Macroeconomic

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Key Economic Indicators

2006 2009 2011 Real GDP growth, % 6.89 -4.82 8.49 GDP per capita, US$ 7687 8553 10498 Inflation, annual avg % 10.51 6.25 6.47 Unemployment, % 10.19 14 11.9 Current acct balance, US$, Billion

-32.2 -13.3 -76.9

Current acct balance as % of GDP

-6.07 -2.18 -9.95

Deposit Interest Rate % 21.65 17.65 - Foreign exchange rate, US$

1.42 1.54 1.67

Fiscal deficit/surplus as % of GDP

1.90 -5.55 -

Fiscal debt as % of GDP 51.50 51.45 -

 

Political Condition

Born in 1923, Turkey implemented democracy in 1950 and the country has since operated democratically

on and off due to military coups in 1960, 1971, and 1980. In each instance a return to democracy was achieved. Interruption to Turkey’s democracy occurred most recently in 1997, where the military essentially forced the government at the time to sign in several laws that separated religion and state to a large extent. A coalition government was then formed and elections held shortly after signifying the return to a democratic system. Given its history in recent decades, there is a fairly high-perceived political risk in the country.

Turkey became a member of the World Trade Organization (WTO) in March of 1995, and has been attempting to gain membership to the European Union (EU) since 2005. A history of

conflict with Greece appears to be the main obstacle to its accession to the EU.

Recent Economic Trends

The recent global crisis had an immediate and strongly negative effect on Turkey’s economy, dropping its real GDP by over 10% between 2008 and 2009. However, the country rebounded extremely quickly and surpassed its pre-crisis peak by 2010. The country experienced real GDP growth of 9.2% and 8.5% in 2010 and 2011 respectively. Turkey also has a relatively low youth unemployment rate, a statistic currently plaguing most European countries because it is too high. Turkey does trade heavily with Europe, but it also has many trading partners to the East. So, when the crisis hit many Turkish firms were able to target their efforts to exporting more to Middle-Eastern nations that were not as strongly impacted by the crisis.

One concern the country has at present is a large current account deficit. This appears to have arisen because foreign firms are more cost- efficient to the extent that transportation costs alone are not large enough to compete against superior imports. Turkey has implemented an investment incentive system to spur growth and development of industry within Turkey in an attempt to mitigate the growing cumulative trade deficit.

Turkey has not welcomed foreign direct investment, and this is among the reasons it is not yet part of the EU. The country has recently made a slight easing of regulations for foreign investments, but progress is very gradual and at this rate it will take many years for Turkey to see a significant inflow of foreign capital. Foreign direct investment (FDI) often leads to internal development in terms of infrastructure and knowledge, so allowing FDI may well eventually result in more productive and effective Turkish firms that are less vulnerable to import competition.

Fiscal and Monetary Policy

The country’s fiscal policy has left Turkey in a more favorable position than most other OECD countries with regard to government ability to repay debt obligations. As of 2009, total government debt equated to 51.45% of GDP. The government appears to alternate between budget deficits and surpluses fairly often,

TURKEY  COUNTRY  REPORT  

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equaling out over time on a % of GDP basis. The 2006 value of 51.50% is almost identical to the 2009 value of 51.45%. Of course, the rapid growth in GDP has allowed for additional government borrowing without deteriorating its deficit as a % of GDP.

The nation’s policy follow a well-regulated and predominantly market-driven economy, with the only real discrepancies from free-market economies existing in the form of restrictions on foreign capital and some trade barriers. Another criticism of the country’s governance is its high cost of setting up a business and disposing of failing businesses. These factors are restricting growth and subsequently restricting government revenues in the form of optimized taxes.

Turkey’s central bank is currently focusing on price stability, and having complete control of its own currency (as opposed to the European Union countries it seeks to join) allows it to align fiscal and monetary policies. This inflation control protects those receiving fixed-income, and also reduces wild exchange rate fluctuations, which is positive from a foreign investment perspective.

Outlook

Turkey is currently characterized by an uncoordinated public sector, with government institutions’ budgets not organized efficiently or effectively. This is an area that the recently elected government has stated it will improve upon. The country has in place a Pre-Accession Economic Program (PEP) with the European Commission that outlines reforms Turkey is expected to implement in coming years to reduce its deficit, improve tax revenue policies and collection, and deregulate further. The nation’s education system is also terrible by most metrics, but an education reform seeks to change that.

The nation’s economy is expected to grow by 3% and 4.5% in 2012 and 2013 respectively. The government’s need for foreign funding in coming years is expected to be very high, given that it is at a point in its economic development where spending for infrastructure is both viable and optimal for the country’s growth. In 2012 allow such funding requirements are expected to be 150 billion USD. Inflation should begin to fall with the implemented monetary policy, but it may take some time before price levels are stable enough for Turkish fixed-income investments to become worthwhile pursuits.

Recommendations

§ Tighten the money supply to reduce inflation. § Centralize budgeting and decision-making of

government entities where possible to reduce wasteful spending and improve efficiency.

§ Reduce restrictions on foreign capital to encourage foreign direct investment.

§ Reduce costs associated with starting and closing businesses to spur entrepreneurship.

§ Reduce quality disparity amongst education facilities at all levels using per-student funding budget allocation.

§ Encourage female participation in the workforce by offering affordable child-care.

§ Lower the cost of employment severance to allow for a flexible workforce that can react quickly to changes in demand.

§ Implement a government spending limit to protect against overspending and keeping the deficit per GDP figure in check.

Conclusion

Investing foreign capital into a Turkish enterprise is slightly risky, but it has very large gain potential for the following reasons:

§ At the very least it has vast export potential to both the Europe and Asia. It may even eventually become a member of the EU, which will really bode well for trade.

§ Turkey has already begun a great deal of deregulation that has opened new market opportunities, particularly for FDI.

§ First mover advantages in many markets will become available in the next few years as the country’s infrastructure is developed.

References

§ CIA Factbook: Turkey, September 2012 § EIU Turkey Country Report, September 2012 § Doing Business in Turkey, Export.gov, 2012 § OECD Economic Survey of Turkey,

September 2012 § Turkey 2011 Progress Report, European

Commission, December 2011 § Turkey – Country Study, The Library of

Congress, March 2011 § Turkey- Human Rights Watch, January 2012 § Turkey Data - World Bank, September 2012 § World Economic Outlook, IMF, April 2012