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View from Davos January 2 2014

Turkey advances with optimism

Turkey’s transformation has been dramatic in the past few years, not least in its banking sector, which has seen impressive growth and responded well in times of crisis. But with a large unbanked population, extraordinary opportunities in the country still abound.  
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Turkey advances with optimism

Akbank recently celebrated its 65th anniversary. It was not a silver or diamond jubilee, but an occasion to reflect on the importance of such a landmark, to evaluate our recent past and to anticipate the substantial challenges ahead. The simple fact is that our history is Turkey’s history and a story of dramatic responses to equally dramatic change is inscribed in our institutional memory.

During the lifetime of the bank, Turkey has transformed itself from an overwhelmingly rural to an overwhelmingly urban society, from a closed and protected market to a member of the global economy that competes on price and quality with the world’s most sophisticated producers. And I think it is fair to say that Turkey has transformed itself from a society where government once crowded out private initiative to one where the private sector takes the lead.

Today’s Turkey faces the challenge of meeting the aspirations of a young population and of retaining a competitive position in the world. It is a question of developing the thrust to escape what is commonly referred to as the middle-income trap. All economies invest to grow but we are determined to provide ‘smart capital’ that locates gaps in the market, as well as areas where Turkey’s accumulated experience, history and geography give it a jump-start.

So it is not an idle platitude to write that Turkey faces the future with rare optimism. We, particularly in the financial sector, see the way ahead. And we do so without rose-tinted glasses.

Dramatic reform

There are two principle reasons for our optimism. The first relates to the pace and success of banking reform. I have, during the course of my professional career, witnessed several major financial crises, the most dramatic in 2001, which proved a watershed for the entire industry. However, what I have also witnessed, and indeed have had the privilege to play a part in, has been the dramatic reformation of the Turkish financial sector.

The sector was restructured and refinanced, and the regulatory framework upgraded. The overall result of reform has been that inflation and interest rates dropped precipitously, and the country’s growth model changed from ‘stop-start’ to one that just kept going.

This restructuring is now proving to be a powerful anchor to the Turkish economy, while major European partners face varying degrees of turbulence. Turkey has developed what many sceptics back in 2001 would have hardly thought possible, which is an inner dynamic enabling it not just to survive but to emerge stronger from major external shocks. 

This is an impressive accomplishment for an economy that was once the step-child of the International Monetary Fund (IMF) and which struggled to implement countless stand-by programmes as it sought to overcome the burden of runaway public debt. In the past, Turkish banks used to generate revenue by collecting deposits and funding government debt instruments. Now we are registering healthy and sustainable growth because the government has its fiscal house in order.

In the 1990s, the average annual rate of inflation in Turkey was 70%. There could be no mortgage market under such conditions. Now banks, acting with due prudence, can help people to buy their homes, finance their children’s education and improve the quality of their lives. Helping small and medium-sized enterprises has become the great win-win for the Turkish financial sector. These enterprises provide 60% of the country’s added value and some 80% of total employment, yet consume only one-quarter of banks’ credit.

Model of expertise

The second reason for optimism is perhaps more subtle and has to do with what I would call a maturation of the culture in the financial sector. If I believe Turkey is willing to embrace innovation, it is because I see that phenomenon within my own institution. The banking sector has become a conservatory of expertise and best practice.

Akbank, for example, pioneered the Carbon Disclosure Project in Turkey and has been instrumental in convincing Turkish corporations to work towards a low-carbon future. The bank is aggressively committed to gender equality, in-job training and education, and reducing the turnover time between spotting a good idea and adopting it to the benefit of customers and staff. And as a bank we have contact with every sector of Turkish business, not to mention millions of households, and we see our ethos spreading.

What implications can we draw?

I would argue that of all the changes the bank has witnessed since its inception, those occurring within the past few years have been among the most dramatic. They consisted of nothing less than the realisation of the much-trumpeted ‘Turkish story’. Turkey was always bursting with the potential of its own youthful demographics and a population hungry for growth. Now it is realising that potential.

As with many other countries, Turkey was also adversely affected by the global credit squeeze in 2008-09 and particularly by the resulting contraction of its export markets. However, it was quick out of the gates the following year with a sturdy growth rate of about 9%. The economy continues to grow, albeit at a slower pace. It is hard to interpret, as some commentators do, that this is a sign of a new fragility. Many European economies would be delighted with Turkey’s third-quarter growth figure of 4.4% in 2013 and the anticipated full-year figure, which is also expected to be impressive.

Over the past decade, Turkey has made significant strides towards behaving predictably, and there is one crucial difference between now and the beginning of the new millennium.

In 2002, the drivers forcing the normalisation of the Turkish economy were largely exogenous. These were the prospect of the country’s membership of the EU and the strict programme set out by the IMF. Today, however, the normalisation of the Turkish economy is being led by endogenous factors. The first of these is the government’s fiscal discipline. The second, as I have argued, is the banking sector itself.

The Turkish government’s track record in keeping public finances under control and its overall competence in economic management has resulted in investment-grade status from two of the three major international ratings agencies. Turkey has maintained the Maastricht criteria’s budget deficit-to-gross domestic product (GDP) ratio since 2002 with only two exceptions in 2009 and 2010. Similarly, Turkey’s debt-to-GDP ratio has also dropped to about 36% in the past decade, well below that set out by the Maastricht criteria.

On track

The Turkish economy remains on track, despite the challenges facing its principal markets. Even more remarkable, it remains on track, despite a coming electoral cycle that includes local elections and a presidential contest in 2014, and a general election no later than 2015.

Both the low rate of savings and the current account deficit remain areas for improvement of the Turkish economy. However, these are what I would call ‘normal’ problems – and they are both being well managed in the short term. Ultimately, in the medium and long term, remedies – which include increasing the numbers of women in the workforce, upping the skill sets of school leavers and building a strong pension fund scheme – will kick in.

Turkey may be a normal economy but the Turkish banking system still has extraordinary opportunities. The country remains underleveraged. Turkey has an unbanked population of 19 million people. The household debt-to-GDP ratio is 19%, whereas the mortgage-to-GDP ratio stands at 6%, astonishingly low figures compared with Europe.

More to the point, Turkey is a young country. Half the population is younger than 29 years old. The investment these young people have made in social connectedness as a way of life would be exemplary even in the developed world. Sixty-five percent of households have access to the internet at home. There are about 32 million Facebook users, 9 million Twitter accounts and 11 million mobile users of the internet.

Investing in Turkey

It is with good reason that Akbank remains committed to Turkey. We have always remained in the top tier of Turkey’s financial institutions and our fortunes rise and fall according to the economy where the bulk of our transactions take place.

This has given us an important perspective. We invest in the long-term growth of Turkey and not the short-terms twists of the market. In the run-up to the 2001 crisis we refused to be seduced by risky assets. That decision earned us the analysts’ sobriquet of being ‘rock-solid’ as we emerged from the crisis stronger than when we went in.

Recently, Akbank has been recognised as Turkey’s most valuable banking brand in acknowledgment of its financial strength and sense of corporate responsibility. It is a mark of our ability over the past 65 years to integrate ourselves into the lives and aspirations of ordinary people. I like to think of it also as a sign of confidence in our ability to help open future chapters in the Turkish story.

Suzan Sabancı Dinçer CBE is chairman and executive board member of Akbank.

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Read more about:  Analysis & opinion , Western Europe , Turkey