Turkey’s economy, bolstered by soaring exports, an upsurge in consumer spending, and increasing bonds with the EU, grew 9.8% in 2004, the fastest among the 30 nations of the Organisation for Economic Co-operation and Development (OECD). This was the country’s third consecutive year of robust growth, the OECD reported.
This development comes as the country reached a new standby agreement with the IMF in mid-April which is expected to be signed in the first half of May. However, questions persist about how the country can handle its continual debt problems and the current account deficit which rose to an estimated $15.6bn in 2004, or 5.2% of the gross national product (GNP), according to the State Planning Organization (DPT).
Good indications
On a more positive note, exports jumped 36.7% last year to a record $64.0bn, driven by a boom in sales of motor vehicles, colour television sets, minerals and metals and chemical products abroad, according to the Turkish Exporters Assembly (TIM). Imports also rocketed 40.2% to an estimated $97.2bn on the strength of increased foreign purchases of raw materials, intermediary goods and consumer products, the DPT reported.
Production, sales and exports of motor vehicles and automotive spare parts and components smashed all-time Turkish records in 2004. The country produced 862,035 motor vehicles last year, including 447,152 automobiles, and exported 518,607 motor vehicles, the Automotive Manufacturers’ Association (OSD) said. A record 753,731 motor vehicles were sold in 2004.
Automotive exports generated $10bn in revenues, and stood behind textiles and tourism as the country’s main foreign currency earners.
Exports of ferrous and non-ferrous metals in 2004 rose 71.1% in 2004 from 2003 to $9.2bn, and sales abroad of chemical products climbed 49.1% to $5.0bn. Industry officials note that 50% of the colour television sets sold in Europe are of Turkish origin. Three of Europe’s five biggest colour television manufacturers are in Turkey.
Turkey’s manufacturing industry in 2004 operated at a healthy 81.5% capacity. Consumer spending was particularly buoyant as a result of the availability of low cost consumer loans for automobiles, household appliances, home electronics and mortgages, bankers said.
In 2004, some 3,396,145 people used TL21,343,000bn ($15.9bn) in consumer loans, compared to TL10,493,000bn ($7.5bn) in 2003, the Banks’ Association of Turkey reported.
The torrid pace of growth transformed Turkey into the OECD’s 16th biggest economy in 2004, up from 20th in 2001, when the worst recession since 1945 jolted the country. The nation’s GNP reached $295bn in 2004.
Employment up
Turkey’s blistering growth has helped create jobs, and the nation’s unemployment rate fell to 10.3% at the end of 2004 from 10.5% in 2003, according to the State Institute of Statistics (DIE). Still, Turkey has the lowest per capita income among the OECD countries at $4172 and one of the highest unemployment rates in Europe.
Inflation based on consumer prices in December 2004 stood at 9.35%, the lowest level in 34 years and down from 125.5% in December 1994. As inflation has dropped so have bank lending rates steadily fallen. Interest rates on overnight bank loans declined to 15.5% on March 14 from 57% in February 2002, reducing borrowing costs, the Central Bank of Turkey reported.
Prime Minister Recep Tayyip Erdogan’s conservative government is also moving forward in its privatisation programme with plans to sell state tobacco concern Tekel, flat steel producer Erdemir, state fixed phone line operator Turk Telekom and natural gas and electricity distribution rights throughout the country this year.
Turkey’s quest for membership to the EU and impressive economic results over the past three years led US rating agency, Moody’s Investors Service, on February 10 to revise the outlook on Turkey’s credit rating to positive from stable. The credit rating service Fitch also upgraded Turkey’s credit rating from B+ to BB- and modified the outlook on Turkey’s economy from stable to positive.
EU membership talks
Membership negotiations with the EU are slated to begin in October, but are likely to be tough and protracted, as the country will have to harmonise its legal system with the entire system of laws, regulations and treaties of the EU.
Even before the membership talks begin, Turkey’s National Assembly will have to approve a customs union with the 10 nations that became members of the EU in May 2004, including Cyprus. This, of course, would be tantamount to its recognition of the Republic of Cyprus, an anathema for most nationalist Turks who would view it as a defeat of three decades of Turkish foreign policy over the divided island. Turkey has been supporting the Turkish Republic of Northern Cyprus, the Turkish Cypriot mini-state in the north, since it sent troops to occupy
the northern two-fifths of the Mediterranean island in 1974 to protect its Turkish Cypriot minority and crush military efforts to unite it with Greece.
The Cyprus deadlock has been a constant source of friction between neighbouring Greece and Turkey and has been viewed as the main stumbling block for Turkish membership in the EU. Efforts to reunify the island failed last April when Greek Cypriots in a plebiscite overwhelmingly rejected a UN-sponsored peace plan. Turkish Cypriots on the same day voted to back the plan.
Turks hope the EU connection will help draw much-needed foreign investment to Turkey.
“There are numerous benefits to the European Union and being a part of it. One of these is foreign investment. We hope to attract large amounts of foreign investment and become rich when Turkey becomes a full member of the EU or when it becomes clear that the country will become a member,” Hürsit Günes, a professor of economics at Marmara University, wrote in the newspaper Milliyet.
The EU recently approved $9bn in grants to Turkey to be ladled out from 2006 to 2011. Negotiations will take place under 31 separate chapters, or legal issues, but the talks could get bogged down on the issues of free movement of labour and the economic backwardness of rural Turkey and the issue of agriculture. The EU fears that millions of unemployed Turks could flood EU labour markets, if free movement is not restricted. Reforming Turkey’s huge farm economy is likely to cause the most headaches for both sides, economists say.
While some 35.4% of Turkey’s workforce is employed in the agricultural sector, compared to only 4.5% in the EU, agriculture accounts for only 12% of Turkey’s GNP. Turkey’s agricultural workforce – 7.1 million people – is more than that of the original 15 countries of the EU (6.9 million), but productivity per farmer in Turkey is less than one-fourth of that of the trade bloc. The average farm in Turkey covers six hectares, under half the European average. Turkish farmers are undercapitalised, lack financial support and know-how, and are unable to shift to new crops to meet changing global demand. Agricultural subsidies have fallen from $6bn in 1999 to $2bn a year, further impoverishing the nation’s farmers.
“Turkey’s economy is currently agriculture-based and this is a serious cause of anxiety among EU members,” a McKinsey Global Institute report on productivity and growth in Turkey says. The report points out that efforts to bring Turkey’s agricultural sector in line with the rest of the EU will place heavy burdens on the finances of its Common Agricultural Policy (CAP).
Under agreements with Brussels, Turkey must sharply reduce its agricultural population to qualify for CAP financing, a move that has been criticised by domestic farm organisations
In an interview with the Turkish Daily News, Semsi Bayraktar, president of the Union of Turkish Agricultural Chambers, an umbrella group representing all of the country’s farmer organisations, said: “If Turkey attempts to kill farming and force people to migrate in order to reduce the agricultural population, greater chaos will appear.” He urged the government to create new employment opportunities for rural workers, including agriculture-based industries in farm areas.
Debt problems continue
As Turkey prepares to deal with the EU, it must also tackle more serious problems at home – its ballooning debts. At the end of February 2005, Turkey’s foreign debts stood at $154bn, of which $89.1bn were government debts, according to the treasury. Its domestic debts stood at TL231,300,000bn ($179.5bn).
Turkey’s foreign debts are largely medium and long-term and do not pose problems for the country. But it is the domestic government debt, which is largely short-term, that is resulting in sleepless nights for the country’s economic planners.
“In terms of government debts to GNP, Belgium, Italy and Spain have larger debt stocks than Turkey,” says Eser Karakas, a professor of economics and dean of Faculty of Business Administration of Istanbul’s Bahcesehir University. “But their debts – based on public sector securities and other debt instruments – are spread over 20 years. In Turkey, a large part of the debts are due in less than 365 days. This isn’t a debt stock, but more like an electric current that is in perpetual motion.”
As Turkey’s economy improves, the government has been able to obtain longer-term, and lower-interest loans and reduce its debt burden.
In January 2005, the Turkish Treasury successfully floated a 20-year, $2bn Treasury Bill (T-bill) in the international money markets at a 7.52% interest rate to 350 institutional investors – the sixth time it has issued and sold medium and long-term T-Bills in markets in the past 12 months. The T-bill issue, underwritten by Citigroup and Morgan Stanley, was oversubscribed 6.5 times.
Economics minister Ali Babacan said that many major institutional investors that had previously shunned Turkey had acquired the T-bills.
Turkey has also been successful in raising long-term project loans. The Turkish and Japanese governments in January also signed an agreement for a $941m soft loan to Turkey for the construction of a subway link under the Bosphorus. The 9.8-km tunnel, which will be built 54 meters underground, is to be completed in 54 months and will help solve Istanbul’s traffic congestion. The loan will be repayable in 40 years with a 10-year grace period at an annual interest rate of 0.75%.
IMF relations
Turkey, nevertheless, will have to repay the IMF $20.7bn of its debts to the lending institution over the next three years, with $7.5bn to be repaid in 2005 alone. The single biggest debt payment installment, $2.086bn, is due this month.
Turkey and the IMF have been hammering out details of a new standby agreement over the past several months and are in the process of signing an accord, under which it will be able to withdraw $10bn over the next three years.
But before the IMF board of directors can approve new funding, the Turkish government was expected to revise its banking law, reform its tax administration and revamp an investment incentives bill that has been viewed as too ambitious. The Grand National Assembly, in March, enacted legislation that brought the country’s three state social security organisations under one roof, as demanded by the IMF.
Turkey’s business leaders have urged the government to complete the legislation and sign the IMF agreement.
“Turkey’s economy has no patience for even the smallest loss of confidence, either internally or externally,” declares Ömer Sabanci, chairman of the Turkish Industrialists’ and Businessmen’s Association (TUSIAD), the country’s most powerful business lobby.
Delays in the reforms triggered sharp falls in share prices on the Istanbul Stock Exchange and a rise in the value of the dollar against the new Turkish lira (YTL) in late March, and led to grumbling in the government and in the ruling, conservative Justice and Development Party.
Material wealth
The government must also revive the textile and apparel industry, Turkey’s biggest economic sector. Turkey’s ready-wear industry stands to lose as much as 30% of its market share in the EU, its main export market, as cheaper products from China and India flood the trade bloc in wake of the removal of global quotas on all textiles, a Raymond James Securities report on the industry says. The WTO lifted all global quotas on clothing and textiles on January 1 of this year.
“Both China and India will almost double their market share [in clothing], while Turkey’s market share will shrink by around 30%, declining from 9% to 6% [in the EU],” says the report, prepared by its chief economist Özgür Altug.
Although industrial production was up 6.8% in January compared to the same month a year ago, with radio, TV and communications equipment manufacturing up 41% and metal goods industry output rising 38.8%, Turkey’s textile and clothing exports fell 9.6% in January, the Turkish Exporters’ Assembly reports.
