Turkey’s Economic & Political Outlook
June 3, 2014
Mehmet Şimşek
Minister of Finance
1
Is political stability at stake?
Low growth – the new normal?
Is the pick-up in inflation temporary?
Turkey’s soft spot - ...
Is political stability at stake?
3
Importance of Political Stability
4
v
A Virtuous Cycle
Political Stability
5
15 Months
139 Months
0
20
40
60
80
100
120
140
Average Lifetime of Governments during 1950-2002 AK P...
Local Election Results
Source: Anadolu Agency
AK PARTY: Justice and Development Party
CHP: Republican People’s Party
MHP: ...
Key Messages from the Ballot Box
Political Stability is here to stay
Corruption allegations were politically motivated
Pre...
2 More Elections Ahead
Presidential
• August 2014
Parliamentary
• June 2015
8
Low growth – the new normal?
9
Real GDP
Source: Turkstat, Eurostat
120
100,0
85
90
95
100
105
110
115
120
Q1-08
Q2
Q3
Q4
Q1-09
Q2
Q3
Q4
Q1-10
Q2
Q3
Q4
Q1...
Real GDP: Turkey vs AMs
Source: Turkstat, Eurostat
120
98
100,0
106
85
90
95
100
105
110
115
120
Q1-08
Q2
Q3
Q4
Q1-09
Q2
Q...
12
Real GDP: Turkey vs EMs
Source: TURKSTAT, IMF
168,8
100,0
152,8
153,0
180,4
159,0
143,8
95
105
115
125
135
145
155
165
...
Upside
• Stronger external demand
• EU pulling out of recession
• Arab Spring becoming less
disruptive
• TL depreciation
D...
Softer Domestic Demand
14
Source: Turkstat, BRSA
(Index)
(Annual,%)
0
5
10
15
20
25
30
35
40
45
55
60
65
70
75
80
85 Jan-0...
15Source: Bloomberg, Turkstat
Index(monthly)
(6monthrolling)
20
22
24
26
28
30
32
34
36
30
35
40
45
50
55
60
65
Jan-09
Apr...
Manufacturing Output
16
Source: Turkstat, CBT
100
80
85
90
95
100
105
110
115
120
125
130
55
60
65
70
75
80
85
90
95
100
1...
PMI remaining above 50
17Source: HSBC
51,1
30
35
40
45
50
55
60
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Ja...
Job Creation
Employment(mnpeoples.a.)
Source:TURKSTAT 18
25,8
20
21
22
23
24
25
26
27
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
M...
Unemployment & Labor Participation Rate
Source:TURKSTAT
44
45
46
47
48
49
50
51
52
8
9
10
11
12
13
14
15
16 Jan-08
May-08
...
Is the pick up in Inflation Temporary?
20
Inflation
0
20
40
60
80
100
120
140
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1...
2014 Inflation: Target vs Forecast
Energy
prices
0.1 ppt
Deterioration
in pricing
behavior
0.3 ppt
Tax hikes
0.5ppt
Food p...
CBRT’s Inflation Outlook
23
Inflation is to resume downward trend as base effects fade
Source: CBRT
Upside
• TL depreciation
• Unprocessed food prices
Downside
• Monetary tightening
• Output gap
• Recent macroprudential me...
(%)
Tight Monetary Policy
Source: CBRT 25
8.0
12,0
9.5
3
5
7
9
11
13
15
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
M...
(%)
26
Kaynak: TCMB
Interest Rates on Turkish Lira Bank Loans
7
9
11
13
15
17
19
21
23
25
27
29
January-08
April-08
July-0...
Macroprudential Measures
• Single limit for all credit cards
• Higher minimum payment
• Limit on # of installments
Credit ...
28
Source: CBRT
Credit Growth
13weekmovingavg.(%.y/y)
* Credit Growth is adjusted for exchange rate movements
12,1
0
5
10
...
Turkey’s Soft Spot – Getting Fixed?
29
Current Account Deficit
Source: CBRT 30
(12MonthRolling,USDbn)
-80
-60
-40
-20
0
20
40
Jan02
Jul02
Jan03
Jul03
Jan04
Jul04...
Factors behind high C/A Deficit (2011-13)
Strong domestic demand
Euro crisis
High energy prices
Arab Spring
31
Upside
• Geopolitical tensions
• Higher energy prices
Downside
• Faster recovery in Europe
• More stable MENA
• Softer dom...
Should we be worried about Open FX
Positions?
33
Turkey's FX Position
Source: CBRT, BRSA, Treasury
* Assets: CBRT FX Deposits of Treasury+ CBRT Foreign Assets; Liabilities...
Firms
Source: CBRT
No FX
Loans
63%
FX Loan w/
export earning
25%
FX Loan w/o
export earning
12%
9,500 firms
Total net sale...
Firms: SMEs and Large Companies
Greater amount of FX debt belongs to LARGE COMPANIES
80% out of the 57% of large companies...
Households: Low Leverage
Source: CBRT, ECB
(HouseholdLiabilities,%ofGDP,June2013)
No FX exposure
65
23
20 40 60 80 100 120...
Banks: Safe & Sound
CapitalAdequacyRatio,%
2002 Mar-14
17,6
2,8
NPLRatioofLoans(%)
15,7
0
5
10
15
20
25
Jan-08
May-08
Sep-...
Turkey’s Banks - among the Strongest in EMs
39
Source: World Bank
Source: World Bank, IMF, BRSA
Banking Sector: Able to Absorb Shocks
Arm
Br
Bul
Col
Cro
Egy
Fr
Gre
Indo
Ire
Ita
Latv
Leb
Li...
Fiscally:
Room to Manoeuvre
41
10,8
7,9
4,1
0,1
-1,3
0,2
1,6
5,5
3,0
0,4
1,0 1,0 1,1
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
12,0
2002 2003 2004 2005 2006 2007 200...
Budget Deficit (2014)BudgetDeficit-to-GDP,%
Source: IMF, OECD, Ministry of Development
3,9
2,9
2,3
1,1
0,5
1
1,5
2
2,5
3
3...
44
Upside
• Conservative revenue assumptions
• Outperformance in non-tax revenues
• Improving tax compliance
Downside
• We...
Source: IMF
Fiscal Strength in EMsGrossPublicDebt(%,GDP)
Fiscal Deficit (%, GDP)
Arm
Br
Bul
Col
Cro
Fr
Hun
Indo
Ire
Latv
L...
74,0
67,7
59,6
52,7
46,5
39,9
40,0
46,1
42,3
39,1
36,2 36,3
33,0
25
30
35
40
45
50
55
60
65
70
75
2002 2003 2004 2005 2006...
Public Debt (2014)
Source: IMF, OECD, Treasury
Debt-to-GDP,%
111,1
89,0
33,3 33,0
20
30
40
50
60
70
80
90
100
110
120
OECD...
Details of Treasury Guarantee Scheme
$3bn cap under 2014 Budget Law
PPPs under guarantee
• 3rd Bridge
• Euroasia Tunnel
• ...
Priorities & Reform Agenda
49
Chapter- 1
Enhancing
Human
Capital
Stock
Local &
Renewable
Energy
Reducing
Informal
Economy
50
Enhancing Human Capital Stock
51
Source: Ministry of Finance
Share of Education Budget(%)
52
Investment Incentives in Education Sector
18% VAT down to 8%
50% tax relief on CIT & PIT for exports in education
PIT and ...
Gross Schooling Rates
Source: Ministry of Development
54
12 Years of Mandatory Education
Austral.
Austria
Belg.
Canada
Chile
Czech R.
Den.
Estonia
Finland
France
Italy
Japan
Lux
M...
2002
91.1 girls per
100 boys
2012
101.8 girls
per 100 boys
Improving Girls’ Education
56
Source: OECD
76
74
47
51
38
46
30
35
40
45
50
55
60
65
70
75
80
Science Math
2006 2009 2012
Enhancing Human Capital Stock:...
Improving Quality of Education
With Fatih Project, we are providing our children with
Broadband Internet Access
Smart Boar...
Local & Renewable Energy
59
High Dependence on Energy Imports
72%
Total Energy
92%
Oil
98%
Natural-Gas
60
Source: TURKSTAT, Bloomberg
Energy Import Bill
(Brent,$pbl)
EnergyImports(BillionDollars)
61
Developing Local & Renewable Resources
Source: Ministry of Energy and Natural Resources
Electricity Generation Installed C...
Renewable Energy OutlookOverthenext
decadeinTurkey,
• 20,000 MW, wind power generation
• 3,000 MW, solar power plants
• 60...
64
0
6
12
18
24
2010 2011 2012 2013
Module Inverter Other Hardware Soft Cost
Costofelectricity,centsperkWh
Source: DOE/NRE...
Turkey’s Solar Energy Potential Atlas
65
Building Nuclear Capacity
Akkuyu:
JV with Russia
Sinop
JV with a Japanese-French consortium
Working on a 3rd plant
66
Improving Energy Efficiency
Industry
20%
Transportation
15%
Construction
30%
67
Combatting Shadow Economy
68
52,1
51,7
50,1
48,2
47,0
45,4
43,5 43,8
43,3
42,1
39,0
36,7
33,8
30
35
40
45
50
55 2002
2003
2004
2005
2006
2007
2008
2009...
Size of Shadow Economy
32,2
31,5
30,7
30,4
29,1
28,4
28,9
28,3
27,7
27,2
26,5
26
27
28
29
30
31
32
33
2003
2004
2005
2006
...
Size of Shadow Economy
Source: Schneider, 2013
But still higher than EU average
31,2
28,4
28,4
28,0
27,6
26,5
25,5
25,2
24...
Chapter- 2
Improving
Infrastructure
Deepening
Capital
Markets
Moving up the
Value-Chain
72
Improving Infrastructure
73
Infrastructure Fueling the Economy
Infrastructure development has the
potential to*
• Promote growth
• Increase equity
• R...
1,714 Km
Total of Motorways
4,387 Km
Total of State and
Provincial Dual
Carriageways
Total: 6,101 Km
January 1, 2003
2,244...
İSTANBUL
EDİRNE
ESKİŞEHİR
Polatlı
ANKARA
KONYA
İZMİR
SİVAS
AFYONKARHİSAR
KAYSERİ
BURSA
ERZİNCAN
ERZURUM
KARS
MERSİN ADANA
...
Future Railways Investments
By 2023 $ 45 billion worth of investment
10,000 km worth of new high speed railway
network
4,0...
İstanbul
Antalya
İzmir
Gaziantep
Trabzon
Kayseri
Samsun
Erzurum
Kars
Van
Diyarbakır
Malatya
Dalaman
Bodrum
Sivas
Elazığ
Bu...
2003
60 Points
SunExpressPegasus
ATLAS JET Onur Air
2014
236 Points
THY
THY
SunExpress
Increase : 294%
79
Flight Points (I...
The 3rd Airport in Istanbul, Largest of All
150 million passengers
An area of 90 million m2
Construction Cost: €10 billion...
Projects of the Century - Under Construction
Tube Tunnel 3rd Bridge
Izmit Gulf Transit Istanbul-İzmir Highway
High-Speed T...
Projects of the Century – Planned
Channel Istanbul
82
Deepening Capital Markets
83
Banks dominate Financial System
Share of Banks
in Financial
Sector
87.4%
84Source: Central Bank of Republic of Turkey
Insu...
2009
72nd
2014
47th
2018
25th
Global Financial Centers Index
Source: Global Financial Centres Index 15
45
47
60
63
70
75
7...
Strengthening the legal framework
Improving physical infrastructure
Simplifying tax system
Providing financial education
I...
Sukuk
87
Sep-12: Sukuk issued for $1.5bn in international market
Oct-12: Sukuk denominated in TL issued for TL1.6bn
Feb-13...
Increasing Savings: Private Pensions
25% State
Contribution
1.4 million
new
participants
and TL7.9bn
funds since
end-2012
...
Support for Start-Ups
Incentives for Biz Angels
Incentives for VCs
89
Moving up the Value-Chain
90
Source: The Scientific and Technological Council of Turkey
* % of GDP
R&D Spending*
91
•3.00%2023
•1.8%2018
• 0.92%2012
• ...
Patent Applications
Source: TPI
92
1.874
12.053
1.000
2.000
3.000
4.000
5.000
6.000
7.000
8.000
9.000
10.000
11.000
12.000...
Trade Mark Applications(2012,Thousand)
86
64
54
44
41
20
30
40
50
60
70
80
90
100
110
120
TURKEY France Germany Italy Spai...
Tax Incentives for R&D
R&D Expenditure
• Corporate income tax relief
• Personal income tax relief
• State contributions to...
Global Investors in Turkey
95
International Companies Operating in Turkey
Source: Ministry of Economy
96
3.212
4.303
6.342
9.092
12.380
16.082
19.097
21...
Foreign Direct Investment Inflows
Source: CBRT
(Billiondollar)
97
14,8
140,6
0
25
50
75
100
125
150
1980-2002 2003-2014 Mar
Strong Long-Term Prospects
98
Determinants of Long-Term Growth
Quality of Institutions
Demographics
Productivity
99
Improving Quality of Institutions
Corruption
Perceptions:
2013: 53rd in 177
2002: 65th in 102
Ease of Doing
Business:
2013...
Corruption Perceptions Index (2002)
(65th among 102 countries)
31
44 45
58
59
65
70
73 74
96
20
30
40
50
60
70
80
90
100
I...
Corruption Perceptions Index (2013)
(53rd among 177 countries)
Source: Transparency International
53
69
72
80 80
94
106 10...
Within the period of 2005-2012, Turkey has ranked higher than Russia, Argentina and Greece.(71st among 117 countries)
31
3...
(44th among 148 countries)
Source: World Economic Forum
Global Competitiveness Index (2013)
29
38
42 44
49
51
55
56
60
63
...
(84th among 175 countries)
Source: World Bank
Ease of Doing Business (2006)
62
69 70
71
84
93
97
108
111
122
131
132 134
1...
(69th among 189 countries)
Source: World Bank
Ease of Doing Business (2013)
53
65
69
72 73
88 89
92
96
112
116
120 126
134...
Favorable Demographics
Source: Eurostat
Shareof15-24yearsoldinTotalPop.(%)
16,6
7 9 11 13 15 17 19 21
Spain
Italy
Andorra
...
1,7
0,7
0,2
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
1,6
1,8
TURKEY OECD EU-28
AnnualAverageGrowthRate(%,2001-13)
Working Age Popul...
Labor Participation Rate, Female
Source: Fraker, A. and D. Ozdemir, 2011, “Female Labor Force Participation How Does Turke...
Source: TURKSTAT, Eurostat, WB
(2004=100)
75
80
85
90
95
100
105
110
115
120
125
130
2004 2005 2006 2007 2008 2009 2010 20...
Labor Participation Rate, Female
Source: Turkstat, OECD
111
(%,Feb2014)
23,3
28,7
14,6
24,1
32,3
39,2
70,4
10
20
30
40
50
...
Formal Employment rising with Education
112
Source: TURKSTAT
No education
Primary
Lower secondary
Upper secondary
Tertiary...
113
National Employment Strategy, 2014-23
Improving confidence and flexibility in the labor
market
Increasing employment o...
114
Targets for 2023 Vision
Unemployment rate down to 5%
Employment rate up to 55%
Non-farm informal employment down to 15%
Boosting Productivity
Enhancing Human Capital Stock
Investing in infrastructure
Supporting R&D and Innovation
115
Higher Labor Productivity in Large Companies
116
(LaborProductivityofLargesttoSmallestEnterprises,%,2010)
Source: TURKSTAT...
GDP per Capita
Low-Income
$1,035-or less
Lower-Middle-Income
$1,036-$4,085
Upper-Middle-Income
$4,086-$12,615
117
High-Inc...
GDP
Source: TURKSTAT, Medium-Term Program,PwC
2002
2050
2002
$ 230
billion
2050
$ 5 trillion
2013
$ 820 billion
2023
$ 2 t...
Thank You…
119
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Euromoney Eurasia Conference

  1. 1. Turkey’s Economic & Political Outlook June 3, 2014 Mehmet Şimşek Minister of Finance 1
  2. 2. Is political stability at stake? Low growth – the new normal? Is the pick-up in inflation temporary? Turkey’s soft spot - getting fixed? Questions of Interest 2
  3. 3. Is political stability at stake? 3
  4. 4. Importance of Political Stability 4 v A Virtuous Cycle
  5. 5. Political Stability 5 15 Months 139 Months 0 20 40 60 80 100 120 140 Average Lifetime of Governments during 1950-2002 AK Party Governments Since 2002 1923-2002 Average Lifetime of Governments: 17 months 2002-14 Political Stability 2023 Vision
  6. 6. Local Election Results Source: Anadolu Agency AK PARTY: Justice and Development Party CHP: Republican People’s Party MHP: Nationalist Movement Party BDP: Peace and Democracy Party (%) 38,8 23,1 16,1 5,7 16,3 45,5 27,8 15,2 4,2 7,3 0 5 10 15 20 25 30 35 40 45 50 AK PARTY CHP MHP BDP Others 2009 2014 6
  7. 7. Key Messages from the Ballot Box Political Stability is here to stay Corruption allegations were politically motivated President is likely to be elected in the first round 7
  8. 8. 2 More Elections Ahead Presidential • August 2014 Parliamentary • June 2015 8
  9. 9. Low growth – the new normal? 9
  10. 10. Real GDP Source: Turkstat, Eurostat 120 100,0 85 90 95 100 105 110 115 120 Q1-08 Q2 Q3 Q4 Q1-09 Q2 Q3 Q4 Q1-10 Q2 Q3 Q4 Q1-11 Q2 Q3 Q4 Q1-12 Q2 Q3 Q4 Q1-13 Q2 Q3 Q4 RealGDP(2007Q4=100,s.a.) 10
  11. 11. Real GDP: Turkey vs AMs Source: Turkstat, Eurostat 120 98 100,0 106 85 90 95 100 105 110 115 120 Q1-08 Q2 Q3 Q4 Q1-09 Q2 Q3 Q4 Q1-10 Q2 Q3 Q4 Q1-11 Q2 Q3 Q4 Q1-12 Q2 Q3 Q4 Q1-13 Q2 Q3 Q4 RealGDP(2007Q4=100,s.a.) TURKEY US Euro Area 11
  12. 12. 12 Real GDP: Turkey vs EMs Source: TURKSTAT, IMF 168,8 100,0 152,8 153,0 180,4 159,0 143,8 95 105 115 125 135 145 155 165 175 185 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Turkey Emerging & Developing Europe LatAm. & the Caribbean Developing Asia excl. China & India Russia South Africa TURKEY RealGDP(2002=100)
  13. 13. Upside • Stronger external demand • EU pulling out of recession • Arab Spring becoming less disruptive • TL depreciation Downside • Tighter financial conditions • Geopolitical tensions Growth Outlook 13
  14. 14. Softer Domestic Demand 14 Source: Turkstat, BRSA (Index) (Annual,%) 0 5 10 15 20 25 30 35 40 45 55 60 65 70 75 80 85 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Consumer Confidence Total Credit Growth (rhs)
  15. 15. 15Source: Bloomberg, Turkstat Index(monthly) (6monthrolling) 20 22 24 26 28 30 32 34 36 30 35 40 45 50 55 60 65 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Eurozone Manufacturing PMI Turkey's Exports to Europe (rhs) External Demand
  16. 16. Manufacturing Output 16 Source: Turkstat, CBT 100 80 85 90 95 100 105 110 115 120 125 130 55 60 65 70 75 80 85 90 95 100 105 110 115 120 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Real Sector Confidence Index (s.a.) Industrial Production (rhs) (s.a.)
  17. 17. PMI remaining above 50 17Source: HSBC 51,1 30 35 40 45 50 55 60 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14
  18. 18. Job Creation Employment(mnpeoples.a.) Source:TURKSTAT 18 25,8 20 21 22 23 24 25 26 27 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13
  19. 19. Unemployment & Labor Participation Rate Source:TURKSTAT 44 45 46 47 48 49 50 51 52 8 9 10 11 12 13 14 15 16 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 Unemployment Rate Labor Force Participation Rate (rhs) (s.a.,%) (s.a.,%) 19
  20. 20. Is the pick up in Inflation Temporary? 20
  21. 21. Inflation 0 20 40 60 80 100 120 140 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: TURKSTAT (CPI,Annual,%) 21
  22. 22. 2014 Inflation: Target vs Forecast Energy prices 0.1 ppt Deterioration in pricing behavior 0.3 ppt Tax hikes 0.5ppt Food prices 0.6 ppt Exchange rate depreciation 0.8 ppt Inflation Target: 5.3 % (2014-16 Medium Term Program) Inflation Forecast: 7.6% 22
  23. 23. CBRT’s Inflation Outlook 23 Inflation is to resume downward trend as base effects fade Source: CBRT
  24. 24. Upside • TL depreciation • Unprocessed food prices Downside • Monetary tightening • Output gap • Recent macroprudential measures Inflation Outlook 24
  25. 25. (%) Tight Monetary Policy Source: CBRT 25 8.0 12,0 9.5 3 5 7 9 11 13 15 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 CBRT Funding Rate O/N Borrowing O/N Lending Policy Rate
  26. 26. (%) 26 Kaynak: TCMB Interest Rates on Turkish Lira Bank Loans 7 9 11 13 15 17 19 21 23 25 27 29 January-08 April-08 July-08 October-08 January-09 April-09 July-09 October-09 January-10 April-10 July-10 October-10 January-11 April-11 July-11 October-11 January-12 April-12 July-12 October-12 January-13 April-13 July-13 October-13 January-14 April-14 Personal Vehicle Housing Commercial
  27. 27. Macroprudential Measures • Single limit for all credit cards • Higher minimum payment • Limit on # of installments Credit card loans • Higher risk weighting for consumer loans Consumer loans • Compulsory advance payment • Term limit for vehicle and consumer loans Auto & other consumer loans • Lower risk weighting for SME & export credits Other Loans 27
  28. 28. 28 Source: CBRT Credit Growth 13weekmovingavg.(%.y/y) * Credit Growth is adjusted for exchange rate movements 12,1 0 5 10 15 20 25 30 35 40 45 Jan-11 Mar-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Apr-13 Jun-13 Agu-13 Oct-13 Dec-13 Feb-14 Apr-14
  29. 29. Turkey’s Soft Spot – Getting Fixed? 29
  30. 30. Current Account Deficit Source: CBRT 30 (12MonthRolling,USDbn) -80 -60 -40 -20 0 20 40 Jan02 Jul02 Jan03 Jul03 Jan04 Jul04 Jan05 Jul05 Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13 Jul13 Jan14 Current Account Current Account excluding Energy Current Account excluding Energy and Gold Net Gold Exports • 2011: -$4.8 billion • 2012: +$5.7 billion • 2013: -$11.8 billion • 2014 Jan-Mar: $1.7 billion
  31. 31. Factors behind high C/A Deficit (2011-13) Strong domestic demand Euro crisis High energy prices Arab Spring 31
  32. 32. Upside • Geopolitical tensions • Higher energy prices Downside • Faster recovery in Europe • More stable MENA • Softer domestic demand • Exchange rate weakness • Falling gold imports • Higher tourism revenues Outlook for C/A Deficit 32
  33. 33. Should we be worried about Open FX Positions? 33
  34. 34. Turkey's FX Position Source: CBRT, BRSA, Treasury * Assets: CBRT FX Deposits of Treasury+ CBRT Foreign Assets; Liabilities= Public gross external debt+CBRT Liabilities to Non Residents. Data from CBT dated 27 May., 2014; data from gross external debt stock as of Q4-13 ** Data – Mar. 2014 *** Data - Jan 2014 **** Data - Mar. 2013 *****Data-16.05.2014 Billion $ Assets Liabilities Net Position Public Sector* 136.5 122.6 13.9 Banking Sector** 472.1 470.4 1.7 Real Sector*** 92.7 265.4 -172.8 Short Term 77.3 94.2 -16.9 Household**** 191.0 0.5 190.5 FX Deposit ***** 84.3 34
  35. 35. Firms Source: CBRT No FX Loans 63% FX Loan w/ export earning 25% FX Loan w/o export earning 12% 9,500 firms Total net sales at 71% of GDP 35
  36. 36. Firms: SMEs and Large Companies Greater amount of FX debt belongs to LARGE COMPANIES 80% out of the 57% of large companies w/ FX debt have export earnings Source: CBRT 36
  37. 37. Households: Low Leverage Source: CBRT, ECB (HouseholdLiabilities,%ofGDP,June2013) No FX exposure 65 23 20 40 60 80 100 120 140 Denmark Netherlands Ireland United Kingdom Portugal Sweden Spain Finland Euro Area Greece Malta Germany France Luxembourg Belgium Austria Italy Estonia Poland Czech Republic Latvia Slovenia Hungary Slovakia Lithuania Turkey 37
  38. 38. Banks: Safe & Sound CapitalAdequacyRatio,% 2002 Mar-14 17,6 2,8 NPLRatioofLoans(%) 15,7 0 5 10 15 20 25 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 Legal Rate: %8 Target Rate 12% Source: BRSA 38
  39. 39. Turkey’s Banks - among the Strongest in EMs 39 Source: World Bank
  40. 40. Source: World Bank, IMF, BRSA Banking Sector: Able to Absorb Shocks Arm Br Bul Col Cro Egy Fr Gre Indo Ire Ita Latv Leb Lith Mex Phil Pol Rom Rus Serb SoAf Sp Tu Ukr Venz 8 10 12 14 16 18 20 22 0 50 100 150 200 250 Private Credit/GDP (%) CAR(%) 40
  41. 41. Fiscally: Room to Manoeuvre 41
  42. 42. 10,8 7,9 4,1 0,1 -1,3 0,2 1,6 5,5 3,0 0,4 1,0 1,0 1,1 -2,0 0,0 2,0 4,0 6,0 8,0 10,0 12,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Maastricht Criteria: 3% Achieved Maastricht Criteria except 2009 Source: Ministry of Development BudgetDeficit-to-GDP,% Low Deficit 42
  43. 43. Budget Deficit (2014)BudgetDeficit-to-GDP,% Source: IMF, OECD, Ministry of Development 3,9 2,9 2,3 1,1 0,5 1 1,5 2 2,5 3 3,5 4 4,5 OECD EU-28 EMs Turkey 43
  44. 44. 44 Upside • Conservative revenue assumptions • Outperformance in non-tax revenues • Improving tax compliance Downside • Weaker domestic demand • Higher VAT rebates Fiscal Outlook
  45. 45. Source: IMF Fiscal Strength in EMsGrossPublicDebt(%,GDP) Fiscal Deficit (%, GDP) Arm Br Bul Col Cro Fr Hun Indo Ire Latv Lith Mex Phil Pol Rom Rus Serb Slvk Slov SoAf Sp Tu 0 20 40 60 80 100 120 140 0 1 2 3 4 5 6 7 8 9 45
  46. 46. 74,0 67,7 59,6 52,7 46,5 39,9 40,0 46,1 42,3 39,1 36,2 36,3 33,0 25 30 35 40 45 50 55 60 65 70 75 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Lower Public Debt Debt-to-GDP,% Satisfying Maastricht Criteria since 2004 Maastricht Criteria: 60% Source: Treasury 46
  47. 47. Public Debt (2014) Source: IMF, OECD, Treasury Debt-to-GDP,% 111,1 89,0 33,3 33,0 20 30 40 50 60 70 80 90 100 110 120 OECD EU-28 EMs Turkey 47
  48. 48. Details of Treasury Guarantee Scheme $3bn cap under 2014 Budget Law PPPs under guarantee • 3rd Bridge • Euroasia Tunnel • Gebze-Izmir Highway Minimum 20% equity In the case of default • Max. 85% of total FX liabilities are guaranteed • Defaulting parties’ assets to be transferred to the state 48
  49. 49. Priorities & Reform Agenda 49
  50. 50. Chapter- 1 Enhancing Human Capital Stock Local & Renewable Energy Reducing Informal Economy 50
  51. 51. Enhancing Human Capital Stock 51
  52. 52. Source: Ministry of Finance Share of Education Budget(%) 52
  53. 53. Investment Incentives in Education Sector 18% VAT down to 8% 50% tax relief on CIT & PIT for exports in education PIT and CIT exemption for 5 years on proceeds gained from education services 5th zone incentives for investments in pre-schools, elementary, secondary and high schools Allocation of public real estate to investors 53
  54. 54. Gross Schooling Rates Source: Ministry of Development 54
  55. 55. 12 Years of Mandatory Education Austral. Austria Belg. Canada Chile Czech R. Den. Estonia Finland France Italy Japan Lux Mex New Zeal. Poland Port. Spain Switz. TURKEY UK USA 6 7 8 9 10 11 12 13 14 9,5 9,7 9,9 10,1 10,3 10,5 10,7 10,9 11,1 11,3 11,5 AverageYearsatSchoolofPop’nover25Years Income per Capita (PPP, log) Source: OECD 55
  56. 56. 2002 91.1 girls per 100 boys 2012 101.8 girls per 100 boys Improving Girls’ Education 56
  57. 57. Source: OECD 76 74 47 51 38 46 30 35 40 45 50 55 60 65 70 75 80 Science Math 2006 2009 2012 Enhancing Human Capital Stock: PISA Results, Gap b/w Turkey & OECD 57
  58. 58. Improving Quality of Education With Fatih Project, we are providing our children with Broadband Internet Access Smart Boards Tablet PCs Other Information Technology Tools 58
  59. 59. Local & Renewable Energy 59
  60. 60. High Dependence on Energy Imports 72% Total Energy 92% Oil 98% Natural-Gas 60
  61. 61. Source: TURKSTAT, Bloomberg Energy Import Bill (Brent,$pbl) EnergyImports(BillionDollars) 61
  62. 62. Developing Local & Renewable Resources Source: Ministry of Energy and Natural Resources Electricity Generation Installed Capacity MW % of Total Current Installed Capacity (2013) 64,044 - Renewable Energy 25,596 40.0 Power Plants Under Construction 14,338 - Renewable Energy 10,804 75.4 In 3-to-5 years 78,382 - Renewable Energy 36,401 46.4 62
  63. 63. Renewable Energy OutlookOverthenext decadeinTurkey, • 20,000 MW, wind power generation • 3,000 MW, solar power plants • 600 MW, geothermal power plants • An energy stock market to be established 63
  64. 64. 64 0 6 12 18 24 2010 2011 2012 2013 Module Inverter Other Hardware Soft Cost Costofelectricity,centsperkWh Source: DOE/NREL The Falling Price of Utility-scale Polar Photovoltaic Projects
  65. 65. Turkey’s Solar Energy Potential Atlas 65
  66. 66. Building Nuclear Capacity Akkuyu: JV with Russia Sinop JV with a Japanese-French consortium Working on a 3rd plant 66
  67. 67. Improving Energy Efficiency Industry 20% Transportation 15% Construction 30% 67
  68. 68. Combatting Shadow Economy 68
  69. 69. 52,1 51,7 50,1 48,2 47,0 45,4 43,5 43,8 43,3 42,1 39,0 36,7 33,8 30 35 40 45 50 55 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Feb.-2014 (%,TotalEmployment) Informal Employment Source:TURKSTAT 69
  70. 70. Size of Shadow Economy 32,2 31,5 30,7 30,4 29,1 28,4 28,9 28,3 27,7 27,2 26,5 26 27 28 29 30 31 32 33 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Schneider, 2013 Down 6 percentage points 70 (%,GDP)
  71. 71. Size of Shadow Economy Source: Schneider, 2013 But still higher than EU average 31,2 28,4 28,4 28,0 27,6 26,5 25,5 25,2 24,3 23,8 23,6 23,1 22,1 21,1 19,0 18,6 18,4 16,4 15,5 15,0 13,9 13,6 13,0 13,0 13,0 12,2 9,9 9,7 9,1 8,0 7,5 5 10 15 20 25 30 35 Bulgaria Romania Crotia Latvia Estonia TURKEY Lithuania S.Cyprus Malta Poland Greece Slovenia Hungary Italy Portugal Spain EUAverage Belgium CzechRep. Slovakia Sweeden Norway Denmark Finland Germany Ireland France UnitedKingdom Netherlands Luxemburg Austria (2013,%,GDP) 71
  72. 72. Chapter- 2 Improving Infrastructure Deepening Capital Markets Moving up the Value-Chain 72
  73. 73. Improving Infrastructure 73
  74. 74. Infrastructure Fueling the Economy Infrastructure development has the potential to* • Promote growth • Increase equity • Reduce poverty 1% increase in road network may increase productivity by 0.5ppt** 74 * Calderon and Serven 2010. ** Infrastructure Fedderke and Kaya (2013)
  75. 75. 1,714 Km Total of Motorways 4,387 Km Total of State and Provincial Dual Carriageways Total: 6,101 Km January 1, 2003 2,244 Km Total of Motorways 20,807 Km Total of State and Provincial Dual Carriageways Total: 23,051 Km January 2014 75
  76. 76. İSTANBUL EDİRNE ESKİŞEHİR Polatlı ANKARA KONYA İZMİR SİVAS AFYONKARHİSAR KAYSERİ BURSA ERZİNCAN ERZURUM KARS MERSİN ADANA DİYARBAKIR ELAZIĞ MALATYA ZONGULDAK SAMSUN Bandırma VAN MUŞ BİLECİK ÇANKIRI KIRIKKALE TEKİRDAĞ İZMİT BALIKESİR AYDIN DENİZLİ BURDUR ISPARTA UŞAK MANİSA KARAMAN NİĞDE OSMANİYE K.MARAŞ AMASYA BATMAN MARDİN Yerköy KARABÜK Yenişehir 405 km 212 km 533 km 624 km 105 km Completed (888 km) Under Construction (1796 km) Bidding Phase (454 km) Project Phase (354 km) GAZİANTEP Çobanbey 76 High Speed Railway Projects
  77. 77. Future Railways Investments By 2023 $ 45 billion worth of investment 10,000 km worth of new high speed railway network 4,000 km of new conventional line 77
  78. 78. İstanbul Antalya İzmir Gaziantep Trabzon Kayseri Samsun Erzurum Kars Van Diyarbakır Malatya Dalaman Bodrum Sivas Elazığ Bursa Ankara Ağrı Erzincan Muş Batman Mardin Şanlıurfa Adana Konya Denizli KKTC THY THY PegasusOnur Air SUN Express ATLAS JET Tokat Zonguldak BoraJet Edremit Siirt Gazipaşa Çorlu KKTC Iğdır Gökçeada Hata y Adana Antalya İzmir Gaziantep Trabzon Kayseri Ankara Bursa Samsun Erzurum Kars Van Mardin Malatya Dalaman Bodrum Konya Sivas Elazığ Sinop Nevşehir Adıyaman Batman Çanakkale Denizli Eskişehir Isparta Kahramanmaraş Merzifon Muş Uşak Ağrı Tekirda ğ Erzincan Diyarbakır Şanlıurf a İstanbul Kastamonu Bingöl Şırnak 2014 6 Airlines 7 Centers 52 Airports 2003 2 Centers 26 Airports In domestic lines the fastest growing country in Europe TURKEY Flight Points (Domestic Lines) 78
  79. 79. 2003 60 Points SunExpressPegasus ATLAS JET Onur Air 2014 236 Points THY THY SunExpress Increase : 294% 79 Flight Points (International Lines)
  80. 80. The 3rd Airport in Istanbul, Largest of All 150 million passengers An area of 90 million m2 Construction Cost: €10 billion Rent (25 Years): €22.2 billion 80
  81. 81. Projects of the Century - Under Construction Tube Tunnel 3rd Bridge Izmit Gulf Transit Istanbul-İzmir Highway High-Speed Train through Ankara-Bursa-Istanbul 81
  82. 82. Projects of the Century – Planned Channel Istanbul 82
  83. 83. Deepening Capital Markets 83
  84. 84. Banks dominate Financial System Share of Banks in Financial Sector 87.4% 84Source: Central Bank of Republic of Turkey Insurance Companies and Pension Mutual Fund 4.7% Other Financial Institutions 8.0%
  85. 85. 2009 72nd 2014 47th 2018 25th Global Financial Centers Index Source: Global Financial Centres Index 15 45 47 60 63 70 75 77 20 30 40 50 60 70 80 Rio de Jeneiro ISTANBUL Warsaw Mauritius Mexico Prague Budapest (2014) 85
  86. 86. Strengthening the legal framework Improving physical infrastructure Simplifying tax system Providing financial education Istanbul as a Finance Center 86 Main Objective: Deepening Financial Markets
  87. 87. Sukuk 87 Sep-12: Sukuk issued for $1.5bn in international market Oct-12: Sukuk denominated in TL issued for TL1.6bn Feb-13: Sukuk issued for TL1.5bn Aug-13: Sukuk issued for TL1.8bn Oct-13: Sukuk issued for $1.3bn Feb-14: Sukuk issued for TL1.3bn Similar to eurobonds, internt’l holders are not s.t. w/holding tax
  88. 88. Increasing Savings: Private Pensions 25% State Contribution 1.4 million new participants and TL7.9bn funds since end-2012 88
  89. 89. Support for Start-Ups Incentives for Biz Angels Incentives for VCs 89
  90. 90. Moving up the Value-Chain 90
  91. 91. Source: The Scientific and Technological Council of Turkey * % of GDP R&D Spending* 91 •3.00%2023 •1.8%2018 • 0.92%2012 • 0.53% 2002
  92. 92. Patent Applications Source: TPI 92 1.874 12.053 1.000 2.000 3.000 4.000 5.000 6.000 7.000 8.000 9.000 10.000 11.000 12.000 13.000 2002 2013
  93. 93. Trade Mark Applications(2012,Thousand) 86 64 54 44 41 20 30 40 50 60 70 80 90 100 110 120 TURKEY France Germany Italy Spain England 108* Source: Turkish Patent Institute *TURKEY 2013 Data 93
  94. 94. Tax Incentives for R&D R&D Expenditure • Corporate income tax relief • Personal income tax relief • State contributions to social security premiums • Exemption from stamp duty • Capital support for young entrepreneurs Strengthening the link b/w R&D and Commercial Activities • 50% tax relief on commercial use of patents, trademarks… • VAT exemption on patents, trademarks… 94 Since 2008, 155 R&D Centers
  95. 95. Global Investors in Turkey 95
  96. 96. International Companies Operating in Turkey Source: Ministry of Economy 96 3.212 4.303 6.342 9.092 12.380 16.082 19.097 21.898 25.170 29.529 33.808 37.199 37.737 0 5.000 10.000 15.000 20.000 25.000 30.000 35.000 40.000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Feb
  97. 97. Foreign Direct Investment Inflows Source: CBRT (Billiondollar) 97 14,8 140,6 0 25 50 75 100 125 150 1980-2002 2003-2014 Mar
  98. 98. Strong Long-Term Prospects 98
  99. 99. Determinants of Long-Term Growth Quality of Institutions Demographics Productivity 99
  100. 100. Improving Quality of Institutions Corruption Perceptions: 2013: 53rd in 177 2002: 65th in 102 Ease of Doing Business: 2013-14: 69th in 185 2006: 84th in 175 Global Competitiveness: 2013: 44th in 148 2005: 71st in 117 Source: WB, WEF, Transparency International 100
  101. 101. Corruption Perceptions Index (2002) (65th among 102 countries) 31 44 45 58 59 65 70 73 74 96 20 30 40 50 60 70 80 90 100 Italy Greece Brazil Mexico China TURKEY Argentina India Russia Indonesia Source: Transparency International 101
  102. 102. Corruption Perceptions Index (2013) (53rd among 177 countries) Source: Transparency International 53 69 72 80 80 94 106 106 114 127 40 50 60 70 80 90 100 110 120 130 140 TURKEY Italy Brazil China Greece India Argentina Mexico Indonesia Russia 102
  103. 103. Within the period of 2005-2012, Turkey has ranked higher than Russia, Argentina and Greece.(71st among 117 countries) 31 35 36 38 43 45 47 48 53 54 57 59 67 68 69 71 30 35 40 45 50 55 60 65 70 75 Portekiz Hungary SlovakRep. Italy Poland India Greece China Russia Argentina Brazil Mexico Romania Ukraine Indonesia TURKEY Source: World Economic Forum Global Competitiveness Index (2005) 103
  104. 104. (44th among 148 countries) Source: World Economic Forum Global Competitiveness Index (2013) 29 38 42 44 49 51 55 56 60 63 64 76 78 84 91 104 25 35 45 55 65 75 85 95 105 China Indonesia Poland TURKEY Italy Portugal Mexico Brazil India Hungary Russia Romania SlovakRep. Ukraine Greece Argentina 104
  105. 105. (84th among 175 countries) Source: World Bank Ease of Doing Business (2006) 62 69 70 71 84 93 97 108 111 122 131 132 134 138 60 70 80 90 100 110 120 130 140 Mexico Italy Uruguay Romania TURKEY Argentina Russia China Greece Brazil Indonesia Ukraine Croatia India 105
  106. 106. (69th among 189 countries) Source: World Bank Ease of Doing Business (2013) 53 65 69 72 73 88 89 92 96 112 116 120 126 134 20 40 60 80 100 120 140 Mexico Italy TURKEY Greece Romania Uruguay Crotia Russia China Ukraine Brazil Indonesia Argentina India 106
  107. 107. Favorable Demographics Source: Eurostat Shareof15-24yearsoldinTotalPop.(%) 16,6 7 9 11 13 15 17 19 21 Spain Italy Andorra Slovenia Greece Portugal Bulgaria Germany Czech Republic Serbia Switzerland Ireland Croatia Estonia Latvia France Austria Hungary Luxembourg Finland Netherlands Ukraine Poland Denmark Sweden United Kingdom Slovakia Norway Malta Lithuania Montenegro Iceland Macedonia Georgia Moldova Turkey Azerbaijan 107
  108. 108. 1,7 0,7 0,2 0,0 0,2 0,4 0,6 0,8 1,0 1,2 1,4 1,6 1,8 TURKEY OECD EU-28 AnnualAverageGrowthRate(%,2001-13) Working Age Population Growth Source: OECD, Eurostat, Turkstat 108
  109. 109. Labor Participation Rate, Female Source: Fraker, A. and D. Ozdemir, 2011, “Female Labor Force Participation How Does Turkey Compare?”, TEPAV FemaleLaborParticipationRate(%) Income per Capita (log) 109
  110. 110. Source: TURKSTAT, Eurostat, WB (2004=100) 75 80 85 90 95 100 105 110 115 120 125 130 2004 2005 2006 2007 2008 2009 2010 2011 2012 TURKEY South Africa Croatia Hungary Poland Brazil Russian Federation Indonesia China Mexico India TURKEY Female Labor Participation Rates 110
  111. 111. Labor Participation Rate, Female Source: Turkstat, OECD 111 (%,Feb2014) 23,3 28,7 14,6 24,1 32,3 39,2 70,4 10 20 30 40 50 60 70 80 2004 Total Illeterate Less than high school High school Vocational high school Higher education OECD Average: 62,3
  112. 112. Formal Employment rising with Education 112 Source: TURKSTAT No education Primary Lower secondary Upper secondary Tertiary 0 10 20 30 40 50 60 70 80 90 100 020406080100 (Informal Employment, %) (FormalEmployment,%)
  113. 113. 113 National Employment Strategy, 2014-23 Improving confidence and flexibility in the labor market Increasing employment of the disadvantaged groups Improving the relation b/w education & employment Improving the relation b/w employment & social protection
  114. 114. 114 Targets for 2023 Vision Unemployment rate down to 5% Employment rate up to 55% Non-farm informal employment down to 15%
  115. 115. Boosting Productivity Enhancing Human Capital Stock Investing in infrastructure Supporting R&D and Innovation 115
  116. 116. Higher Labor Productivity in Large Companies 116 (LaborProductivityofLargesttoSmallestEnterprises,%,2010) Source: TURKSTAT, OECD, Enterpreneurship at a Glance 2013 4,2 1 1 2 2 3 3 4 4 5 TURKEY Poland Hungary Portugal Italy Spain SlovakRep. Slovenia Belgium Switzerland Australia Austria Estonia Sweden Finland France Germany UK
  117. 117. GDP per Capita Low-Income $1,035-or less Lower-Middle-Income $1,036-$4,085 Upper-Middle-Income $4,086-$12,615 117 High-Income $12,616 and up 2002 $ 3,492 2013 $ 10,782 2016 $ 12,670 Source: TURKSTAT, Medium-Term Program, WB
  118. 118. GDP Source: TURKSTAT, Medium-Term Program,PwC 2002 2050 2002 $ 230 billion 2050 $ 5 trillion 2013 $ 820 billion 2023 $ 2 trillion 118
  119. 119. Thank You… 119

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