Many countries have responded to the global financial crisis with wide-ranging and unprecedented monetary and fiscal measures. On the international level, the G-20 played an instrumental role in building up confidence and co-ordinating the policy responses.
A strong momentum and common aspiration have also emerged at an international level to strengthen the global economic and financial architecture. This includes improving the financial regulation at home and internationally and making the international financial institutions stronger, more effective and more legitimate. In addition, work is under way to expand the scope of financial regulation, introduce a macro-prudential approach to regulation and supervision, and enhance cross-border co-operation and improve compliance to international standards. The establishment of the Financial Stability Board and the membership of the key emerging market economies, including Turkey, are important developments in our efforts to achieve a sounder international financial system and avoid similar problems in the future.
The other component of strengthening the global economic and financial architecture is the reform of the international financial institutions, in particular the International Monetary Fund (IMF). Critical decisions were taken at the annual meetings of the IMF and World Bank in Istanbul and their timely implementation will be critical to prepare the IMF for the post-crisis global economy. In particular, modernising the governance structure of the IMF in line with today's realities will strengthen its legitimacy and help facilitate a well-functioning global economic system. In line with the call made in the Istanbul communiqué of the International Monetary and Financial Committee (IMFC), the quota shares of underrepresented dynamic emerging market economies should be increased significantly. Turkey is among the dynamic emerging market countries whose current quota and representation at the fund is significantly below its weight in the global economy.
Turkey and the crisis
The Turkish economy, which grew by about 7% a year between 2002 and 2007, was not immune from the recent problems due to its high degree of economic integration with the global economic and financial system. However, it weathered the recession relatively well. The latest export, credit growth and industrial production figures, signal that the Turkish economy is now in recovery. Economic growth in 2010 is expected to be 3.5%. Although this growth figure is well below its potential, Turkey will be among the fastest growing economies among Organisation for Economic Co-operation and Development (OECD) and EU countries in 2010.
Secure banking sector
The soundness of the banking sector played a key role in the resilience of Turkey's economy. The current crisis has confirmed that the Turkish banking system is in a healthy state and is functioning well with a strong capital base, liquidity position and improved risk-management practices. The absence of toxic assets in our banks' balance sheets prevented the sector from experiencing write-downs.
The sector managed to sustain its strong capital base despite the crisis, with a capital adequacy ratio currently higher than 20%, well above the levels required by international standards. Furthermore, Turkish banks' relatively low reliance on external credit to finance their operations provided a cushion against risks from unfavourable global financial conditions. As a result, our banking sector did not need any government support, not even a change in the deposit guarantee scheme, which is still equivalent to about 25,000 euros per person, per bank and covers only the savings deposits. According to the latest OECD Economic Outlook, Turkey is the only OECD member country that did not intervene in its banking system or change the deposit guarantee scheme.
Turkey was able to respond to the crisis with counter-cyclical fiscal and monetary policies. The economic transformation process and subsequent fiscal consolidation in the wake of the 2001 crisis provided the necessary fiscal space and enabled us to develop a timely policy response. In addition, during the course of the crisis, the exchange rate followed a relatively stable pattern which is a sign of investor confidence in the Turkish economy and financial system. There was no tendency of either increased dollarisation or capital flight. Monetary policy rates and cost of government borrowing have fallen to single digits for the first time. We have not faced any difficulty in accessing the international capital markets in 2009: against a target of $3.5bn, Turkey raised $3.75bn through sovereign Eurobond issuance.
The answer to why such an unprecedented economic crisis on a global scale had a relatively limited impact on the Turkish economy lies in the fundamental and comprehensive transformation that took place in Turkey's macroeconomic policies and institutions from 2002. The improvement in the fiscal balances was accompanied by a major reduction in public debt, inflation and real interest rates. Inflation fell from about 70% in 2001 to single digits within the inflation-targeting policy framework.
Banking sector reform, strong fiscal adjustment underpinned by enhanced transparency of the budget accounts, fundamental structural reforms and improving the business climate were the central components of the transformation process.
The main pillars of the post-2001 banking reform were restructuring the state banks, the resolution of banks where intervention was necessary, and strengthening the legal and regulatory framework. The reform was designed and implemented with an understanding that financial stability, price stability and growth were all dependent on credible resolution of the problems in the banking sector.
Fiscal adjustment
In the meantime, Turkey has undergone a sizeable fiscal adjustment. The annual average public sector primary surplus between 2003 and 2006 was 5% of gross domestic product. EU-defined gross public debt came down to below 40% from 74% in 2002. The public sector borrowing requirement declined steadily, considerably contributing to the improvement in the banking sector's balance sheet. Turkey has also undertaken fundamental fiscal structural reforms. Public expenditure management was streamlined with strengthened transparency, effectiveness and accountability of the public financial management system. This was accompanied by modernised public procurement practices and tax reforms. The social security system was also overhauled and put on a sustainable path.
The business climate has been significantly improved in Turkey as our government gave high priority to increasing the role of the private sector in the economy. The ambitious privatisation programme led to a reduced role for the government in key sectors such as energy and communication. Meanwhile, the corporate tax rate was reduced to 20%, from 30%. In addition, various employment costs were lowered. Thus, the reduction in the overall cost of doing business has improved Turkey's attractiveness. In addition, as a candidate country for EU membership, Turkey has taken important steps toward convergence to the EU in economic, social and legal aspects. As a result of our efforts to improve the business climate in Turkey, foreign direct investment inflows have exceeded a total of $70bn in the past four years, compared with a total of less than $20bn in the preceding three decades.
Lessons learnt
Among the many lessons that can be drawn from the Turkish experience, three points stand out. First of all, successful economic transformation requires strong and good political leadership in terms of an open-minded, reform-oriented and courageous approach to long-awaited issues. Second, a sound banking sector is the key to strong growth and a well-functioning economy. The recent crisis has shown that the soundness of the banking sector is critical for the resilience of the overall economy to external shocks. Third, the structural reform process should be conducted together with sound macroeconomic policies. Fiscal adjustment has played a key role in building confidence towards government's policies and establishing an environment in which the private sector can flourish. Without it, for example, it would not have been possible to successfully complete the banking sector reform.
Turkey will continue to implement sound macroeconomic policies. We have recently announced our medium-term programme for 2010/12 in order to restore the fiscal balance, which deteriorated mostly due to lower tax revenues, and put the economy back on a sustainable growth path. Within the programme period, we will gradually improve the primary balance, reaching a 1% surplus by 2012, stabilise the upward trend in the debt stock by 2011 and reduce it thereafter.
One of the most important aspects of the programme will be the introduction of a 'fiscal rule' which will sustain the improvement in the public fiscal balances and reinforce confidence in the fiscal policy framework. The fiscal rule will be effective from the 2011 budget cycle. The rule will have two components: a cyclical adjustment component and another that will determine the pace of adjustment when the overall deficit in the previous year exceeds its target. The parameters governing the rule and the institutional framework for operating the rule will be defined in 2010. The fiscal rule implementation will be supported by structural reforms such as launching a comprehensive local government reform, reducing tax fraud and losses through administrative measures, introducing a new governance model in state economic enterprises, prioritising current public expenditures and public investments, and taking steps to improve the efficiency of health services and expenditures.
Investor support
The framework and policies we have announced in the medium-term programme quickly gained the support of investors and analysts. Moreover, major international credit rating agencies demonstrated their confidence in the programme by promptly revising the rating outlook of Turkey upwards. Fitch has recently upgraded Turkey's long-term sovereign foreign debt rating by two notches to BB+, based on the relative resilience of the Turkish economy to the global crisis and the soundness of the financial sector.
In light of these positive responses, we do not expect any difficulty in attracting international capital inflows in 2010 and beyond. Yet, we have followed a conservative and prudent approach in preparing our 2010 financing programme.
The high resilience of the Turkish economy and our government's recent policy actions indicate a more prominent growth path going forward. Our own forecasts, as well as the expectations of most international institutions and analysts, verify that Turkey will be one of the countries that will emerge from the crisis relatively fast and attain high growth rates as soon as the dust settles.
