Turkey’s growth slackened in the first quarter of 2005 due to rising energy costs and increased taxes, cutting into consumer spending, as prime minister Recep Tayyip Erdogan’s government moved to slow down an overheated economy and attempted to bring a gapping current account surplus under control, ahead of membership talks with the EU.
The gross national product (GNP) grew 5.3% in Q1 2005, down from the blistering 12.4% rise in Q1 2004, according to the State Institute of Statistics. Buttressed by an upswing in foreign trade and domestic spending, Turkey’s economy expanded by a torrid 9.9% in January-December 2004.
The construction industry was the best performing sector in Q1 2005, growing 16.5% compared with a 2.9% rise in Q1 2004. This was due to a surge in spending on big public sector construction projects, such as the start up of the $4.1bn Marmaray commuter rail system in Istanbul, and a boom in private housing construction, as the government moved to establish a legalised and regulated mortgage market.
The administration slapped a 20% increase on taxes last autumn on the sales of motor vehicles, tobacco products and spirits. It imposed additional taxes on perfume, cosmetics, personal care products, precious stones, and many durable consumer products in April to restrain runaway economic growth. It hopes that the taxes will help cut back on imports of the finished consumer goods that are inundating the market, in an effort to prevent the country’s current account deficit from spinning out of control.
In the first half of 2005, the country’s current account deficit stood at $13.7bn and is likely to reach a record $22bn by year end, the Central Bank of Turkey reported. The deficit widened to 5.1% of GNP in 2004 from 3.4% in 2003, and will probably reach more than 5.5% of GNP this year.
“Turkey’s widening current account deficit is attracting renewed attention, increasing concerns on its sustainability,” wrote Volkan Kurt, an economic analyst at Finansinvest, one of Turkey’s leading brokerage houses, in August in a report on the nation’s economy.
Currency strength
The situation has been complicated by the continuing strength of the lira. The currency has revalued 20% against the dollar since April 2003 because of a boom in foreign capital inflows into the economy and greater industrial productivity.
Although interest rates on government bonds and treasury bills have fallen in recent years, they are still high by world standards, attracting investors and further strengthening the lira.
Capital inflows, including a rise in foreign direct investment and foreign purchases of Turkish securities, in excess of the current account deficit have led to the central bank accumulating $6.3bn in 2004, economists say. The central bank’s foreign exchange reserves, excluding gold reserves, at the end of July stood at a record $42.9m, up from $36.6bn in December 2004 – enough to meet about five months’ worth of Turkey’s imports.
Exports are slowing down in all sectors of the economy, with the exception of agricultural products, because of the strength of the lira against the dollar and the euro, which is making it more difficult for Turkish producers to remain competitive against their rivals in the Far East. Imports of raw materials, intermediate products and finished goods were entering the Turkish market. Exports of clothing and apparel, the longtime engine of Turkey’s foreign sales drive, fell 1.88% in July to $1.234bn from $1.257bn in July 2004, according to Istanbul Textile and Apparel Exporters’ Association, a trade group.
Although Turkey has a flourishing automobile industry, 70% of the cars sold in the country are imports because they are often cheaper than locally produced vehicles. Local producers have to export two-thirds of their cars to survive.
Some economists have suggested that Turkey should devalue its currency to stimulate exports and dampen imports but they have also warned that they could result in more job losses (about one in every 10 Turks is unemployed).
“Any current account reversal arising through the exchange rate won’t cause a balance of payment crisis, although its adjustment costs on growth and employment may not be minor,” wrote Finansinvest’s Mr Kurt.
Cyprus and the EU
Turkey is preparing for gruelling accession talks with the EU, starting on October 3. Germany, France, Holland and Austria either want to postpone the membership negotiations or to grant Turkey a “privileged partnership” status that would fall far short of membership. Turks are demanding full membership, which would give them considerable clout in the European Parliament and other EU organisations.
France has demanded that Turkey recognise Cyprus’s Greek Cypriot administration. “It is inconceivable to start negotiations with a country that does not recognise all 25 European countries,” Turkish news media quoted French prime minister Dominique de Villepin as saying.
On July 30, the Turkish government approved a customs union with the 10 nations that became members of the EU in May 2004, including Cyprus, but in an addendum said that the accord did not stand for recognition of the Greek Cypriot administration as the sole government of Cyprus. According to western diplomats, the EU may ask the Turkish government to allow Greek Cypriot ships and aircraft access to Turkey’s ports and airports as a precondition for beginning accession talks. Greek vessels can travel through the Turkish straits, linking the Aegean Sea and the Black Sea, but are not permitted to dock at Turkish ports and Greek Cypriot jetliners are not allowed to land at Turkish airports.
Turkish officials have brushed aside the French demand. “Cyprus talks are just political cacophony,” Turkey’s economy minister and chief EU negotiator, Ali Babacan, said in a television interview. He said that all the conditions for starting the membership talks with the EU had been met and no obstacles stood in Turkey’s way.
Cyprus has been divided since 1974, when Turkey sent its troops to occupy the northern two-fifths of the island to protect its Turkish Cypriot minority following a coup against the Cypriot government engineered by the junta then ruling in Greece. Turkey has supported the Turkish Republic of Northern Cyprus, the ministate, since then and refuses to recognise the Greek Cypriot administration.
The stalemate has been a constant bone of contention between neighbouring Greece and Turkey, and has been viewed as the main stumbling block for Turkish membership of the EU. Efforts to reunify the island failed in April 2004 when Greek Cypriots overwhelmingly rejected a UN-brokered peace plan in a plebiscite. Turkish Cypriots voted on the same day to support the plan.
Foreign investment
Turkish bankers say that up to $15bn in foreign investment could enter Turkey in 2005 as accession negotiations begin. That is a huge sum compared with the total foreign investment that the country attracted between 1954 and 2004: $20.7bn.
“If Turkey focuses on the EU and completes its reforms, foreign investment will pour into Turkey and remain here,” said Tayfun Beyazit, chairman of Turk Dis Ticaret Bankasi (Disbank), a medium-sized bank, in a magazine interview. Belgium’s Fortis Bank acquired an 89.3% stake in Disbank from the Dogan Group in July 2005 for $985m, in one of several foreign banking acquisitions this year.
Brokers say that the biggest direct foreign investments would be in major state enterprises, ports, railway stations and terminals, power stations, and electricity distribution and natural gas distribution, all of which Turkey is privatising. Some of the major state enterprises that may be acquired by foreign investors in the coming months are:
- Turk Telekom. The Privatisation Administration signed an agreement in August selling a 55% share in state fixed phone line operator Turk Telekom to Oger Telecoms Joint Venture Group for $6.5bn, in the biggest privatisation in Turkey’s history. Transfer of ownership is due to take place after approval by Turkey’s top administrative court. Oger Telekom Joint Venture is a partnership between Oger Telekom, Saudi Oger and Telecom Italia International. Oger is owned by the family of former Lebanese prime minister Rafiq al-Hariri, who was killed in a bomb blast in Beirut earlier this year.
- Port of Mersin. A Turkish-Singaporean joint venture offered the highest bid to operate the Mediterranean Port of Mersin, Turkey’s third biggest port, for 36 years, with a $755m offer. The winning consortium includes Akfen Holding of Turkey and PSA of Singapore.
- Erdemir. In total, 13 international and local companies and groups have prequalified for the privatisation of 49.29% of Turkey’s biggest steel manufacturer Erdemir. The groups include Luxembourg-based Arcelor, the UK’s Corus Group, and Mittal Steel Co.
- Telsim. The Turkish Savings and Deposit Insurance Fund has also offered Telsim, Turkey’s second biggest mobile phone services operator. A minimum bidding price has been set at $2.804bn. The UK’s Vodaphone and Hong Kong’s Hutchison Whampoa say they will bid for the GSM operator.
- Tupras. A total of 13 groups prequalified in the privatisation of 51% share of oil refineries operator Tupras, including the Shell Company, Repsol of Spain, PKN of Poland and ENI SpA from Italy.
