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Upgrading business-investment-turkey-oecd-economic-survey-july-2018

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Upgrading business investment Turkey OECD economic survey July 2018

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Upgrading business-investment-turkey-oecd-economic-survey-july-2018

  1. 1. 2018 OECD ECONOMIC SURVEY OF TURKEY Upgrading business investment Paris, 13 July 2018 @OECD @OECDeconomy http://www.oecd.org/eco/surveys/economic-survey-turkey.htm
  2. 2. 2 Growth remains strong despite headwinds Source: OECD Economic Outlook database. -6 -4 -2 0 2 4 6 8 10 12 -6 -4 -2 0 2 4 6 8 10 12 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Annual GDP growth in %
  3. 3. 3 The dispersion of incomes has narrowed Source: Turkstat. 0 5 10 15 20 25 0 5 10 15 20 25 Poorest 2 3 4 5 6 7 8 9 Richest Equivalised disposable income deciles Income convergence Growth of real average disposable incomes, 2007-16, %
  4. 4. 4 Tax and transfers can play a more important role Gini coefficient, 2015 or latest year 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 ISL SVN SVK DNK CZE FIN BEL NOR AUT SWE LUX HUN DEU POL FRA KOR CHE IRL NLD CAN ITA EST JPN PRT AUS GRC ESP LVA NZL GBR ISR USA TUR CHL MEX After taxes and transfers Before taxes and transfers Source: OECD (2018), OECD Income Distribution (database).
  5. 5. 5 Women continue to suffer from unequal opportunities Composition of the working-age population (over 15 year-old), in per cent Note: Formal unpaid family workers are family members doing household work, paying social security contributions and earning pension rights. Source: Turkstat. 0 10 20 30 40 50 60 70 80 90 100 2000 2005 2010 2016 2000 2005 2010 2016 Men Women Formal salaried Informal salaried Formal self-employed Informal self-employed Formal unpaid family workers Informal unpaid family workers Unemployed Inactive
  6. 6. 6 Carbon emissions per unit of GDP are still not falling Source: OECD (2018), Green Growth Indicators. 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.0 0.1 0.2 0.3 0.4 0.5 0.6 1990 1993 1996 1999 2002 2005 2008 2011 2014 CO2 per GDP - production based kg/USD, 2010 PPP prices Turkey OECD
  7. 7. 7 MACROECONOMIC REBALANCING IS REQUIRED
  8. 8. 8 Investment is dynamic but increasingly funded by debt Source: OECD Economic Outlook and OECD Financial Accounts (databases). 185 190 195 200 205 210 215 220 24 25 26 27 28 29 30 31 2010 2011 2012 2013 2014 2015 2016 2017 Investment (left axis) Debt (right axis) Total investment and total debt, % of GDP
  9. 9. 9 Construction has gained a very large weight in investment Source: OECD Economic Outlook database. 7 9 11 13 15 17 19 7 9 11 13 15 17 19 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Gross fixed capital formation in construction, % of GDP TUR MEX POL OECD
  10. 10. 10 The export sector has grown below potential Source: OECD Economic Outlook database. 75 100 125 150 175 200 225 75 100 125 150 175 200 225 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Shares in world exports, index 2000 = 100 TUR CZE KOR POL
  11. 11. 11 The deficit of current account is rising Source: OECD Economic Outlook database. -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Current account balance, % of GDP
  12. 12. 12 Debt sustainability is at risk Gross external debt, in per cent of GDP Note: The "2010-17 average" scenario extends average parameters observed over 2010-17 until 2050. The "baseline" scenario assumes an interest rate of 1.5% in 2018 rising by 0.5 percentage points per year and stabilising at 4.0% from 2023 onwards, real GDP growth of 5%, inflation of 7%, effective exchange rate depreciation of 5%, a current account deficit of 4% and net FDI inflows of 1.5% of GDP per annum. "CA shock" assumes a current account deficit of 6% while the "e-shock" scenario assumes 7% nominal depreciation per year (all other fundamentals equal to baseline for both shock scenarios). Source: OECD calculations based on IMF (2018), Balance of Payments (database) and OECD (2018), OECD Economic Outlook (database). 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Baseline 2010-17 average Current account shock e-shock
  13. 13. 13 Fiscal consolidation is at risk Source: IMF (2018), Fiscal Monitor, April 2018. -8 -7 -6 -5 -4 -3 -2 -1 0 -8 -7 -6 -5 -4 -3 -2 -1 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 General government cyclically-adjusted balance, % of GDP Turkey Advanced economies Emerging market and middle-income economies
  14. 14. 14 Inflation is rising sharply Source: Central Bank of the Republic of Turkey. Inflation expectations and inflation target, y-o-y % changes 3 4 5 6 7 8 9 10 11 3 4 5 6 7 8 9 10 11 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 12-month ahead 24-month ahead Inflation target
  15. 15. 15 The Lira has depreciated significantly Source: OECD Economic Outlook databases. 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 1.05 1.10 Real exchange rate (2010=1)
  16. 16. 16 The recent tightening of monetary policy is welcomed 0 5 10 15 20 0 5 10 15 20 2012 2013 2014 2015 2016 2017 2018 %% Interest rate corridor O/N interest rate in BIST Interbank Repo Market¹ CBRT average funding rate¹ 1 week repo rate Late liquidity window lending rate² The interest rate corridor and the main funding rates
  17. 17. 17 POLICY RECOMMENDATIONS  Publish quarterly general government accounts according to international standards and a regular Fiscal Policy Report covering all contingent liabilities and quasi-fiscal activities of the government.  Tighten fiscal and quasi-fiscal policies, strengthen the macroprudential rules and rein in housing loans.  Restore the credibility of monetary policy by committing all stakeholders to the independence of the central bank.  Forward guidance should be provided on how the authorities plan to achieve the inflation target.
  18. 18. 18 UPGRADING THE BUSINESS SECTOR WITH HIGHER QUALITY AND BETTER ALLOCATED INVESTMENTS
  19. 19. 19 Entrepreneurial dynamism contrasts with regulatory restrictions Source: Global Entrepreneurship Research Association, London Business School, Global Entrepreneurship Monitor (database, http://www.gemconsortium.org/data) and Global Entrepreneurship and Development Institute, Global Entrepreneurship Index 2018. The quality of institutions supporting entrepreneurship and entrepreneurial qualities are scored between 0-1. 0.0 0.2 0.4 0.6 0.8 1.0 1.2 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 TUR CHL HUN ITA MEX POL PRT CZE USA ESP KOR DEU Gap between entrepreneurial dynamics and institutions Gap between entrepreneural dynamics and institutional quality (left axis) Quality of institutions that support entrepreneurship (right axis) Entrepreneurial qualities (right axis)
  20. 20. 20 Small firms considerably lag behind in labour productivity Labour productivity of small firms relative to large firms, large firms=100, 2014 or latest 0 5 10 15 20 25 30 35 40 45 0 5 10 15 20 25 30 35 40 45 MEX TUR HUN CZE POL PRT Note: Small (large) firms are defined as those employing less than 10 (more than 250) persons. Source: OECD (2017), Entrepreneurship at a Glance 2017.
  21. 21. 21 Informality has declined but remains high Share of informal activities in total value-added, 2017, % 0 5 10 15 20 25 30 0 5 10 15 20 25 30 CZE PRT ESP GRC POL HUN TUR Source: Medina and Schneider, "Shadow Economies Around the World: ", 2018.
  22. 22. 22 Machinery and equipment investments grow at uneven paces across firm types -10 -8 -6 -4 -2 0 2 4 6 8 10 -10 -8 -6 -4 -2 0 2 4 6 8 10 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 % changes % points deviation from average Small firms Medium firms Listed firms Young high-tech firms Unweighted firm average (right axis) Note: Investment growth rates of small firms (employing less than ten workers and which are more than five years old); of medium-sized firms (employing from 50 to 249 workers); of firms listed on the stock exchange; and of young technology- intensive firms (less than four year old firms in upper-middle and high technology sectors) are shown in percentage point deviation from the manufacturing sector average, after controlling for sectoral composition differences. Source: OECD/CBRT dataset on the basis of Enterprise Information System (EIS). Manufacturing, lagged machinery and equipment stock (real prices)
  23. 23. 23 Medium-sized firms and high-tech start-ups are particularly leveraged 50 52 54 56 58 60 62 -4 -2 0 2 4 6 8 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Ratio in % % points deviation from average Small firms Medium firms Young high-tech firms Unweighted firm average (right axis) Total liabilities to total assets of firms, manufacturing Note: Small firms (employing less than ten workers and which are more than five year old), medium-sized firms (employing from 50 to 249 workers), and young technology-intensive firms (less than four year-old firms in upper-middle and high technology sectors) ratios are shown in percentage point deviation from the manufacturing sector average, after controlling for sectoral composition differences. Source: OECD/CBRT dataset on the basis of Enterprise Information System (EIS). Note: Small firms (employing less than ten workers and which are more than five year old), medium-sized firms (employing from 50 to 249 workers), and young technology-intensive firms (less than four year-old firms in upper-middle and high technology sectors) ratios are shown in percentage point deviation from the manufacturing sector average, after controlling for sectoral composition differences. Source: OECD/CBRT dataset on the basis of Enterprise Information System (EIS).
  24. 24. 24 Digitalisation advances but core applications should spread more broadly 0 5 10 15 20 25 30 35 40 45 50 0 5 10 15 20 25 30 35 40 45 50 PRT TUR CZE HUN POL A website and using social media Enterprise resource planning software Share of enterprises having : Digitalisation among enterprises, 2017, % of all enterprises Source: Eurostat (2017), The Digital Economy and Society Index.
  25. 25. 25 R&D expenditures are low but rising Source: OECD Main Science and Technology Indicators database. 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 1995 2000 2005 2010 2015 R&D expenditure, % of GDP Turkey OECD
  26. 26. 26 The credit costs of all firms can be reduced considerably Source: Thomson Reuters Datastream (database) and Central Bank of the Republic of Turkey. -100 0 100 200 300 400 500 2013 2014 2015 2016 2017 2018 EMBI spreads Basis point TUR CHL CZE MEX POL 150 200 250 300 350 400 450 500 550 600 0 2 4 6 8 10 12 14 16 18 2005 2007 2009 2011 2013 2015 2017 EMBI spread and domestic interest rate 3-year moving averages Real interest rate on business loans (left axis) EMBI spread (right axis)
  27. 27. 27 Equity risk premia are high Source: Thomson Reuters Datastream (database). 0 5 10 15 20 25 30 0 5 10 15 20 25 30 RUS TUR HUN KOR POL CZE DEU ITA CHN MYS ESP MEX BRA USA Price/earning ratio, average first half 2018
  28. 28. 28 POLICY RECOMMENDATIONS  To reduce the funding costs of the economy improve the international credibility of governance institutions, fiscal transparency and price stability.  Carry out a strategic review to identify and address the most binding constraints to the development of the currently weak ecosystem for equity financing of investment.  Evaluate the uptake of the various recent social security contribution cuts granted and make permanent those which have proven most supportive of formalisation, financing this through better tax enforcement.  Encourage family firms through technical support and awareness campaigns to develop standard corporate governance, professional management and financial transparency.
  29. 29. 29 POLICY RECOMMENDATIONS (cont.)  Enforce the compulsory auditing rules of the new Company Law. Reduce audit costs - while maintaining audit quality standards- via tax incentives in the early years of audited financial reporting.  Undertake a cost-benefit analysis of the credit guarantee system and normalise its size, tighten the macroprudential rules and contain the quasi-fiscal activities of public financial institutions.  Complete and enforce a holistic strategy of digitalisation, encompassing education, life-long learning and infrastructure and internet access policies.
  30. 30. 30 STRENGTHENING TURKEY’S INSTITUTIONAL AND HUMAN CAPITAL BASIS
  31. 31. 31 The quality of institutions can be improved Source: World Bank (2017), Worldwide Governance Indicators. 0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70 2006 2011 2016 2006 2011 2016 2006 2011 2016 Rule of Law Control of Corruption Government Effectiveness (Rule of law, control of corruption, government effectiveness)
  32. 32. 32 The quality of education should be improved Secondary students' mathematics skills 1. Proficiency level 5 or above on a scale of 1 to 6. Source: OECD (2016), PISA 2015 Results: Excellence and Equity in Education (Vol. I) and OECD (2016), Skills Matter: Further Results from the Survey of Adult Skills. 380 400 420 440 460 480 500 2006 2012 2015 PISA score 0 2 4 6 8 10 12 14 2006 2012 2015 Share of top performers, %¹ Turkey OECD average
  33. 33. 33 The skills of the working age population should be strengthened 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Chile Turkey Poland OECD Czech Republic Below level 1 Level 1 Level 2 Level 3 Level 4/5 Source: OECD (2016), PISA 2015 Results: Excellence and Equity in Education (Vol. I) and OECD (2016), Skills Matter: Further Results from the Survey of Adult Skills. Adult population's numeracy skills % of 16-65 year-olds
  34. 34. 34 Future growth prospects hinge on reforms Projected gains in real GDP per capita from gradual convergence with OECD good practices, % difference from baseline Source: Estimations based on "OECD Long-term Scenarios for the World Economy" database. 0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 35 2020 2025 2030 2035 2040 Rule of law Educational attainment Product market regulation Labour market policies Total
  35. 35. 35 POLICY RECOMMENDATIONS  Strengthen the rule of law, judiciary independence and step up the fight against corruption.  To reorient spending to top priority areas, implement the strategic and performance-oriented budgeting objectives of the Public Finance Law 5018 to help reorient spending.  Grant more autonomy and resources per student to education institutions, against greater performance accountability.  Facilitate further women’s labour force participation, notably by increasing the provision and quality of early child education and child and elderly care.  Assess the additional impact on carbon emissions and use economic instruments such as harmonised pollution taxes and emission permits to reduce them
  36. 36. 36 For more information http://www.oecd.org/eco/surveys/economic-survey-turkey.htm Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

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