Turkey 2015

CONTENTS TURKEY 2015
Great expectations
Page 27
The government’s ambitious econom-
ic targets for 2023 are getting a boost
from a declining current account
deficit, thanks partly to lower oil
prices. However, substantial structur-
al reforms are likely to be necessary
in order to regain the country’s strong
growth trajectory, including achiev-
ing the political stability needed to
attract more investor interest in
the state’s recent privatisation efforts.
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Snapshot: Turkey in figures
COUNTRY PROFILE
A new page: Significant developments have
occurred over the last decade
Forging a new path: The country has been
through several changes and is set to make
new economic and political gains in the years
ahead
Viewpoint: President Recep Tayyip Erdoğan
TRADE & INVESTMENT
Onwards and upwards: The country has
significant potential to boost trade and foreign
investment
Maximising potential: Efforts to pursue further
trade agreements
Interview: Richard Moore, UK Ambassador to
Turkey
Viewpoint: Dr Jim Yong Kim, President, World
Bank Group
ECONOMY
Great expectations: Structural reforms key to
regaining the economy’s positive trajectory
Interview: Mehmet Şimşek, Minister of Finance
Interview: Mark Lewis, Former Senior Resident
Representative in Turkey, International
Monetary Fund
A private line: The government continues
liberalisation efforts
Interview: Ömer Cihad Vardan, President,
Foreign Economic Relations Board of Turkey
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BANKING
Keeping a watchful eye: The prospects for
growth are excellent so long as risks are
heeded
Interview: Erdem Başçı, Governor, Central Bank
of the Republic of Turkey
Interview: Ali Fuat Taşkesenlioğlu, CEO,
Halkbank
Entries and exits: The international presence in
the sector is set to change markedly
Interview: Suat İnce, Deputy Chief Executive,
Türkiye İş Bankası
Interview: Hikmet Ersek, President and CEO,
Western Union
Loan rangers: The main players are alert to the
risk of the level of bad debt rising
Rate and see: The agencies’ verdicts shine a
revealing light on the sector
CAPITAL MARKETS
To the marketplace: With its bourse easing
after a recent surge, the country looks to
regulatory reforms and multi-tier platforms to
encourage new listings
Interview: Vahdettin Ertaş, Chairman, Capital
Markets Board
Interview: İbrahim Turhan, Former Chairman
and CEO, Borsa Istanbul
INSURANCE
Providing and expanding coverage: The
country’s insurance sector continues to offer
new and better products to a growing
population
Pensions boom: Newly passed legislation
ushers in a new era for private pension
contributions
Interview: Mehmet Bostan, General Manager,
Vakıf Emeklilik
Interview: M Uğur Erkan, CEO, Anadolu Hayat
Emeklilik
Talking takaful: Sharia-compliant insurance is
poised to receive government support
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Onwards & upwards
Page 18
An advantageous geographical position
meansTurkeyoffersahighpotentialfortrade.
With the economy long hampered by a heavy
dependence on imports, the government has
taken many steps recently to diversify mar-
kets, as well as cut the trade and current
accountdeficits.Thishasalsohelpedtotrans-
form the investment environment, with FDI
reaching record levels over the past decade.

CONTENTS TURKEY 2015
www.oxfordbusinessgroup.com/country/turkey
4
Made in Turkey
Page 78
Despite a slowdown in overall industrial
growth, Turkey’s demographic fundamentals
arehelpingfuelexpansioninmanysegments,
from jewellery to metals, with a strong long-
term outlook for domestic retail. While fur-
ther growth may depend on broader recov-
eryintheEU,thedefenceandautoindustries
areboostingexportsanddrawinginvestment.
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INDUSTRY & RETAIL
Made in Turkey: Although industrial growth is
slowing, exports are up and a number of
segments have scope for expansion
Interview: Bora Yalınay, CFO, Ülker
Interview: Sadettin Korkut, General Manager,
Petkim Petrokimya Holding
High performance: The defence sector is
thriving with a range of new equipment and
systems being produced locally
Interview: Muharrem Dörtkaşlı, CEO, Turkish
Aerospace Industries
Iron in the soul: Metals industry will benefit
from an expected rise in demand
More precious: Legislative changes to further
boost growth of the jewellery industry
A leading light: Automotive sector sees a rise
in investment, output and exports
A growth market: Formalisation is being driven
by a new retail law as local outfits seek new
opportunities abroad
Slower growth: Although consumer sentiment
is weakening, the outlook remains positive
ENERGY
Opportunity knocks: Taking advantage of low
prices to increase hydrocarbons supply
Liberalising power: The privatisation of assets
and infrastructure in the country’s electricity
sector continues
Trans-Anatolian steps: Natural gas is poised to
traverse the country through a new pipeline
project connecting Azerbaijan to Europe
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Interview: Besim Şişman, CEO and Chairman of
the Board, Turkish Petroleum
Still searching: Drilling for hydrocarbons
resources continues
Splitting the atom: Nuclear ambitions
encounter unexpected delays
CONSTRUCTION & REAL ESTATE
Full speed ahead: Several large projects are
under way or in planning stages, while Turkish
firms are also in demand overseas
Keeping up with demand: The construction
and mining machinery and equipment
segment benefits from the vast amount of
activity taking place
Dialogue: Ergil Ersü, Chairman, Gama Holding,
and Orhan Paçacı, Member of the Executive
Committee and Shareholder, Mesa Holding
Interview: Emin Sazak, CEO, Yüksel İnşaat, and
Former President, Turkish Contractors
Association
Efficiency upgrade: Demand for insulation
surges due to regulations and growing
awareness
Safe as houses: Population and income growth
as well as strong foreign interest drive sector
expansion
AGRICULTURE
Reap what you sow: With the country already a
major agricultural producer, the government is
looking to consolidate growth
Good enough to eat: Turkey has made
important strides in food safety to meet EU
regulations and expand export markets
TRANSPORT
On the road: A spate of new highways, trains,
airports and other infrastructure projects are
in the works
Interview: Turgut Erkeskin, President,
Association of International Forwarding and
Logistics Services Providers
Interview: Mümin Kahveci, General Manager,
Istanbul Electric Tramway and Tunnel
Establishments
Age of rail: New investments are set to
improve and expand both intercity and
national rail connections
Chairman: Michael Benson-Colpi
Director of Field Operations: Elizabeth
Boissevain
Managing Director, Africa: Karine
Loehman
Country Directors: Solene Pignet,
Clémentine Hazeran
Field Operations Executive: Meltem
Okur
Field Operations Assistant: Arda Özgen
Project Coordinator: Firdevs İrem
Güller
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CONTENTS TURKEY 2015 5
THEREPORT Turkey 2015
Full speed ahead
Page 114
The construction sector has been one of
Turkey’sleadingdriversofGDPgrowthover
the past few years, worth about €28.1bn
at current prices as of end-2014, up 14.5%
on a year earlier. With some $700bn in
infrastructure spending in the works and
about 1m permits issued for new projects
in 2014, up 21% on the previous year,
growth in the sector looks set to continue.
On the road
Page 136
State-backedmega-projectsinIstanbulare
leading the way in the rapidly expanding
transport sector. The Marmaray tunnel and
metrobus corridor now link the city’s Asian
and European sides, while national airport
capacity has doubled since 2003. The gov-
ernment push for transport infrastructure
shows no signs of slowing, with high-speed
raillinks,bridgesandtunnelsinthepipeline.
Reap what you sow
Page 130
A top global producer of seven crops,
in the top five for 35 others, and with
a third of its landmass devoted to farm-
ing, the country’s agriculture sector is
strongly positioned to provide for both
domestic needs and export markets.
While the sector’s share of GDP has
declined from 12.1% in 1998 to 7.2% in
2013, its value has expanded each year.
Young and tech-savvy
Page 146
A technologically adept population is
driving continued growth in the tele-
coms sector’s mobile voice and data
segments, which should only rise fur-
therwiththeimpendingintroductionof
4G. In the IT sector, fast-paced growth
in internet usage looks set to continue
with the roll-out of fibre-optic cables.
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TELECOMS & IT
Young and tech-savvy: Demographic forces are
driving mobile up-take and expansion
Who you gonna call?: The take-off of business
process outsourcing
Next generation: The country rolls up its
sleeves to launch its 4G mobile network
Servers of joy: Mobile networks and fibre-optic
cables are expanding to meet demand
Interview: Mehmet Nalbantoğlu, CEO,
KoçSistem
HEALTH
Smooth operators: Indicators are improving
under a far-reaching government programme
Interview: Hasan Ulusoy, Chairman, Nobel İlaç
EDUCATION & RESEARCH
Walking the walk: The government is investing
heavily to achieve its education targets
Interview: Turgut Şenol, General Manager,
Teknopark İstanbul
Showing promise: Government incentives and
increased private sector participation are
helping to boost the sector
TOURISM
Diverse appeal: An increasingly versatile tourist
offering is ensuring continued sector growth
Making room: Rising visitor numbers have
prompted a rush of international hoteliers to
the country
TAX
Grant Thornton
Clarifications coming: A new income tax act is
in the making
Drawing down duties: A look at how tax law
deals with corporations
Attracting attention: Recommendations for
improving the investment climate
LEGAL FRAMEWORK
Kılıç and Partners
Regulating for growth: Legal changes are
guiding and enabling foreign investment
across the board
Viewpoint: Harun Kılıç, Partner, Kılıç and
Partners
THE GUIDE
What’s in a name?: A small tower with a big
history
Upon a time: History and viticulture beckon
visitors to a small treasure offshore
A good night’s rest: Some hotels to consider
for your stay
Listings: Useful phone numbers for local
services
Facts for visitors: Useful information for
first-time and returning visitors

SNAPSHOT6
Turkey in figures
FDI, net inflows, 2004-14 ($ bn)
SOURCE:WorldBank
0
5
10
15
20
25
1413121110090807060504
SOURCE:InvestmentSupport&Promotion
Agency,Deloitte
Net FDI in real estate, 2008-14 ($ bn)
0
1
2
3
4
5
2014201320122011201020092008
SOURCE:TUIK
Tourism sector income, 2004-14 (bn $)
0
7
14
21
28
35
1413121110090807060504
SOURCE: TUIK
Manufacturing 15.8
Wholesale & retail trade 12
Transport & storage 12
Real estate activities 9.8
Agriculture, forestry & fishing 7.1
Construction 4.6
Public admin., defence & social security 4.2
Professional, scientific & technical activities 3.4
Financial & insurance activities 3
Contribution to GDP by economic sector,2014(%)
Production of selected crops, 2013-14 (m tonnes)
SOURCE:TUIK
0
1
2
3
4
5
Green teaHazelnutsOrangesOlivesApplesGrapes
20142013

SNAPSHOT 7
SOURCE:TUIK
Fixed-line & mobile subscribers, 2004-14 (m)
0
16
32
48
64
80
No. of mobile
tel. subscribers
No. of ﬁxed
tel. subscribers
1413121110090807060504
Amount raised via IPOs by industry, 2014 ($ m)
SOURCE:PwC
0
40
80
120
160
200
Financial
services
Real estatePharma
& biotech
Food &
beverage
Ind. goods
& services
Insurance
SOURCE:BPStatisticalReviewof
WorldEnergy2014
Natural gas consumption, 2003-13 (bn cu metres)
0
10
20
30
40
50
1312111009080706050403
Construction GDP, 2004-14 (TL bn, current prices)
SOURCE:TUIK
0
16
32
48
64
80
1413121110090807060504
SOURCE: IMF
2013 2014 2015 2016 2017
GDP, current prices (TL trn) 1.57 1.72 1.88 2.06 2.25
GDP per capita, current prices (TL) 20,708.57 22,448.41 24,262.19 26,210.20 28,314.31
Total investment (% GDP) 20.96 21.91 22.19 22.25 22.37
Inﬂation, avg. consumer prices 6.64 5.30 5.00 5.00 5.00
(% change)
Vol. of imports of goods & services 11.33 7.17 8.54 10.15 10.16
(% change)
Vol. of exports of goods & services 3.14 4.01 4.97 5.31 5.42
(% change)
Population (m) 75.81 76.71 77.60 78.48 79.34
General gov't revenue (TL bn) 559.27 610.38 659.24 721.23 790.44
General gov't revenue (% GDP) 35.62 35.45 35.01 35.06 35.19
Total gov't expenditure (TL bn) 593.21 649.33 701.92 768.17 839.32
Total gov't expenditure (% GDP) 37.79 37.71 37.28 37.35 37.36
Gov't net lending/borrowing (TL bn) 12.29 8.10 4.10 4.09 5.88
Gov't net lending/borrowing (% GDP) 0.78 0.47 0.22 0.20 0.26
Gov't gross debt (TL bn) 557.29 609.26 660.64 716.34 774.63
Gov't gross debt (% GDP) 35.50 35.38 35.09 34.83 34.48
Select economic indicators, 2013-17
Internet banking transactions, 2005-14 (TL bn)
SOURCE:TBB
0
600
1200
1800
2400
3000
20142013201220102005
SOURCE:TUIK*2010=100
Industrial production index, 2005-14*
0
30
60
90
120
150
2014201320122011201020092008200720062005

9
Renewed efforts to address economic challenges
Concerns remain regarding freedom of the press
Election cycle creating a bevy of new developments
Government is maintaining strong regional ties
Country Profile

COUNTRY PROFILE AT A GLANCE
The country aims to make significant economic gains by 2023
Many have hailed Turkey’s notable development per-
formance over the past decade, and for good rea-
son. The country averaged 5.4% growth between
2003 and 2013, one of the highest rates in the world.
This was accompanied by drops in joblessness and
poverty, as well as gains in school enrolment, home-
ownership and life expectancy.
Furthermore, in November 2012, the republic
received its first investment-grade rating since 1994
– a testament to the success that policymakers have
had in reducing sovereign debt and external imbal-
ances. As part of the statement, Fitch also cited the
country’s strong sovereign, bank and household bal-
ance sheets as influencing the upgrade decision.
INDICATORS: Due to weak economic conditions and
tight monetary policies adopted by the central bank,
the country’s GDP growth rate was 2.9% in 2014,
which was lower than the 3.3% predicted for the year
as borrowing costs curtailed domestic demand. More
worrying, perhaps, was the continuing drop in net
foreign direct investment (FDI) inflow, from $12.7bn
in 2013 to $12.14bn in 2014, and the highest unem-
ployment rate in five years at 11.3%, which cast a
shadow over hopes of generating growth.
Declines in the current account deficit notwith-
standing, the downtrend in FDI also means that
Turkey is still heavily dependent on foreign portfo-
lio inflows to meet its funding needs. Yet the gov-
ernment is taking the long view, confident that
progress will continue if the country can maintain
political stability and leverage its competitive advan-
tages. These include a large domestic market, young
population, resilient financial system and strategic
geographic location. Buoyed by these strengths,
Turkey aims to become one of the world’s 10 largest
economies by the year 2023, when the republic will
mark the centennial of its founding.
INFRASTRUCTURE & TECHNOLOGY: A key pillar of
Vision 2023, as the long-term national development
plan is called, is infrastructure development. Over the
last decade public expenditure on transportation
infrastructure as a percentage of GDP has nearly
doubled, allowing for the construction of new ports,
airports, tunnels, railway lines and divided highways
nationwide. This upward spending trajectory is set
to continue, with the 2015 budget estimated to be
TL473bn (€166.54bn) as various infrastructure proj-
ects are planned or under way. Much of this capital
will need to come from the private sector, which
means that the state must improve the tendering
process for public works.
The quality of Turkey’s information and commu-
nications technology infrastructure has improved
markedly in recent years, with the domestic fibre net-
work reaching roughly 245,000 km as of end-2014.
According to the Information and Communication
Technology Authority, total broadband subscribers
reached 40m in the third quarter of 2014, more than
tripling since 2008, when the total was only 6m.
Given Turkey’s young demographic profile, it is
perhaps not surprising that the country is a leader
in mobile phone, internet and social media use. Aver-
age per person mobile phone talking time was 370
minutes per month in the third quarter of 2014,
which was well above Europe’s average of 170.
EDUCATION: Continued socioeconomic progress
will also require meaningful education reforms. More
students are entering the system, but Turkey still
lags behind similarly developed nations in enrol-
ment. Further, Turkish pupils achieved relatively low
scoresonthe2012InternationalStudentAssessment
(PISA), which revealed performance gaps between
male and female test-takers, and between test-tak-
ers in urban and rural areas. Skills gaps are also an
issue, with many local employers reporting that col-
lege graduates are unqualified for entry-level jobs.
To address these and other challenges, education
officials made big changes to the sector in 2012,
when the ruling Justice and Development Party (AK
Party) introduced a new “4 + 4 + 4” educational mod-
10
A new page
Significant developments have occurred over the last decade

COUNTRY PROFILE AT A GLANCE
eldividingtheschoolsystemintothreefour-yearseg-
ments: primary school, middle school and second-
ary school. Equally important, the model increased
the mandatory enrolment period from eight to 12
years. Though many welcomed this development,
especially the extension of the mandatory enrol-
ment period, others criticised the move as a dis-
guised attempt to increase student enrolment at
the religiously oriented imam hatip schools.
ENERGY: Another challenge is the country’s lack of
energy resources. Turkey ranks among the top 25
nations globally for energy consumption, and domes-
tic electricity demand is rising by 6% per year. Yet
Turkey produces only small amounts of oil and nat-
ural gas, which has led to severe import dependence.
The national energy import bill reached $56bn in
2014, and is expected to hit $64bn by 2017.
In response, the state is implementing an all-of-
the-above energy strategy calling for more on and
offshore drilling, greater use of coal, additional devel-
opment of renewable sources, and the construction
of the country’s first nuclear power facilities. Efforts
are also under way to further liberalise the gas mar-
ket, which is dominated by the loss-making state
operator, BOTAŞ. Yet many have questioned why lib-
eralisation is proceeding so slowly; whether foreign
partners can be found to assist in exploration; how
a nuclear programme will be funded; and if regula-
tors can create market conditions that attract gen-
uine renewable investments.
To achieve its goal of becoming an energy transit
state, Turkey also aims to build regional gas pipeline
projects. According to officials from Turkey and Azer-
baijan, the Trans-Anatolian Pipeline (TANAP), which
will deliver 16bn cu metres of gas per year from the
Shah Deniz II field, will be operational in 2017. Turkey
itself will receive 6bn of the gas volume, and collect
handsome transit fees.
GEOGRAPHIC IMPLICATIONS: Turkey’s favourable
geography – it is surrounded by four bodies of water
and sits at the intersection of the Middle East, Cen-
tral Asia and Europe – also makes it a trading hub.
From 2002 to 2014 the volume of Turkish exports
rose more than four-fold, jumping from $36bn to
$157.6bn. By 2023, Turkey aims to achieve an annu-
al export volume of $500bn. Reaching this target will
largely depend on the performance of the manufac-
turing sector, especially the automotive, chemicals,
textiles and metals industries.
Turkey’s central location, combined with its sun-
ny climate, plethora of famous historical sites and
welcomingculture,alsomakesitanattractivetourism
destination. The 2023 development target for the
tourism sector is 50m annual visitors, up from an esti-
mated 31.78m visitors in 2012. Some industry stake-
holders are concerned that the rapid growth in the
tourism sector is threatening the integrity of some
sensitive areas; however, tourism has had an unde-
niably positive impact on the economy through mul-
tipliereffects.In2014thesectorcontributed580,000
jobs, which accounts for 2.2% of total employment.
GLOBALIMAGE: As more foreigners come to Turkey,
more Turks are also leaving their footprint abroad.
The country now has the second-highest number of
major international contractors in the world, with
firms especially active in MENA, where infrastructure
demand is rising fast. While competing in nearby
states, Turkish contractors typically benefit from an
understanding of local market conditions and cul-
tural ties dating back to Ottoman times.
Indeed, Turkey’s history as the last seat of the
Islamic caliphate, along with its current status as a
secular Muslim democracy, gives it a unique role in
global affairs. It is the only country, for example, to
hold membership in both NATO and the Organisa-
tion of Islamic Cooperation (OIC). However, some
regard Turkey’s Islamic identity as a barrier in its EU
accession negotiations, which remain stalled.
When the AK Party came to power in 2002, then-
Foreign Minister Ahmet Davutoğlu, who is now prime
minister, signalled that the new administration would
adopt a “zero problems with neighbours” policy that
prioritisedgreaterregionalcooperation.Tosome,this
vision has been challenged by the outbreak of the
Arab Spring, and by the Syrian conflict in particular.
In light of the unrest, the AK Party, which has repeat-
edly called for Syrian President Bashar Al Assad to
step down, maintains that the “zero problems”
approach has simply been adjusted to account for
other considerations, including the need to protect
human rights and new regional conflicts.
Indeed, Turkey’s soft power may have grown under
a more principled foreign policy, especially in the
Arabworld.TheTurkishInternationalCooperationand
Development Agency, which is building hospitals
and schools in some of the most impoverished places
on earth, is also playing a key role in establishing and
enhancing the country's image internationally. Yet,
given the rising number of journalists in Turkish jail
cells, as well as restrictive legislation on publish-
ing, more progress could still be beneficial at home.
11
The country is among the top 25 economies in terms of energy usage, with demand rising 6% per year

COUNTRY PROFILE OVERVIEW
As of 2013 the country had a per capita income of $10,971
The country is now in the midst of a lengthy politi-
cal cycle, with the local elections in March 2014
being followed in August by the country’s first-ever,
direct presidential elections. 2015 will also see the
country’s 18th general election, currently sched-
uled for June 7. Thus, these are very much political
and busy times for Turkey, a characteristic given
some edge by the turbulence of 2013, when the
country saw a sharpening of disagreement over the
direction of Turkey’s development and the role of
its leaders and institutions.
Nonetheless, the resounding victory of the sitting
government in the March 2014 local elections –
which were accepted by all sides as a ballot on the
national government, too – demonstrated the wide-
spread and continuous support for the leadership
of Recep Tayyip Erdoğan. This 60-year old leader
from the poorer, Kasımpaşa neighbourhood of Istan-
bul has come to dominate and symbolise modern
Turkey more than any other politician of the recent
Republican era. He now leads a nation that has grown
greatly in confidence, wealth and international
stature since his party took power in 2002.
PLANS FOR THE FUTURE: Now, the government is
looking forward to 2023, the centenary of the foun-
dation of the Turkish Republic, as a target year for
the achievement of a string of developmental goals.
If these are reached, Turkey will be among the world’s
top 10 countries in terms of the size of its econo-
my, with its per capita income around twice what it
was in 2013 at $10,971 and the country’s GDP
planned to grow from $822.13bn in 2013 to $2trn.
In doing so, it will also have likely become a region-
al political leader, powerfully influential in capitals
that range from the western Chinese frontier to the
Aegean Sea, and from Europe to the Congo. Whether
such ambition will be achieved remains to be seen,
but for sure, there is a great spirit of dynamism in
Turkey today – and national pride in the country’s
achievements, both contemporary and historical.
LAND OF EMPIRES: Today’s Anatolian Turks trace
their ancestry back to a group of tribes in eastern
central Asia that began westwards migration from
the 6th century onwards. Bringing with them their
Turkic language – the modern versions of which are
still spoken over a geography ranging from Western
China to Azerbaijan – and converting to Islam, the
Seljuk Turks were the first to establish a permanent
presence in Anatolia, starting from the 11th centu-
ry. There, they clashed with the Byzantine Empire,
beginning a conflict that would last until 1453, when
the Seljuk’s successors, the Ottomans, captured Con-
stantinople, now Istanbul.
By then, the Ottoman Empire had expanded into
the Balkans as well. It added territories over the fol-
lowing decades until reaching a golden age under
Sultan Suleyman the Magnificent in the 16th cen-
tury. By that time, most of the Middle East was under
Ottoman rule, along with North Africa, the Cauca-
sus, the Crimea and South-eastern Europe as far
north as the gates of Vienna. A multi-ethnic empire,
Ottoman Turkish, Greek, Arab, Kurdish, Caucasian
and Balkan subjects dominated trade, culture, poli-
tics and warfare in the Mediterranean, Black and
Red Seas for decades, while also holding the west-
ern end of that great medieval bundle of overland
trade routes, the Silk Road.
The Ottoman Empire then began a protracted
decline, however, in the centuries that followed, as
the power of an industrialising Europe and resurgent
RussiagraduallypushedtheOttomansoutoftheCau-
casus, the Crimea and the Balkans, then, in the late
19th and early 20th centuries, out of North Africa
andtheMiddleEast.Thefinaldenouementcamewith
the First World War, when the Ottoman Empire joined
the losing side and was subsequently partitioned
and shared between the victorious Allies.
Confined to Anatolia and a sliver of Thracian land,
a period of great turmoil then ensued out of which
modern Turkey was born. In this, Mustafa Kemal
The Turks can trace their
ancestry back to
confederations of tribes
from central Asia that
began migrating in the
6th century, before
settling in Anatolia
around the 11th century.
13
Anatolia was also the seat
of power for the Ottoman
Empire, which stretched
across most of the Middle
East and North Africa, as
well as part of
south-eastern Europe.
Forging a new path
The country has been through several changes and is set to make new
economic and political gains in the years ahead

Atatürk emerged as the leader of the resurgent Turk-
ish nationalists. Fighting off an invading Greek army
in western Anatolia and French occupation along
the country’s south-east coast, Atatürk also manoeu-
vred the British out of their occupation of Istanbul
and established the Turkish Republic in 1923, after
the last sultan had gone into exile. An unprecedent-
ed modernisation drive then began. The Latin alpha-
bet was adopted, in place of the Arabic, modes of
dress were changed, a command economy was insti-
tuted, and a national, rather than religious, interpre-
tation of history and the modern state was enforced.
A NEW ERA: Atatürk died in 1938, with İsmet İnönü
taking over as president in what was largely an
authoritarian state, under a single political party –
the Republican People’s Party (CHP), founded by
Atatürk and the ancestor of the modern opposition
grouping. İnönü kept Turkey neutral during the Sec-
ond World War, while also allowing the first free
elections in 1950. However, the elections led to his
ouster by the Democratic Party of Ceylal Bayar and
Adnan Menderes, who then became prime minister.
Menderes was, however, overthrown in a military
coup in 1960 and subsequently executed. The mili-
tary restored civilian power soon after though, with
a succession of coalition governments following, led
once again by İnönü for a time, then Süleyman
Demirel and Bülent Ecevit, who became major polit-
ical leaders of the 1970s, 1980s and 1990s.
Two more military coups followed, in 1971 and
1980, with the 1970s also seeing the Turkish mili-
tary’s intervention in Cyprus in 1974, which estab-
lished the current de facto division of the island. The
1980s premiership of Turgut Özal was also signifi-
cant, as his government launched a major liberali-
sation programme for the economy.
The post-Cold War period – Turkey has been a
member of NATO since 1952 and fought on the
Allied/UN side in the Korean War – saw the coun-
try’s first female prime minister, Tansu Çiller, and
the signing of a Customs Union with the EU. Turkey
has been pursuing membership of the EU and its
predecessors since the Ankara Agreement of 1963.
The 1990s were also a period of successive and
short-lived coalition governments, with Çiller going
into coalition with the Welfare Party in 1996. A “soft
coup” was subsequently unleashed by the military
in 1997 that saw this government ejected from
office. The coalitions that followed were also unsta-
ble, however, with major financial crises striking in
2000 and then again in 2001.
In 2002, general elections thus saw a resounding
victory for the Justice and Development Party (AK
Party), which had grown out of the Welfare Party, but
with a more politically and economically liberal agen-
da. Able to establish single party rule for the first time
since 1960, the AK Party won subsequent general
elections in 2007 and 2011. Its term of office has
also seen a major shift in power away from the mil-
itary – many members of which have since been
prosecuted for their role in the 1997 soft coup and
alleged role in other conspiracies. There has also
been a pronounced shift in power away from the old,
secularist, Kemalist elite that had dominated Turk-
ish politics since before the Second World War.
HEADOFSTATE: Under the current constitution, the
president is the head of state, with the power to
appoint the prime minister (usually the person able
to command a majority in parliament), the ministers
of government, (on the prime minister’s advice) the
Chief of the General Staff, the members of the Con-
stitutional Court and other top legal officials.
He or she also presides over the National Securi-
ty Council, at which the leading members of the gov-
ernment meet with the chiefs of the security forces,
and the Council of Ministers. He or she also appoints
rectors of universities and the members of a string
of key – and sometimes controversial– bodies, such
as the Higher Education Council. The president may
alsoissuedecrees,althoughinmostcases,thesemust
also be signed by the prime minister.
The president may also exercise a power of veto
over bills presented by the parliament, returning
them for further debate. If parliament continues to
approve the bill, however, the president is obliged
to sign the bill into law, or call a referendum. Until a
constitutional amendment was passed by just such
a referendum in 2007, the president was elected for
a single, seven-year term by parliament, rather than
by popular vote. The presidential election in August
2014 was the first time the head of state had been
elected by universal suffrage. The president can also
now run for a maximum of two, five-year terms.
EXECUTIVE POWER: Most political power lies cur-
rently with the prime minister, who is usually the
head of the largest party in parliament and who
appoints ministers and others to the cabinet. The
prime minister has considerable powers of appoint-
ment within state agencies, as well as being able to
dissolve parliament and call elections within the
five-year term of the assembly. The prime minister’s
14
smet nönü headed the Republican People’s Party and took over the presidency after Atatürk died in 1938
The Justice and
Development Party came to
power in 2002, and since
then the country has seen
a significant shift away
from military involvement
in political decisions.
The president is the head
of state and has the power
to appoint the prime
minister, government
ministers, the Chief of the
General Staff, members of
the Constitutional Court
and other top legal
officials, among others.

government drafts and submits laws to the parlia-
ment while also deciding policy for, and giving direc-
tion to, state ministries, departments and agencies.
LEGISLATIVE MATTERS: The full name of the sin-
gle-chamberparliamentistheGrandNationalAssem-
bly of Turkey (TBMM). It is composed of 550 deputies,
elected for four-year terms under a proportional
representation, party-list system. Parties must also
get at least 10% of the national vote in order to qual-
ify for seats in the TBMM, a threshold which has
worked strongly against minority and regional par-
ties. Independents may stand without requirement
for the 10% threshold, however, with some region-
al and minority parties thus unofficially fielding can-
didates in this category. The 2011 elections pro-
duced a victory for the AK Party, which garnered
49.83% of the vote, and 327 deputies. Runners up
were the CHP, with 25.98% of the vote and 135
deputies, followed by the National Action Party, with
13.01% of the vote and 53 deputies. Some 6.57% of
the vote went to “independent” candidates, many
of who subsequently became Peace and Democra-
cy Party (BDP) deputies. The BDP was a pro-Kurdish
party, based mainly in the south-east. Some 12 oth-
er parties ran candidates, but all received less than
1.5% of the vote and failed to gain any deputies. Bills
must be debated and passed by the TBMM before
going to the president for final approval. In 2013-
14, faced with a large number of bills, the TBMM
began bundling these together in a manner that has
been controversial. The current speaker of the TBMM
is Cemil Çiçek of the AK Party.
LOCAL AUTHORITIES: Turkey is divided into 81
provinces, with these further divided into 892 dis-
tricts. Each district has its own municipality, while
cities and towns within a district may also have a
municipal authority – the larger ones have several
– while cities of more than 750,000 inhabitants also
have a greater metropolitan municipality. For this rea-
son there are around 2856 municipalities country-
wide, following a reduction in numbers after some
smaller units were amalgamated ahead of the 2009
local elections. Each municipality is headed by an
elected mayor, who presides over an elected coun-
cil. There are also village councils in rural areas, and
sub-district units in urban areas, known as mahalles,
headed by a muhtar, who is also subject to election.
Local government is a significant force in Turkish
politics, as well as in the local economy. In 2013
around 30% of all public investment in the country
was carried out by local government units, with
approximately 80% of these carried out by munici-
palities. They are active in local health care and edu-
cation provision, as well as investing in transport
and communications infrastructure, environmental
protection and even tourism.
THE LAW: The judicial system divides first into civil-
ian and military branches, with each of these in turn
dividing into administrative and ordinary. In the mil-
itary branch, the Military Court of Cassation is the
highest ordinary body, presiding over military courts
and beneath them, disciplinary courts. On the civil-
ian side, the Court of Cassation is the highest ordi-
nary court, with district courts of appeals, then
courts of civil law and courts of criminal law com-
ing under this. On the administrative side, the Coun-
cil of State is the highest judicial body, followed by
district administrative courts, then administrative
courts and lastly tax courts.
Over the whole hierarchy sits the Constitutional
Court, with the Court of Jurisdictional Disputes on
the same level, deciding on issues between judicial
bodies. The High Council of Judges and Prosecutors
(HSYK), established in 1982, makes decisions on
appointments and promotions of judges, with HSYK’s
powers expanded under 2010 constitutional reforms
from seven to 22 members. Police and gendarmerie
(the rural police force) are affiliated to the Ministry
of the Interior, while prisons and detention centres
are affiliated to the Ministry of Justice.
OUTLOOK: The 2015 period is likely to be dominat-
ed by electoral activity, as the rival parties vie for the
presidency, followed by general elections to decide
on the government itself. In August 2014, one of the
earliest results in the first of these critical ballots
was Erdoğan’s presidency. This is widely expected to
lead to a sharp change in the role and powers of the
position too, as he was elected by popular will, rather
than decided by parliamentary vote.
As Erdoğan’s presidency continues it is likely to
develop a more active, chief-executive character
than the position previously did, with one challenge
likely to be that of achieving greater consensus with
those that voted for other parties, while also forg-
ing ahead with the kind of development the presi-
dent wants. The presidency may also likely have a
significant effect on the vote in the 2015 general
elections. The long history of the country and the
lessons of its turbulent past will likely stand
Turkey in good stead though, as it moves through a
packed agenda towards the republic’s first centennial.
15
In urban areas, sub-districts are known as mahalles and each is headed by a local official, or muhtar
Turkey is divided into 81
provinces, with these
further divided into 892
districts. Each district has
its own municipality, while
cities and towns within a
district may also have a
municipal authority. Cities
of more than 750,000
inhabitants also have a
greater metropolitan
municipality.
The Constitutional Court
presides over the entire
judicial system, while the
High Council of Judges and
Prosecutors makes
decisions on the
appointment and
promotion of judges.

COUNTRY PROFILE VIEWPOINT
President Recep Tayyip Erdo€an
Since the establishment of the republic in 1923,
Turkey has been in a state of constant flux. Due to
domestic and global developments, the country was
marred by political and economic instability for
decades. The economy was hindered by political set-
backs, growth was underperforming and the coun-
try struggled with skyrocketing, chronic inflation.
By the end of 2002, however, Turkey had entered
a new era of stability, prosperity and economic devel-
opment under the stewardship of the Justice and
Development (AK) Party. Hand in hand with demo-
cratic reforms, the country has significantly improved
its investment environment. With a staunch belief
in the entrepreneurial spirit of the private sector, the
current administration has embarked on a compre-
hensive reform programme that over the years has
created a robust business climate in which the pri-
vate sector has flourished.
Turkey’s economic growth, led by the private sec-
tor, has yielded impressive results in many areas,
such as macroeconomic stability and socioeconom-
ic development. Over the past 11 years, the econo-
my has grown by an average of about 5% a year in
real terms. As a result, the size of the economy
reached $820bn by the end of 2013, up from $230bn
at the end of 2002. Inflation has meanwhile been
tamed down to the single digits, budget discipline
has been achieved and public debt has been reduced
from 74% of GDP in 2002 to 36% in 2013.
We have also made sure that our economic poli-
cies improve people’s socioeconomic conditions. In
this regard, per capita income has more than tripled,
reaching about $11,000, while poverty has been
drastically reduced. As an illustration of this, back in
2002 the portion of the population that was living
on less than $4.30 a day was more than 30%. With-
in a decade, this figure had been reduced to 2.9%,
and we remain determined to eradicate it complete-
ly. Alongside this decrease in poverty, a new middle
class has emerged and spurred economic growth.
Political and economic stability, together with a
favourable investment climate, have also acted as a
magnet for foreign investors. Attracting foreign
direct investment (FDI) has been one of the main pil-
lars of our economic development policy. To this
end, in 2003, we introduced a new FDI law granting
foreign investors equal treatment to local investors;
guaranteeing their rights and the transfer of prof-
its; allowing them to purchase real estate in Turkey;
and providing them with the mechanisms for set-
tling international disputes. Moreover, we reinforced
thelegalframeworkwitheffectiveinstitutions,estab-
lishing, under the auspices of the prime ministry,
the Investment Support and Promotion Agency of
Turkey, which serves and assists inbound direct
investors and reports directly to the prime minister’s
office. These efforts have yielded concrete results.
Turkey has attracted more than $140bn of FDI since
2002, compared to a total of less than $15bn dur-
ing the preceding eight decades.
I believe that this trend will continue apace. We
have embarked on a new economic journey that will
create more and more opportunities in Turkey. We
have set specific targets to achieve by 2023, the
centennial of the republic, and after a decade of
impressive economic performance, we have not
become complacent. Our targets for 2023 include
making Turkey one of the top ten economies in the
world with a GDP of $2tn, increasing GDP per capi-
ta to $25,000 and boosting the country’s exports to
$500bn. Also counted among the 2023 targets are
important upgrades to Turkey’s education, health
care and energy infrastructure.
We have already launched many of the infrastruc-
ture projects that will pave the road to 2023, and I
am happy to see foreign investors contributing on
this journey. As the prime minister of the Republic
of Turkey, I invite foreign investors to invest here,
and I give them my assurance that we will support
and assist them at every stage of their engagement.
16
A new journey
President Recep Tayyip Erdo€an, on his country’s economic rise

17
Trade & Investment
Seeking to cut the trade and current account deficits
Exports reached an all-time high in 2014
Decline in oil prices lowers energy import bill
Foreign direct investment levels returns to growth

TRADE & INVESTMENT OVERVIEW
Great strides have been made in diversifying Turkey’s markets
Turkey has spent the last decade trying to maximise
the potential of its geographical position and abili-
ty to expand its economy with export-led growth.
While this has been hampered by a heavy depend-
ence on imports and a bulging current account
deficit, the country has made great strides in grow-
ing trade and diversifying markets.
With strong domestic growth and a sense of eco-
nomic stability following the difficulties of the 1990s
and the 2001 banking crisis, the country has been
able to radically transform the investment environ-
ment, garnering record numbers for foreign direct
investment in the last 10 years.
TRADE DEFICIT: In many respects 2014 was typical
of Turkey’s recent trade performance. The country
ran a significant trade deficit as it has in successive
years since the global financial crisis. In 2014 exports
grew by 3.9% to $157.6bn, while imports totalled
$242.2bn, a drop of 3.7%. As such the republic is run-
ning a trade deficit of $84.5bn, or around 10% of GDP.
This is the result of a multitude of factors. Even in
the pre-crisis years when Turkish exports were grow-
ing in double digits, the country was running a large
trade deficit. In 2007, for example, exports grew by
25.4% to $107.3bn, but the deficit was still a size-
able $62.8bn. This is indicative of the structural lim-
itations of the economy, with export and domestic
growth and production highly reliant on imports.
Indeed, according to the World Economic Forum’s
“Global Enabling Trade Report 2014”, intermediate
goods accounted for 61.3% of total imports in 2012,
with industrial supplies (primary and processed)
accounting for 45.5% and parts and accessories
accounting for 10.8%. In such circumstances, the
country has to run a large foreign trade deficit and
current account deficit to achieve strong growth.
Indeed, since 2006 the external trade deficit has
only been below 9% of GDP once, in 2009, when the
economy contracted by 4.8%. Similarly, the current
account deficit has only been below 5% of GDP once
in the last seven years, again in 2009. The structur-
al problems of the economy are also exacerbated
by Turkey’s dependency on energy imports.
In 2012, for example, net energy imports account-
ed for 73% of energy use in Turkey, according to the
World Bank. Turkey’s energy import bill stood at
$55.9bn in 2012, or 23.6% of the total value of
imports. This has been a chronic problem for the
country and a significant contributing factor to its
balance of payments problem.
ENERGY IMPORTS: As the government targets
becoming one of the top-10 largest economies by
2023, the demand for energy is likely to increase. The
government is adopting a range of measures to
lessen the country’s energy dependence and cut
the import bill. The primary policy is to boost domes-
ticenergyproductionthroughtherolloutofanuclear
energy programme. The government plans to bring
the private sector on board to build three nuclear
plants in the next decade, cutting some $7.2bn from
the annual natural gas bill.
The government has already signed contracts with
a Russian firm, Rosatom, and a Japanese-French con-
sortium of Mitsubishi Heavy Industries, Itochu Cor-
poration and GDF Suez for the construction of the
first two nuclear plants on the Mediterranean and
Black Sea coasts, respectively.
The construction of the country’s first nuclear
plant near Mersin on the Mediterranean coast start-
ed in April 2015. Initially expected to begin genera-
tion in 2019, the Akkuyu plant is now likely to start
operations by 2020, while the second facility in Sinop
is expected to be operational by 2023.
However, the current account deficit is narrow-
ing: the 2014 deficit decreased to $45.8bn from
$65bn in 2013, according to the Turkish Central
Bank. In its “World Economic Outlook April 2015”
report, the IMF estimates Turkey’s ratio of current
account deficit to GDP to narrow to 4.2% of GDP in
2015 from 5.7% of GDP in 2014 thanks to a substan-
As the government aims to
become one of the
top-10 largest economies
by 2023, the demand for
energy is likely to increase.
The government is thus
adopting a range of
measures to lessen the
country’s energy
dependence and cut the
import bill.
18
Onwards and upwards
The country has significant potential to boost trade and foreign investment

tial fall in the cost of energy imports. As an energy
importer, lower oil prices have benefitted Turkey and
are positively impacting the current account. The
price of Brent crude was at $45.25 per barrel in April
2015 – its lowest level since March 2009.
GOLD TRADE: In addition to energy imports, the
other major distorting factor for Turkey’s trade bal-
ance has been gold. In 2012 net gold trade record-
ed a surplus of almost $6bn on the back of a deal to
send gold to Iran as payment for natural gas and oil
imports. However, as the US closed a loophole in its
sanctions regime against Iran in the second half of
2013, these exports declined. Indeed, in 2013, Turkey
recorded a net gold trade deficit of almost $12bn,
as it replenished gold stocks while taking advantage
of cheaper prices in the international market.
In 2013 gold imports reached some 302.3 tonnes,
more than double the level one year earlier when
imports totalled 120.8 tonnes. This massive fluctu-
ation in gold trade had a substantial impact on the
country’s trade deficit for 2013. Indeed, excluding
the gold trade, exports grew faster than imports in
2013. Furthermore, excluding energy and gold
imports, Turkey’s current account deficit looked
much more healthy, standing at less than 1% of GDP.
In 2014 gold imports declined sharply, totalling 130.9
tonnes, according to data from Borsa Istanbul.
TARGET MARKETS: The prospects for foreign trade
and the current account in 2015 look promising.
The IMF says Turkey’s economic growth is likely to
increase to 3.1% in 2015, up from 2.9% in 2014, as
consumption will be boosted by lower energy prices.
Turkish exports have also become more competitive
as a consequence of a depreciating lira in 2013-15.
The country’s export growth is likely to be helped
bytherecoveryofitsleadingtargetmarkets.Theslow
but steady recovery of the eurozone bodes well for
Turkishexports.Althoughthegovernmenthaslooked
to diversify Turkey’s export markets, the EU as a
whole remains a critical part of the republic’s trade
performance, accounting for 41.5% of total exports
in 2013 (down from close to 60% a decade earlier)
and 43.5% in 2014. The eurozone is showing clear
signs of recovery, growing 0.3% in the fourth quar-
ter of 2014 as a whole, while its largest economy,
Germany, expanded by 0.7%. The European Commis-
sion is forecasting growth in 2015 of 1.3%, which
would be the area’s best outcome since 2011 when
it grew by 1.6%. Meanwhile, the European Central
Bank has raised its GDP forecasts for 2015 and 2016
and projected 2.1% growth in 2017, the first time in
a decade that it has forecasted growth above 2%.
This augurs well for Turkey, especially considering
the impact the fallout from the Arab Spring has had
on its other main export market. Turkish exports to
the Near and Middle East declined by 16.1% to
$35.6bn in 2013 and to $35.4bn in 2014. As such,
the region’s share in Turkish exports fell from 27.8%
in 2013 to 22.5%. Excluding this unstable region,
Turkey is well placed to grow exports across all
regions. The country’s leading exports are automo-
tives, textiles and chemicals. One potential growth
market could be Iran. Given the loosening of the US
sanctions regime, Turkey’s neighbour could realise
its potential as a destination for Turkish goods. His-
torically, Turkish exports to Iraq and Iran have large-
ly run in parallel. However, since the introduction of
sanctions, their paths have diverged. Iraq is now
Turkey’s second-biggest export market after Ger-
many, with exports reaching some $10.9bn in 2014,
while Iran ranks tenth with around $3.9bn worth of
exports, according to TurkStat.
FOREIGN INVESTMENT: Beyond the general trade
environment, the government is also looking to bol-
ster foreign direct investment (FDI) to fund the cur-
rent account deficit. An uptick in FDI could help the
country to reduce its dependence on intermediate
imports and thus reduce the trade deficit in the
manufacturing and industrial sectors. It can also
help the country to develop higher-value products
and transfer knowledge to the local economy.
Turkey has certainly improved its ability to attract
foreign investment in the last decade. Put simply,
19
Top 10 countries by import, 2014 (bn $)
SOURCE:TUIK
0
6
12
18
24
30
SpainIndiaSouth
Africa
FranceIranItalyUSGermanyChinaRussia
Lower oil prices have reduced the cost of energy imports
The country’s export
growth is also likely to be
helped by the recovery of
its leading export markets,
such as the EU, which
accounted for 43.5% of
total exports in 2014.

between 2004 and 2014, the country attracted 8.5
times more FDI ($123.7bn) than it did in the whole
of the previous 80 years. And yet since a peak of
$22bn in 2007, Turkey’s FDI performance has been
stuttering. In 2013 the country received $12.4bn in
FDI, a decrease of 6% on the previous year, accord-
ing to the central bank. However, 2014 saw a slight
improvement to $12.5bn. The country’s sluggish per-
formance is the result, to some extent, of a weak
export environment. This is particularly true in the
automotive sector, a significant recipient of FDI, and
an industry that exports the majority of its products.
With Europe gradually recovering from its long
recession,theopportunitiesforexport-ledFDIgrowth
in Turkey are improving. Indeed, for the first time,
Turkey was ranked as one of the most promising
economies for FDI between 2013 and 2015 on the
UN Conference on Trade and Development “World
Investment Report 2013”. The government has cer-
tainly taken great strides to attract more FDI. In April
2012, for example, then-Prime Minister Recep Tayyip
Erdoğan (now the president) announced a package
of measures to incentivise investment including
export tax exemptions, value-added tax exemptions
and refunds, employment insurance support and
interest rate support.
Turkey has also been growing its base of special
economic zones with 59 technology development
zones (40 of which are currently operational) aimed
at bolstering research and development innovation
across the country, 289 organised industrial zones
(212 of which are operational) and 20 free zones
(of which 19 are operational). All of these zones
offer investors a range of exemptions and incentives
to support investment.
OBSTACLES: However, challenges remain to boost
FDI in the country. The corporate tax rate has been
brought down to 20% from 35% and foreign investors
are subject to exactly the same regulations, levies
and laws as domestic companies, however, taxation
remains a major concern for investors. According to
EY’s Turkey Attractiveness Survey 2013, corporate
tax remains an issue for potential investors.
Turkey ranks 56th out of 189 economies for pay-
ing taxes in the “World Bank Doing Business 2015”
Report. The bureaucracy surrounding tax payment,
as well as payment rates, is preventing the country
from a higher ranking. In August 2013 the Revenue
Administration altered its interpretation of build-
operate-transfer(BOT)agreements,effectivelymean-
ing that investments made in a BOT project could
now be subject to taxation.
Fırat Yalçın, a partner at Pekin & Pekin, an Istan-
bul-based law firm, told OBG that the tax ruling is a
significant change in the taxation of BOT. “The rul-
ing is likely to significantly increase the tax burden
of investments made through BOT, and although the
tax burden may not have any major effect on the gov-
ernment budget, considering that investors will
include such cost items when bidding for public-
private projects, it will impact the cost of invest-
ment to the government,” he said.
Higher interest rates since January 2014 may also
have a negative effect on FDI given that it increas-
es the cost of money. While this is unlikely to deter
investors, coupled with the general economic envi-
ronment, it may lead to a wait-and-see attitude.
Indeed, the interest rate environment is likely to have
an impact on large-scale infrastructure projects in
the country, financed by private and foreign capital
predominantly on a BOT basis.
OUTLOOK: However, there is substantial potential
for FDI in the country. Turkey’s location, population
and longer-term growth potential make it an attrac-
tive option. In the short term, the weaker lira will also
offer opportunities, in terms of establishment costs
and export potential for foreign investors.
Indeed, the coming year is likely to see Turkey’s
trade deficit shrink as a number of factors converge
to boost exports. The return of growth to Europe,
the growth potential of the Iranian market, a weak-
er lira and weaker domestic demand all point to an
upsurge in exports, while imports are likely to decline.
20
FDI, net inﬂows, 2004-14 ($ bn)
SOURCE:WorldBank
0
5
10
15
20
25
20142013201220112010200920082007200620052004
In 2014 foreign direct investment reached $12.5bn
Turkey has been expanding
its number of special
economic zones, with 40
technology development
zones, 212 organised
industrial zones and 19
free zones currently
operational. All the zones
offer a range of
exemptions and incentives
to support investment.

TRADE & INVESTMENT ANALYSIS
The country scores relatively well for trade and investment freedom
Turkey’s trade record over the last few years has been
relatively impressive. Exports have risen substantially,
iferratically.In2006,exportsstoodat$85.5bn.By2014,
the figure reached a record high of $157.6bn. Howev-
er,importshavealsogrownrapidly,reaching$242.2bn
in 2014. This trade deficit, which reached 10% of GDP
in 2014, has been a perennial problem for the coun-
try. The country is looking to change this balance and
has placed better export performance at the heart of
its growth strategy up to 2023, the centenary of the
Turkish Republic. The government is targeting exports
of $500bn by that date as part of a plan to reach an
annual GDP figure of $2trn (up from around $800bn
in 2014) and a per capita income of $25,000 (up from
$10,400 in 2014). The country is certainly well placed
to bolster its trade volumes, both for import, export
and re-export. Turkey’s geographic location gives it
proximitytothemarketsofEurasia,AfricaandtheMid-
dleEast.Some56countriesliewithinafour-hourflight
of Turkey, a swathe of countries with around 1.5bn
peopleandexportpotentialofupto$10bn,according
to EY. The republic has also developed the infrastruc-
ture to maximise this trade potential.
FREER TRADE: The country scores relatively well on
theHeritageFoundation’sIndexofEconomicFreedom
2015 for trade freedom and investment freedom.
Turkey’s overall score of 63.2 ranks it 70th globally.
However, it scores 84.6 on trade freedom and 75 on
investment freedom (with a score above 70 denoting
that a country is mostly free and a score above 80 sig-
nifyingthatitisfree).TurkeyalsoscoreswellintheWorld
EconomicForum’s“GlobalEnablingTrade2014”report,
ranking 46th overall, 34th for domestic market access
and 26th for its transport infrastructure. According to
thereport,Turkeyalsohasamaximumscore,alongwith
34 other countries, on Customs transparency. But this
generallyliberaltraderegimewillonlygetTurkeysofar.
The government has also been pushing hard to con-
clude comprehensive and limited free trade agree-
ments (FTAs) with several partners to bolster trade.
The republic has 17 FTAs in force, is in negotiations
forafurther13andhasbegunpreliminarydiscussions
to commence negotiations on a further 10 with coun-
tries or country blocks including the US and Canada.
TheseFTAshavebenefittedTurkey.Intheyearsfrom
2000 to 2012, trade with FTA partners outperformed
the country’s overall trade. According to a November
2013articlebyCerenSavaseratHerdemAttorneyson
Mondaq.com, total exports in this period increased by
446%, while Turkish exports to FTA partners rose by
551%. By 2012 Turkey’s exports to FTA partners had
reached $14.5bn, compared to overall exports of
$152.5bn. In the same period, total imports to Turkey
increasedby340%,whereasimportsfromFTApartners
increasedby280%.By2012theyhadreached$10.7bn,
or 4.5% of the total. As the statistics suggest, Turkey’s
FTAtrade,whilerelativelysmall,hasoutshonethecoun-
try’s general trade performance. Moreover, it has ben-
efitted disproportionately from its FTAs compared to
its partners. These countries have a 4.5% share in
Turkey’s imports, but a much more impressive 9.5%
shareinitsexports.OutofTurkey’s17FTAs,sevenpart-
ners ranked in the top-40 export destinations in 2012
(Egypt,Israel,Georgia,Lebanon,Morocco,Switzerland
and Tunisia). While the government has struggled in
generaltermstoboostexportswithoutaconcomitant
increase in imports, the country has had no problems
inremainingcompetitivewithitsFTApartners.Turkey’s
generaltradedeficitstoodat$84.1bn,or10.7%ofGDP,
in 2012. However, with FTA partners, the country was
running a $3.9bn trade surplus.
NEGOTIATIONS:Itishardlysurprisingthatthegovern-
ment is keen to conclude more FTAs. In April 2014 the
country signed an agreement with Malaysia; negotia-
tions with Singapore and Peru are progressing rapidly.
The Turkey-Malaysia FTA is targeted to boost bilateral
trade to $5bn by 2018 from around $1.1bn currently.
The two countries will also abolish visa requirements
for their citizens, and Malaysia has agreed to invest
$1.5bn in the Turkish economy across several sectors
In 2014 Turkey concluded
an agreement with
Malaysia, with the aim to
boost bilateral trade to
$5bn by 2018, while
negotiations with
Singapore and Peru are
progressing rapidly.
21
The country is looking to
change its trade balance
and has placed better
export performance at the
heart of its growth strategy
up to 2023, the centenary
of the Turkish Republic. The
government is targeting
exports of $500bn by
that year.
Maximising potential
Further trade agreements are in the works

TRADE & INVESTMENT ANALYSIS
from transport infrastructure to health care. The gov-
ernment also began a second round of FTA negotia-
tionswithPeruinJanuary2014.AccordingtoPeru’smin-
ister of foreign trade and tourism, Magali Silva, while
negotiations could take up to four years, the ministry
is hopeful they will be concluded sooner. Turkey’s FTA
negotiationswithSingaporebeganin2014.Oneofthe
sticking points in the negotiations has been Singa-
pore’sservicessectorandthepotentialimpactitcould
have on the local economy. Indeed, while Turkey has
benefitted from such agreements in the past decade,
the government is trying to remain vigilant about the
potentialdamagethatagreementswithhighlycompet-
itive nations could have on the local economy.
ACROSS THE ATLANTIC: One of the main concerns
forTurkey’stradepolicycurrentlyisthepotentialTransat-
lantic Trade and Investment Partnership (TTIP), or FTA
between the US and the EU. Under the terms of the
CustomsunionbetweenTurkeyandtheEU,established
in 1996, Turkey is obliged to apply the same tariffs as
theEUdoestoindustrialproductsandprocessedagri-
culture products imported from third-party countries.
Assuch,ifTTIPweresigned,USproductswouldgetpref-
erential access to the Turkish market, while Turkish
productswouldgainnoreciprocalbenefitwhenenter-
ingtheUSmarket.Theagreementcouldthereforehave
a deleterious effect on bilateral trade with the US.
The trade balance between the two countries is
alreadyintheUS’sfavour.In2014USexportstoTurkey
were worth $12.7bn, while Turkish exports to the US
reached $6.3bn. Nonetheless, exports to the US are
growing rapidly. In 2012, they grew at 22%, almost
twice the rate of exports to the rest of the world, and
in 2014 they were up 12.4% year-on-year. Companies
exportingautomotiveparts,machineryparts,andiron
and steel have all gained a substantial foothold in the
US market. In order for exports to the US to continue
growing, Turkey is likely to look for a bilateral FTA with
its North Atlantic counterpart. Discussions have been
held regarding the commencement of FTA negotia-
tions, but there are impediments to the talks that go
beyond technicalities on the free movement of goods.
In any negotiations, the US is likely to raise concerns
aboutareaslikefreedomofpressandthelackoftrans-
parency in public procurement.
CHALLENGES: Among the steep challenges that still
need to be met to boost trade and investment, one of
the biggest is the issue of intellectual property and
counterfeitgoods,whichhampersbothforeigninvest-
ment and progress on FTAs. Turkey remained on the
watch list of the Office of the US Trade Representative
(USTR) in 2014. In a report from that year, the USTR
noted that several successful enforcement initiatives
led to the prosecution of individuals selling counter-
feitmedicinesonlineandtheseizureofprintingpress-
es and materials used to counterfeit pharmaceutical
packaging, as well as the seizure of pirated books, fake
food products and counterfeit cancer treatments.
Nonetheless, the report said, “US rights holders con-
tinue to raise serious concerns regarding the export
from, and trans-shipment through, Turkey of counter-
feit and pirated products. In particular, industry has
expressedconcernaboutthemanufactureofcounter-
feitedluxurygoods,digitalmediaandtextiles.”Enhance-
mentofTurkey’scopyrightandintellectualpropertyleg-
islation could thus give a sizable boost to trade.
Another issue whose resolution could have large
benefitsforinvestmentistheeliminationofvisarequire-
ments for Turkish citizens visiting Europe’s Schengen
area. This took a step forward in May 2015, when the
EU trade commissioner and Turkish interior minister
announced a decision to revise the framework and
expand the scope of the EU Customs union, including
eventual visa liberalisation. Turkey has gained much
from the Customs union in terms of attracting foreign
investors. Its proximity to both the EU and the Middle
East, as well as its liberalised trade environment with
many of the countries in its hinterland, make it a desir-
able location for production and export – a case illus-
trated by high FDI levels in its automotive industry. If
Turkey is to get its external financing on a surer foot-
ing and meet its 2023 targets, FTA negotiations with
a host of countries will be crucial in the coming years.
22
Top 10 countries by export, 2014 (bn $)
SOURCE:TUIK
0
4
8
12
16
20
IranUAESpainRussiaUSFranceItalyUKIraqGermany
Exports reached a record high of $157.6bn in 2014
The growth in free-trade
agreements is likely to be
beneficial for the country’s
FDI stock. Indeed, Turkey
has already been able to
benefit from its Customs
union with the EU as a
means of attracting
foreign investors.

TRADE & INVESTMENT INTERVIEW
Richard Moore, UK Ambassador to Turkey
Fromaneconomicstandpoint,howdoestheUKview
the importance of its relationship with Turkey?
MOORE: The relationship between our two countries
goes back a long way and has been rooted in econom-
ic and trading issues from the day the first English
ambassador arrived in Turkey in 1583. As Europe, and
theUKinparticular,hasreorienteditselftowardsmore
export-led growth over the past few years, there has
been a real focus on building better trading relation-
shipswithemergingmarkets.TurkeyisrightonEurope’s
doorstep and, as such, is a country on which European
nationsshouldfocus.In2010theUKandTurkeyagreed
on an ambitious plan to double trade by 2015 based
on 2009 figures, and I can happily say we are current-
ly on track to meet this goal.
Whatindustriesposethegreatestpotentialinterms
of foreign involvement in the Turkish economy?
MOORE: UK companies are active in Turkey across a
wide range of fields. Some 2400 UK companies oper-
ate here, including household names such as BP, Shell,
Vodafone, Compass, HSBC, Tesco, B&Q and Harvey
Nichols. We focus our efforts where we can bring
expertiseandexperiencetoTurkey.TheCityofLondon
is working to support Istanbul’s plans to become a
major financial centre. We are also currently focusing
on three other high-value areas.
One is nuclear energy, where there are real oppor-
tunities for British and other European firms to help
Turkeydevelopcapacity.Theplansforthreenuclearpow-
er plants have created demand for the expertise of all
types of companies, for example, engineering consul-
tancy firms. Another area of focus for us is healthcare,
in which the current Turkish government has invested
heavilysincetakingoffice.Theconstructionofthethird
Istanbul airport will also provide significant opportu-
nities for international companies. The sheer scope of
the project necessitates the involvement of many dif-
ferentspecialtycompanies,suchasdesignfirms,high-
tech engineering consultancies and specialists in the
public-privatepartnershipmodel.Overall,welookvery
favourablyonthevariousinfrastructureimprovements
upon which Turkey is currently embarking, and our
companiesarecommittedtosharingtheirexpertisein
order to help the country reach the ambitious devel-
opmentgoalsofits2023vision.UKcompaniesarealso
increasingly partnering with Turkish companies in the
engineering and construction sectors to work togeth-
er in third country markets.
What more can the government of Turkey do to
attract increased foreign investment?
MOORE: Turkey has come a long way economically,
especially in the last decade or so of the AKP govern-
ment’s tenure. Overall the Turkish government is very
open to foreign investment and keen to encourage it.
The country has made great strides in this area since
opening up to increased international involvement in
the late 1980s under Turgut Özal. That said, when it
comestovariouseaseofdoingbusinessindices,Turkey’s
rankingisnotcommensuratewithitsimportancetothe
global economy, as the 16th largest economy in the
world. There seems to be a general consensus among
policymakers that they need to deliver new measures
todriveforeigndirectinvestment,suchasreducingbar-
riers to entry and encouraging further deregulation,
as well as implementing key supply side structural
reforms (e.g. in education) if the Turkish economy is to
develop its higher-value added export capacity.
Foreign investors want political stability allied to the
rule of law, as well as transparency and consistency in
the implementation of legislation. The EU accession
process, in its active phases, has been a very signifi-
cantdriverofthesetypesofreforms.Thatisoneofthe
reasons the UK is so strong an advocate of Turkey’s EU
vocation. I am confident that progress will continue to
be made over the coming years and that Jim (“BRICS”)
O’Neill, the British economist, was right to put the “T”
into MINTS – the countries with the best chance
of providing the new economic giants of the 2050s.
23
Open doors
OBG talks to Richard Moore, UK Ambassador to Turkey

TRADE & INVESTMENT VIEWPOINT
Dr Jim Yong Kim, President, World Bank Group
The founding father of the Turkish Republic, Mustafa
KemalAtatürk,said,“Economicdevelopmentformsthe
backboneoftheidealofTurkey,whichisfree,independ-
ent, ever stronger and more prosperous”. Turkey has
madegreatstridesintherealisationofthisideal,thanks
toasolidtrackrecordofmacroeconomicmanagement
and structural reforms. It is thus fitting that the gov-
ernment, led by Prime Minister Recep Tayyip Erdoğan,
has set ambitious targets for 2023, the centennial of
the foundation of the Republic.
At the World Bank, we are also setting some ambi-
tiousgoals:toendextremepovertyby2030andboost
shared prosperity for the bottom 40% in developing
countries.Wewillthereforeneedthesupportofallmem-
ber countries of the World Bank, as well as the private
sector, civil society and private foundations.
Turkey, given the significant progress it has made in
itsowndevelopment,willplayakeyrole.Thecountry’s
economic achievements are an inspiration to many
developing nations. Indeed, we have started a project
withthegovernmenttoshareitsdevelopmentlessons
with policymakers throughout the world. Already, our
teamsarebringingdelegationsfromvariouscountries
toTurkeyforknowledgeexchanges:MalaysiaandKoso-
vowereinterestedinthehealthsector;Iraqinthesocial
security system; and Mauritania in the use of informa-
tion technology. Let me share just three of the many
lessons Turkey can offer the development community.
First,anexamplethatisparticularlyclosetomyheart,
as someone who has worked in public health for many
years,isthatTurkeytooklessthanadecadetoachieve
universal health coverage. The introduction of the
Health Transformation Programme in 2003 initiated a
root and branch reform of the health system. Since
1990, infant mortality has fallen by two-thirds and
maternalmortalityby80%,whileaveragelifeexpectan-
cy has risen by 10 years.
Countries can learn much from Turkey’s policies, as
well as the sequencing of reforms to create quick wins
for the population and overcome the resistance of
vested interests. In our flagship training course on
healthreform,wehighlightthecountryasacasestudy
of success in achieving universal health coverage.
Second, Turkey’s energy sector stands out among
many emerging market economies for the strength of
itsregulatoryframework,aswellasitsabilitytoattract
significant private investment. It is also notable for its
focusonrenewableenergyasakeyelementofagreen-
er growth path. The country has largely eliminated
energysubsidies,whicharefiscallycostlyanddiscour-
agemuch-neededinvestmentsinenergyefficiency.As
a result, energy prices reflect market costs.
Third, lessons have been learnt from the devastat-
ing effects of the 1999 Marmara Earthquake and an
improved capacity to anticipate, mitigate and respond
to the risks of natural disasters. The Istanbul Seismic
Risk Mitigation and Emergency Preparedness Project
is a great example of a city-wide effort to improve
resilience to shocks that are likely to strike along the
North Anatolian fault line. In our “2014 World Devel-
opmentReport:RiskandOpportunity–ManagingRisk
for Development”, Turkey is featured prominently for
its work in this area. I could also mention progress in
the country’s banking system and fiscal consolidation.
Of course, Turkey’s own development agenda is not
complete. Many challenges remain: from boosting the
participation of women in the labour force to increas-
ing the skill levels of a young and growing labour pool;
from raising domestic savings to attracting more for-
eign direct investment to make growth less depend-
ent on short-term capital from abroad.
In addition, we have seen around the world how
importantitisforcitizenstofeeltheyhaveavoiceand
a stake in their country’s development. To be sustain-
able,economicprosperityhastoprovideopportunities
forall.ThisisanobjectiveIknowwesharewithTurkey’s
citizens and policymakers.
The World Bank is grateful for our partnership with
Turkey because it is based on mutual learning and
on a shared quest for the best development solutions.
24
Valuable lessons
Dr Jim Yong Kim, President, World Bank Group, on the development
lessons Turkey can share with the world

25
Economy
Ambitious growth targets on the horizon for 2023
Current account deficit in decline due to lower oil prices
Structural reforms needed to strengthen the economy
Privatisation efforts continue despite some challenges

ECONOMY OVERVIEW
Turkey has tripled its national income in the decade to 2013
Throughout 2014 Turkey had to shoulder its fair
share of international financial turbulence, espe-
cially in terms of currency volatility. However, despite
investor concerns, the country has largely retained
its appeal as a success story in the region with rel-
atively sound long-term growth potential, provided
the appropriate structural reforms are enacted.
The past decade has seen the economy thrive as
Turkey took significant steps forward in its develop-
ment. A young and growing population in a strate-
gically important location have marked Turkey as a
potential economic heavyweight. However, concerns
remain over renewed political uncertainty and the
private sector’s exposure to external debt.
FULL SPEED AHEAD: The government has set an
ambitious target of becoming one of the top-10
economies in the world by 2023, to coincide with
the centenary of the founding of the Republic of
Turkey. However, the optimism that gave birth to
this goal has dimmed somewhat, as external factors
have placed significant stress on the economy in
recent months. While it is better positioned than a
decade ago, the economy has also become more vul-
nerable and investors are beginning to question
whetherTurkeycankeeppacewiththegrowthtrends
of the past decade given its structural imbalances.
Since 1999 Turkey has recorded average annual
growth of 3.9%, making it one of the best perform-
ing emerging markets. Growth fell below 3% in 2014,
but there is potential for an uptick in 2015, with
support coming from domestic investment and the
prospect of modest growth in the eurozone.
GROWTH BY NUMBERS: While construction has
been a leading source of growth in recent years,
recording double-digit growth in constant prices in
2010 and 2011, this slowed to 2.2% in 2014. Accord-
ing to the Turkish Statistical Institute (TurkStat), the
largest contributors to the economy in 2014 were
manufacturing, with a 15.8% share of GDP in cur-
rent prices; wholesale and retail trade, with 12%;
transport and storage, at 12%; and real estate activ-
ities, with 9.8%. As a whole, services accounted for
58.4% of GDP in constant prices in 2014, while indus-
try contributed 28.7% and agriculture brought in the
remaining 12.9%, TurkStat figures show.
DEMOGRAPHIC DIVIDEND: Turkey’s fundamentals
bode well for strong economic growth. With a mar-
ket of 77.7m people as of the end of 2014, nearly
half of which are under the age of 30, there is room
for rapid expansion. As the country faces a falling
dependency ratio, which stood at around 50% in
2013, there will be less pressure on recurring gov-
ernment expenditure and a growing workforce to
generate government revenues. Government poli-
cies on labour and education are likely to have a
large impact on whether this potential is realised.
Additionally, Turkey’s strategic trade location, with-
in four hours’ flying distance of 1.5bn consumers,
presents opportunities for export-led expansion and
an attractive incentive for foreign direct investment.
TRACKING PROGRESS: Over the course of the last
decade, these factors have worked in the country’s
favour, as evidenced by a long run of sustained eco-
nomic growth. Between 2003 and 2013 Turkey’s
economy grew by a compound annual growth rate
of 4.4%, according to data from TurkStat, making it
one of the top performers in the G20. In 2010 and
2011 alone the country recorded 9.2% and 8.8%
year-on-year (y-o-y) growth. Indeed, Turkey has expe-
rienced a decade of heady growth and development
following the uncertainty of the 1990s, which were
marked by coalition governments, an insurgent war
in the east and the 2001 banking crisis.
STATE MEASURES: The ruling Justice and Develop-
ment Party (AK Party) has not been shy about laud-
ing its own achievements. In a November 2013
speech, Ali Babacan, deputy prime minister respon-
sible for the economy, reported that Turkey had
tripled its national income in the decade to 2013,
surpassing $17,000 in per capita national income at
27
Between 2003 and 2013
Turkey’s economy grew by
a compound annual
growth rate of 4.4%,
making it one of the top
performers in the G20. In
2010 and 2011 alone the
country recorded 9.2% and
8.8% year-on-year growth.
Great expectations
Structural reforms are key to regaining the economy’s positive trajectory

ECONOMY OVERVIEW
purchasing power parity. In real terms, GDP rose by
over 60%, while GDP per capita was up 40%.
The government has also been keen to stress its
stewardship of public finances. During the height of
the euro crisis at the end of 2011, for example,
Turkey’s performance compared favourably with that
of its European neighbours. Turkey’s budget deficit
at the time stood at 2.5% of GDP, within the EU
benchmark of 3% and well below that of its troubled
European neighbour, Greece, at close to 10%. A
decade of single party governments has also brought
public debt under control. At nearly 80% of GDP in
2001, it fell to 36% by 2013, substantially below
Greece (142.8%), Italy (119%) and Portugal (93%).
By 2016, the World Bank predicts it will reach 33%.
MAKING THE GRADE:Thecountrywasrewardedfor
itscoursecorrectionin2013,whenMoody’sInvestors
Service raised Turkey’s sovereign bond rating to
investmentgrade,bumpingitupfrom“Ba1”to“Baa3”,
with a stable outlook. This gave Turkey the same
credit rating as India, Spain and Columbia, bolster-
ing hopes it would attract a wider investor base.
However, by April 2014 Moody’s revised the coun-
try’s outlook from stable to negative, citing greater
external financing vulnerability due to lower global
liquidity and domestic political uncertainty, as well
as less optimistic near- and medium-term growth
forecasts. Moody’s most recently upheld this posi-
tion in April 2015. In terms of the banking sector, in
March2015Moody’salsoreaffirmeditsnegativeout-
look for the second year running, after putting 10
of its banks on notice for downgrades in early 2014
and lowering various ratings of 11 banks that June.
Standard and Poor’s (S&P) has been similarly bear-
ish. As the only one of the big three credit ratings
agencies not to grant Turkey investment-grade sta-
tus, S&P has maintained a “BB+” rating with a neg-
ative outlook, the highest junk status. However,
according to statements from Nihat Zeybekci, min-
ister of economic affairs, the outcome of the June
elections could have a positive impact on ratings.
BIG PLANS: Turkey’s track record over the last
decade has encouraged the government to set high-
ly ambitious growth targets for the country’s econ-
omy. Between 2014 and 2023 the government is
working to boost GDP from around $800bn to $2trn;
GDP per capita from $10,400 to $25,000; and total
exports from $157.6bn to $500bn.
For some time analysts have warned that it will be
difficult to replicate the performance of the past
decade, and that such ambitious growth figures can-
not be sustained with a burgeoning current account
deficit (CAD) and the structural problems that cre-
ated it. In January 2014 Sinan Ülgen, the director of
the Istanbul-based, Centre for Economics and For-
eign Policy Studies, told the press that Turkey’s
growth model based on low global interest rates and
large capital inflows was outdated. “For years, it has
been clear that this model would come to an end
the moment central banks, like the [US Federal
Reserve], started raising interest rates again.”
UP & AWAY: Much of Turkey’s growth since 2008
has been based on domestic consumption, rapid
credit expansion, and the construction and servic-
es sectors. This has led to rising energy and inter-
mediate imports to fuel manufacturing and exports.
While the loan-to-deposit ratio of the banking sec-
tor stood at 40% in 2003, from 2010 to end-2013 it
grew from 88% to 114%, according to Moody’s.
Although the sector’s 13.4% core tier-1 capital ade-
quacy ratio insulates it from a certain degree of risk,
banks are still exposed to market turbulence, espe-
cially with leverage rising from 8x to 9x since 2010.
Consumer debt has also increased, from 4.3% of
household disposable income in 2002 to 55% by the
end of 2013. Credit card debt alone rose by 22% in
2013 on the back of a 31% rise in 2012. Such con-
sumer-led growth is unsustainable in the long run.
STRUCTURAL CONCERNS: To achieve this kind of
persistent growth again, Turkey needs to do more to
tackle the problems of low-value production and
28
Credit card debt rose by 31% in 2012 and 22% in 2013
Between 2014 and 2023
the government is working
to boost GDP from around
$800bn to $2trn; GDP per
capita from $10,400 to
$25,000; and total exports
from $157.6bn to $500bn.
SOURCE: IMF
2014 2015 2016
GDP, current prices (TL trn) 1.72 1.88 2.06
GDP per capita, current prices (TL) 22,448.41 24,262.19 26,210.20
Total investment (% GDP) 21.91 22.19 22.25
Inﬂation, avg. consumer prices (% change) 5.30 5.00 5.00
Vol. of imports of goods & services (% change) 7.17 8.54 10.15
Vol. of exports of goods & services (% change) 4.01 4.97 5.31
Population (m) 76.71 77.60 78.48
General gov't revenue (TL bn) 610.38 659.24 721.23
General gov't revenue (% GDP) 35.45 35.01 35.06
Total gov't expenditure (TL bn) 649.33 701.92 768.17
Total gov't expenditure (% GDP) 37.71 37.28 37.35
Gov't net lending/borrowing (TL bn) 8.10 4.10 4.09
Gov't net lending/borrowing (% GDP) 0.47 0.22 0.20
Gov't gross debt (TL bn) 609.26 660.64 716.34
Gov't gross debt (% GDP) 35.38 35.09 34.83
Select economic indicators, 2014-16

ECONOMY OVERVIEW
pursue supply-side reforms that will lead to greater
labour productivity and larger domestic savings.
According to a report released by the Bahçeşehir Uni-
versity Centre for Economic and Social Research in
August 2013, the country runs the near-term risk of
falling into the middle income trap, as it continues
to face a lack of sufficient labour productivity and
a consequent inability to push up per capita income.
The events of 2014 highlighted the structural chal-
lenges and risks faced by the Turkish economy. Per-
ceptions of political uncertainty have discouraged
risk-averse investors and led to a flight to foreign
exchange for domestic deposits. At the same time,
external conditions, such as the US Federal Reserve’s
decision to pull back on quantitative easing, coupled
with the structural problems of Turkey’s chronic CAD,
are putting substantial pressure on the country’s
economy. The consequences of these trends – most
notably a falling lira and creeping inflation – pres-
ent a challenge to the strategy of growth at all costs.
Inflation concerns have been stoked by consecu-
tive interest rate cuts in January and February 2015,
on political pressure to boost domestic growth.
Although inflation remains above the 5% target set
by the Central Bank of the Republic of Turkey (TCMB),
as of April 2015 the consumer price index had risen
7.91% y-o-y, compared to 9.38% one year prior. While
lower oil prices are helping compensate for the infla-
tionary pressure of the rate cuts, continuing depre-
ciation of the lira is limiting this effect.
MORE NEEDED: The central crux for the country is
that annual growth of 4% may not be enough to
keep pace with population growth. “Turkey has a
young population and it is growing, so a fast growth
rate is crucial. If we grow 4-5% on average, it will not
generate unemployment,” Uğur Küçük, senior econ-
omist at Garanti Bank, told OBG. “This is an assump-
tion that is largely shared across the board, as well
as by the central bank.”
However,withGDPgrowthof2.9%in2014,accord-
ing to the IMF, the country’s unemployment rate
increased from 9.6% at the end of 2013 to 11.3% as
of January 2015. To both regain and sustain econom-
ic momentum, restructuring will need to be priori-
tised. In its medium term outlook, the government
has conceded that a 5% growth rate in 2014 will not
be possible. Instead, it is emphasising growth of 4%,
a lower CAD and greater productivity.
The government is aware that it is in a difficult eco-
nomic period, with US monetary policy and the EU’s
halting recovery continuing to have an impact. Back
in August 2013 Babacan told local press that, in light
of Federal Reserve tapering, “It should not be sur-
prising for Turkey to revise its growth rate below
4%… We set our annual exports target at $158m, but
it looks difficult to reach this target as well.”
STRONG CURRENT: The most significant obstacle
to the long-term health of the economy is Turkey’s
persistent CAD. Indeed, in the seven years to 2014,
the CAD registered below 5% of GDP just once, in
2009. Although the figure decreased by nearly 30%
in 2014, from $65bn in 2013 to $45.8bn, according
to figures from the TCMB, this was primarily due to
lower oil prices, which drove down the cost of ener-
gy imports. Weaker oil prices are expected to foster
further improvements in the current account in 2015
(see Energy chapter). In relative terms, the IMF
expects Turkey’s CAD to fall from 7.9% and 5.7% of
GDP in 2013 and 2014, respectively, to 4.2% in 2015.
However, as economic growth picks up to an esti-
mated 3.9% in 2016, the CAD could increase to 4.8%.
GROWING PAINS: The high CAD in 2013, up 34.2%
over 2012, was indicative of strong economic expan-
sion that year, at 4.1%, compared to sluggish growth
in 2012, when GDP rose by 2.1%, according to the
IMF. While a higher CAD can signify growth, its per-
sistence in Turkey underscores the need for restruc-
turing. IMF staff estimates put the medium-term
CAD at 5.5-6% of GDP based on current policies.
Turkey’s current account is particularly vulnera-
ble as GDP grows, with the deficit swelling as the
economy expands. Indeed, Turkey has become stuck
in what the IMF terms “boom and bust cycles”, with
31
Inflation has largely remained above the central bank’s target of 5%
Thanks to lower oil prices,
the IMF expects the
current account deficit to
fall from 7.9% and 5.7% of
GDP in 2013 and 2014,
respectively, to 4.2% in
2015.
SOURCE:TUIK
Number of people in the labour force, 2005-14 (m persons)
0
6
12
18
24
30
2014201320122011201020092008200720062005

ECONOMY OVERVIEW
growth being fuelled by imports and short-term cap-
ital flows. According to the IMF roughly 75% of the
downward adjustment in the current account in
2012camefromacyclicaldropinimportsandunusu-
ally large net exports of gold. It was also the result
of a decline in investment rather than an increase
in savings. The fund’s annual staff report on Turkey
from 2014 notes, “The current account deficit
remains 2.5-5% of GDP higher than warranted by
fundamentals and optimal policy settings.”
Turkey’s reliance on imported energy is one of the
main factors behind the deficit. Indeed, the coun-
try’s net energy import bill reached $55bn in 2014,
with net energy imports accounting for 74% of ener-
gy use and 59% of electricity generation.
TAPER TANTRUM: Given the size of the CAD, the
country is particularly vulnerable to any external
shocks that could halt capital inflows, which are cur-
rently financing Turkey’s deficit. In the event of an
abrupt and pronounced reversal of inflows, the econ-
omy would almost certainly face a rough and rapid
adjustment leading to negative growth. Although
analystshavewarnedofthisscenarioforyears,avari-
ety of internal and external factors gained pace in
2013, lending greater credence to risk assessments.
In May 2013 the US Federal Reserve announced
that it might begin to wind down its large-scale asset
purchases. The programme, enacted in response to
the global financial crisis, has spurred lower US inter-
est rates, bringing greater liquidity to emerging mar-
kets offering higher returns. The tapering, which
began in December 2013, signals an eventual US
interest rate hike, which is likely to have a negative
impact on portfolio investment in emerging mar-
kets. However, weaker than expected job and infla-
tion figures in March 2015 have fuelled expectations
that the increase will not happen before September.
A reversal in investment flows is particularly trou-
blesome for a country like Turkey, which has become
so highly dependent on short-term capital inflows.
However, according the IMF, low interest rates in the
EU and Turkey’s investment-grade status could help
to mitigate this effect, creating more of a “mixed”
environment for capital flows. The Foreign Econom-
ic Relations Board (DEİK), having been restructured
in September 2014, is focused on reaching the Vision
2023 targets of boosting exports to $500bn and
the volume of foreign trade to $1trn. To this end, DEİK
works with international organisations to bolster
ties with the global business community and increase
opportunities for domestic firms (see interview).
EXTERNAL EXPOSURE: The more pressing concern
for Turkey at present is the amount of foreign debt
held that is set to mature in the near term. The short-
term external debt stock on a remaining maturity
basis, meaning debt that is set to mature within one
year, stood at $164.9bn as of end-February 2015, up
26% since the end of 2011. The vast majority – over
85% – of this debt is held by the private sector, with
more than two-thirds accounted for by banks. While
this increases economic vulnerability and presents
a long-term challenge to sustainable growth, the
banking sector has had “no difficulty in rolling over
its external borrowings and has adequate buffers
against any [foreign exchange] liquidity shocks that
may emanate from abroad”, according to the TCMB’s
most recent Financial Stability Report from Novem-
ber 2014. Moody’s has echoed this view, noting that
the country’s banks, corporates and public institu-
tions alike have historically been able to roll over
maturing debt even during times of crisis.
CURRENCY WOES: The currency composition of
Turkey’s short-term external debt stock is also note-
worthy, particularly in light of recent depreciations
in the lira. According to the TCMB, as of the end of
February 2015, just 12.1% of all short-term external
debt was denominated in lira, while more than half
was in US dollars and nearly one-third was in euros.
The CAD, fed by high imports, a substantial trade
deficit and newly vulnerable to capital outflows, has
had a sizable impact on the strength of the lira. The
currency depreciated 28% against the dollar between
May 2013 and the end of 2014, before falling by
another 15% through to the end of April 2015.
The depreciation of the lira has also been exacer-
bated by risk-averse local actors. According to Ozer
Balkız, the director of economic research at the Inde-
32
Just 12.1% of short-term external debt was denominated in lira as of the end of February 2015
According the IMF, low
interest rates in the EU
and Turkey’s
investment-grade status
could help to mitigate the
effect of a US interest rate
hike on capital flows.
The short-term external
debt stock on a remaining
maturity basis stood at
$164.9bn as of the end of
February 2015, up 26%
since the end of 2011.
SOURCE: TUIK
Manufacturing 15.8
Wholesale & retail trade 12
Transport & storage 12
Real estate activities 9.8
Agriculture, forestry & ﬁshing 7.1
Construction 4.6
Public admin., defence & social security 4.2
Professional, scientiﬁc & technical activities 3.4
Financial & insurance activities 3
Other 28.1
Contribution to GDP by economic sector,2014(%)

Turkey 2015

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