July 10, 2006	Monday	Jumadi-ul-Sani 13, 1427

Turkey

Turkey is at the centre of an economic and political area known as ‘Eurasia’, where three regions of the world, Europe, the former Soviet Union and the Middle East intersect. The proximity to the Balkans and the rest of Europe as well as to the growing emerging markets in Central Asia, the Middle East, and North Africa creates unique business opportunities. The experience of numerous global firms confirms Turkey as a predominant investment location and export platform. Companies like Coca-Cola, the GE, Procter & Gamble and Phillip Morris, as well as international investment institutions like the World Bank Group’s International Finance Corporation have already selected Turkey as a regional base. Turkey is fast becoming a production centre for Europe in diverse industries, but in particular in automotives.

The country has witnessed three major crises since 1994, and the 2001 financial crisis was one of the worst economic downturns Turkey has ever experienced. Although the average historical growth rates have been more than satisfactory, political instability, problems in foreign affairs, populist domestic policies and a major earthquake at an industrial centre have all contributed to these crises. Growth rates since 2001, on the other hand, have been the highest in the OECD area.

Strong activity in the private sector continues to boost the economy and GDP growth is expected to remain above six per cent in 2006 and 2007. While the public deficit is projected to shrink further, the current account deficit is likely to stay at historically high levels. To maintain growth on a sustainable path, domestic and international confidence must be preserved. Policies should ensure the credibility of macroeconomic policy institutions; make sure that the regulatory framework can cope with potential financial risks; and improve enterprises’ competitiveness by accelerating the programme of microeconomic reforms.

Long-term persective: Furthermore, the long-term perspectives look even more promising. With Turkey’s population growth rate having fallen from over two per cent to roughly 1.5 per cent, it is on the verge of entering a ‘golden demographic period’ similar to what East Asia experienced in the 1980s, where the productive working population is the largest relative to children and retirees, providing the potential for even more rapid income growth.

The continuation of reforms to bring Turkey into full EU membership will not only increase the confidence in the Turkish potential and investments in Turkey, but is also likely to make Turkey indispensable for the EU. Turkey is likely to become the Florida of the EU, in terms of caring for the old. Only a few emerging markets in the world have the potential of attracting investment both for export as well as for their domestic market.

The industrial production has shown steady increase since 2001 and has reached its highest ever level of 143 in September 2005, based on the 1997 index. Capacity utilization rates have demonstrated a similar pattern and have been hovering around the 80 per cent mark over the last year. The rates are higher than the 1995 boom years’ levels and industrial production has sky-rocketed by 20 points since the end of 2000, another boom year.

The steady decrease in inflation levels has not only boosted confidence in the domestic market, but also allowed all the players in the economy to be able to plan ahead, perhaps for the first time in the last 30 years. Over a period of past five years, annual inflation has fallen to single digit. From 68 per cent in 2001 the CPI has come down to 5 per cent in 2006. Turkish business people are very happy to have the high inflation nightmare out of their sight. However, the increase in inflation in the past five months was primarily caused by high domestic demand, according to the central bank.

The central bank in its report stressed that the impact of fluctuations on the economy in global markets, which started in May, merited serious concern. The fluctuations have pushed up production costs significantly in the manufacturing industry, the report said. The recent developments would shrink Turkey’s gaping foreign trade deficit and the current account deficit, said the report that anticipates a revival in exports, particularly in labour-intensive industries. The central bank said domestic demand hit by market fluctuations was likely to cool off over the short term, which would have a positive affect on bringing down the inflation rate in the second half of the year. The central bank pointed out that the fluctuations were shaping market perceptions on inflation negatively, which it considered to be a development meriting attention. The central bank reiterated its determination to fight inflation and vowed to protect its cautious stance on monetary policy.    The bank predicted a slowdown both in domestic demand and economic growth in the second part of the year and forecast that economic growth would be relatively restricted until the first half of 2007. However, the report said cooling-off of domestic demand would relieve some of the pressure caused by higher productions costs, which would have visible affects starting in August, when the yearly inflation rate would fall within the central bank’s forecast. However, the rate would go back up in the fall until it will start going down again in the second quarter of 2007.    Turkey’s chances of single digit inflation for end-2006 have increased following the bank’s decision to increase short term rates. The effects of market fluctuations were not likely to linger on exchange rates in 2007, which the central bank said would be another gain brought by higher rates.  The central bank report said Turkey’s inflation target is still within reach over the medium term. The bank targets four per cent inflation for next year and five per cent for this year. 

Economic reforms: The Turkish government prepared and declared a three-year budget in line with the IMF targets. This development has definitely contributed to positive expectations in the market.

As part of the economic reform programme, the Turkish government began a series of privatizations, some of which are in strategic industries. It raised US$9.65 billion in 2005. It seems that the government’s persistent attempts in the privatization programme will continue in the future, creating further and profitable opportunities in the energy, telecoms, agribusiness, transport and real estate industries.

Turkish foreign trade has increased tremendously over the past decade, growing almost 20 per cent annually. According to the WTO figures, Turkey ranks fifth in the world in terms of exports growth. In fact, Turkey’s exports have more than doubled in the last three years, reaching an estimated US$72 billion for 2005. Its imports have also been growing at an impressive rate. The structure of imports remains concentrated in raw materials and other industrial inputs, suggesting that however high they may be at this stage imports are merely supporting the export base. The only serious concern in the major economic indicators relates to current account deficit, which is high by any standards at its annual current level of US$22.8 billion as of end of 2005.