $ 20.8 billion in repayments to the
IMF over the next three years.
Inflation
The policies of the newly autonomous financial
institutions (such as the Central Bank
and Banking Regulation & Supervisory
Agency - BRSA) have had a significant
impact on the economy. Consumer Price
Inflation (CPI) fell from 73.2% in January
2002 to 7.5% as of October 2005.
The Central Bank introduced a new currency
(the New Turkish Lira YTL) on 1 January
2005 and has adopted a new monetary policy
framework, which will lead to the formal
adoption of inflation targeting in 2006.
The Bank believes year-end inflation will
come out in line with the 8% target despite
rising oil prices and global volatility.
Banking Sector
Perhaps the most significant aspect of
the economic reforms has been the rehabilitation
of the banking sector. The Banking Authority
(BRSA) completed a three-stage audit of
banks’ balance sheets in 2002. Many
banks required capital injections from
shareholders in order to meet strict capital
adequacy criteria. Around twenty failed
banks were taken into the Savings Deposit
Insurance Fund (SDIF) for sale, merger
or liquidation. The cost of this rehabilitation
is estimated at $47 billion (30% of 2002
GNP).
A stronger supervisory role for the BRSA
has reduced the likelihood of another
banking crisis. Macroeconomic stability
and the prospect of “EU convergence”
has contributed to an increased interest
from foreign banks in the Turkish banking
sector. A number of recent mergers included
BNP Paribas-Turk Ekonomi Bank, Koc-Uni
Credito and Yapi Kredi Bank, Garanti Bank-General
Electric Consumer Finance and the acquisition
of Disbank by Fortis. Falling interest
rates and a decreasing reliance on government
debt instruments have encouraged local
banks to adopt an aggressive policy on
property and consumer loans. The government
is expected to pass the legislative framework
for the introduction of a mortgage system
next year.
The government has recently passed a new
Banking Act to bring local banking practices
closer to EU standards. The law will introduce
strict rules regarding the “fit
and proper” criteria for bank ownership,
restrict risk exposure to group companies
and enhance the supervision of the sector.
State banks still have a large share of
the market (around 10%), which distorts
competition to an extent. The government
is expected to announce an action plan
for the privatisation of state banks soon.
The Banking Regulatory and Supervisory
Agency estimated that the share of foreign
participation in the sector might reach
20% by the end of this year. Also the
abolishment of a full state guarantee
on deposits in July 2004 (guarantee was
limited to deposits of up to $ 35,000)
was an important factor in enhancing competition
in the sector.
Fiscal Policy
The early elections in November 2002 had
a negative effect on the outgoing government’s
fiscal discipline. The overall fiscal
performance of the AKP government in the
last three years, however, has been quite
successful. The budget recorded a primary
surplus of 6.9% of GNP (over the 6.5%
target) in 2004 and is expected to record
a 6.5% primary surplus this year. The
fiscal position is somewhat distorted
by the unregistered economy and a large
social security deficit. The government
is committed under the new IMF programme
to enact a pension reform law in 2006.
The government submitted the 2006 budget
to the Parliament in October. The draft
budget reflected tight fiscal policies
for the fourth year in which the primary
surplus target was set at 6.5% of GNP.
In line with the change in legislation,
the budget, for the first time, included
macroeconomic and budgetary projections
for the coming three years and covered
all public sector entities in order to
make it more transparent.
Debt Sustainability
Turkey’s net debt/GNP ratio fell
from 79% in 2002 to 63.5% in 2004, helped
by the appreciation of the local currency
and a rapid decrease in interest rates
(from 76% during the Iraq war to the current
14% level). The government’s target
is to reduce the debt stock to the 60%
level (in line with Maastricht criteria)
by the end of 2006. Due to continuing
tight fiscal policies and the successful
privatisation performance the debt stock
is expected to decrease in nominal terms
starting from next year. The market demand
for Treasury debt has remained high. Some
of the foreign pension funds, which did
not enter the Turkish market because Turkey’s
credit rating was below investment grade,
have invested in Turkish debt instruments
this year. This helped the government
to extend the maturity of domestic borrowing
(up to 5 years) and reduce interest rates
more aggressively than original estimates.
Also, local corporate and individual investors
have substantially increased their holdings
of Treasury papers.
FDI
Turkey has experienced some difficulties
in the past with attracting significant
volumes of FDI. The average FDI inflow
per year has been less than $ 1 billion
since the 1980s. The year 2001 was an
exception as Turkey’s FDI inflow
reached $3.2 billion, but more than half
of this was accounted for by Telecom Italia
and HSBC acquisitions. The AKP government
enacted a new FDI law in 2003, which removed
the need for investment permission. The
company registration procedure has also
been considerably simplified.
Foreign interest in the Turkish market
has rapidly increased since 17 December
2004 when Turkey was given a date to start
negotiations with the EU and inflows have
accelerated since the start of accession
negotiations on 3 October. The projection
for FDI inflows this year was $ 5.2 billion.
High levels of local demand for quality
products make Turkey an attractive proposition
for foreign firms prepared to take the
investment risk. The local Marks and Spencer
franchise opened their third store in
Ankara in 2003, Tesco invested in the
local supermarket chain Kipa and Cadbury's
Schweppes took over the local confectionery
company Kent. A BP led consortium has
almost completed the construction phase
of the $3 billion trans-Turkey Baku-Tbilisi-Ceyhan
(BTC) oil pipeline. Vodafone has also
expressed interest in the sale of the
second largest GSM operator.
Privatisation
The government has completed more than
$20 billion worth of privatisation projects
in 2005. The size of privatisation projects
completed in 2005 was more than double
the amount in the last 20 years.
The 2005 privatisation programme included
the blocksale of 55% of Turk Telecom (which
was purchased by Saudi Oger), the blocksale
of 46.1% of iron and steel company Erdemir
(which was purchased by the Army Pension
Fund Oyak); and the blocksale of 51% of
oil refinery Tupras (which was purchased
by local Koc Holding in partnership with
Shell). The privatisation programme also
included public floatation of some state
assets such as Turkish Airlines (raised
$ 190 million) and Tupras (raised $ 459
million) and a few other contracts like
the privatisation of the vehicle inspection
stations (at $ 614 million) and the transfer
of operating rights of Istanbul Ataturk
Airport for 15.5 years at $ 3 billion.
The British perspective
In 2004 the UK exported £2.0bn in
goods to Turkey, making it Britain’s 20th
biggest export market. The Turkish economy
has recovered remarkably quickly from
a financial crisis in 2001. The economy
grew by 7.8% in 2002, 5.9% in 2003 and
9.9%, the highest growth rate among OECD
countries, in 2004.
Economic growth slowed down to 4.3% during
the first half of 2005, but full year
growth is expected to reach 5%, which
is in line with official projections.
The main driver behind growth in the last
two years was an increase in private sector
investment and domestic demand. Accession
negotiations with the EU commenced on
the 3rd October 2005 further adding to
interest in this market.
Opportunities
Turkey offers opportunities for trade
and investment across a wide range of
sectors. As well as its large domestic
market, Turkey is an important trading
gateway to the Middle East and neighbouring
countries Georgia, Armenia, Azerbaijan
and further a field Turkmenistan, Uzbekistan,
Kazakhstan and Kyrgyzstan.
Priority sectors that present particular
opportunities include:
Environment
Water
Financial Services
ICT
Construction
Agriculture
Transport
Exporters need to conduct careful market
research and product development before
seeking entry to the Turkish market, but
by choosing CWC Gulf International to
work with you the pitfalls may be avoided
and success is quickly achievable.
In
2006 CWC Gulf opened a new representative
office in Istanbul. If you are
planning to do business in Turkey
then speak to us now.
