218 OECD ECONOMIC SURVEY OF TURKEY Upgrading business investment Paris, 13 July 218 http://www.oecd.org/eco/surveys/economic-survey-turkey.htm @OECDeconomy @OECD
Growth remains strong despite headwinds 12 Annual GDP growth in % 12 1 1 8 8 6 6 4 4 2 2-2 -2-4 -4-6 28 29 21 211 212 213 214 215 216 217 Source: OECD Economic Outlook database. -6 2
The dispersion of incomes has narrowed 25 Income convergence Growth of real average disposable incomes, 27-16, % 25 2 2 15 15 1 1 5 5 Poorest 2 3 4 5 6 7 8 9 Richest Source: Turkstat. Equivalised disposable income deciles 3
Tax and transfers can play a more important role Gini coefficient, 215 or latest year.6 After taxes and transfers Before taxes and transfers.6.55.55.5.5.45.45.4.4.35.35.3.3.25.25.2 ISL SVN SVK DNK CZE FIN BEL NOR AUT SWE LUX HUN DEU POL FRA KOR CHE IRL NLD CAN ITA EST JPN PRT AUS GRC ESP LVA NZL GBR ISR USA TUR CHL MEX.2 Source: OECD (218), OECD Income Distribution (database). 4
Women continue to suffer from unequal opportunities Composition of the working-age population (over 15 year-old), in per cent Formal salaried Informal salaried Formal self-employed Informal self-employed Formal unpaid family workers Informal unpaid family workers Unemployed Inactive 1 9 8 7 6 5 4 3 2 1 2 25 21 216 2 25 21 216 Men Women Note: Formal unpaid family workers are family members doing household work, paying social security contributions and earning pension rights. Source: Turkstat. 5
Carbon emissions per unit of GDP are still not falling.6 CO 2 per GDP - production based kg/usd, 21 PPP prices.6.5 Turkey OECD.5.4.4.3.3.2.2.1.1. 199 1993 1996 1999 22 25 28 211 214. Source: OECD (218), Green Growth Indicators. 6
MACROECONOMIC REBALANCING IS REQUIRED 7
Investment is dynamic but increasingly funded by debt Total investment and total debt, % of GDP 31 Investment (left axis) Debt (right axis) 22 3 215 29 21 28 25 27 2 26 195 25 19 24 21 211 212 213 214 215 216 217 Source: OECD Economic Outlook and OECD Financial Accounts (databases). 185 8
Construction has gained a very large weight in investment 19 Gross fixed capital formation in construction, % of GDP TUR MEX POL OECD 19 17 17 15 15 13 13 11 11 9 9 7 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 7 Source: OECD Economic Outlook database. 9
The export sector has grown below potential 225 2 Shares in world exports, index 2 = 1 TUR CZE KOR POL 225 2 175 175 15 15 125 125 1 1 75 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 75 Source: OECD Economic Outlook database. 1
The deficit of current account is rising Current account balance, % of GDP -1-2 -3-4 -5-6 -7-8 -9-1 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217-1 -2-3 -4-5 -6-7 -8-9 -1 Source: OECD Economic Outlook database. 11
Debt sustainability is at risk 1 9 8 7 6 5 4 3 2 1 Gross external debt, in per cent of GDP Baseline 21-17 average Current account shock e-shock 1 9 8 7 6 5 4 3 2 1 26 28 21 212 214 216 218 22 222 224 226 228 23 Note: The "21-17 average" scenario extends average parameters observed over 21-17 until 25. The "baseline" scenario assumes an interest rate of 1.5% in 218 rising by.5 percentage points per year and stabilising at 4.% from 223 onwards, real GDP growth of 5%, inflation of 7%, effective exchange rate depreciation of 5%, a current account deficit of 4% and net FDI inflows of 1.5% of GDP per annum. "CA shock" assumes a current account deficit of 6% while the "e-shock" scenario assumes 7% nominal depreciation per year (all other fundamentals equal to baseline for both shock scenarios). Source: OECD calculations based on IMF (218), Balance of Payments (database) and OECD (218), OECD Economic Outlook (database). 12
Fiscal consolidation is at risk -1 General government cyclically-adjusted balance, % of GDP Turkey Advanced economies Emerging market and middle-income economies -1-2 -2-3 -3-4 -4-5 -5-6 -6-7 -7-8 28 29 21 211 212 213 214 215 216 217 218 219-8 Source: IMF (218), Fiscal Monitor, April 218. 13
Inflation is rising sharply 11 1 Inflation expectations and inflation target, y-o-y % changes 12-month ahead 24-month ahead Inflation target 11 1 9 9 8 8 7 7 6 6 5 5 4 4 3 26 27 28 29 21 211 212 213 214 215 216 217 218 3 Source: Central Bank of the Republic of Turkey. 14
The Lira has depreciated significantly 1.1 Real exchange rate (21=1) 1.5 1..95.9.85.8.75.7.65.6 Source: OECD Economic Outlook databases. 15
The recent tightening of monetary policy is welcomed The interest rate corridor and the main funding rates % Interest rate corridor CBRT average funding rate¹ Late liquidity window lending rate² O/N interest rate in BIST Interbank Repo Market¹ 1 week repo rate % 2 2 15 15 1 1 5 5 212 213 214 215 216 217 218 16
POLICY RECOMMENDATIONS Publish quarterly general government accounts according to international standards and a regular Fiscal Policy Report covering all contingent liabilities and quasi-fiscal activities of the government. Tighten fiscal and quasi-fiscal policies, strengthen the macroprudential rules and rein in housing loans. Restore the credibility of monetary policy by committing all stakeholders to the independence of the central bank. Forward guidance should be provided on how the authorities plan to achieve the inflation target. 17
UPGRADING THE BUSINESS SECTOR WITH HIGHER QUALITY AND BETTER ALLOCATED INVESTMENTS 18
Entrepreneurial dynamism contrasts with regulatory restrictions Gap between entrepreneurial dynamics and institutions Gap between entrepreneural dynamics and institutional quality (left axis).3 Quality of institutions that support entrepreneurship (right axis) Entrepreneurial qualities (right axis) 1.2.2 1..1.8..6 -.1.4 -.2.2 -.3 TUR CHL HUN ITA MEX POL PRT CZE USA ESP KOR DEU. Source: Global Entrepreneurship Research Association, London Business School, Global Entrepreneurship Monitor (database, http://www.gemconsortium.org/data) and Global Entrepreneurship and Development Institute, Global Entrepreneurship Index 218. The quality of institutions supporting entrepreneurship and entrepreneurial qualities are scored between -1. 19
Small firms considerably lag behind in labour productivity Labour productivity of small firms relative to large firms, large firms=1, 214 or latest 45 4 35 3 25 2 15 1 5 MEX TUR HUN CZE POL PRT 45 4 35 3 25 2 15 1 5 Note: Small (large) firms are defined as those employing less than 1 (more than 25) persons. Source: OECD (217), Entrepreneurship at a Glance 217. 2
Informality has declined but remains high Share of informal activities in total value-added, 217, % 3 3 25 25 2 2 15 15 1 1 5 5 CZE PRT ESP GRC POL HUN TUR Source: Medina and Schneider, "Shadow Economies Around the World: ", 218. 21
Machinery and equipment investments grow at uneven paces across firm types Manufacturing, lagged machinery and equipment stock (real prices) % points deviation from average Small firms Medium firms % changes 1 8 Listed firms Unweighted firm average (right axis) Young high-tech firms 1 8 6 6 4 4 2 2-2 -2-4 -4-6 -6-8 -8-1 27 28 29 21 211 212 213 214 215 216-1 Note: Investment growth rates of small firms (employing less than ten workers and which are more than five years old); of medium-sized firms (employing from 5 to 249 workers); of firms listed on the stock exchange; and of young technologyintensive firms (less than four year old firms in upper-middle and high technology sectors) are shown in percentage point deviation from the manufacturing sector average, after controlling for sectoral composition differences. Source: OECD/CBRT dataset on the basis of Enterprise Information System (EIS). 22
Medium-sized firms and high-tech start-ups are particularly leveraged % points deviation from Total liabilities to total assets of firms, manufacturing Ratio in % average 8 62 Small firms Medium firms Young high-tech firms Unweighted firm average (right axis) 6 6 4 58 2 56 54-2 52-4 5 26 27 28 29 21 211 212 213 214 215 216 Note: Small firms (employing less than ten workers and which are more than five year old), medium-sized firms (employing from 5 to 249 workers), and young technology-intensive firms (less than four year-old firms in upper-middle and high technology sectors) ratios are shown in percentage point deviation from the manufacturing sector average, after controlling for sectoral composition differences. Source: OECD/CBRT dataset on the basis of Enterprise Information System (EIS). Note: Small firms (employing less than ten workers and which are more than five year old), medium-sized firms (employing from 5 to 249 workers), and young technology-intensive firms (less than four year-old firms in upper-middle and high technology sectors) ratios are shown in percentage point deviation from the manufacturing sector average, after controlling for sectoral composition differences. Source: OECD/CBRT dataset on the basis of Enterprise Information System (EIS). 23
Digitalisation advances but core applications should spread more broadly Digitalisation among enterprises, 217, % of all enterprises 5 45 4 35 3 25 2 15 1 5 Share of enterprises having : A website and using social media Enterprise resource planning software PRT TUR CZE HUN POL 5 45 4 35 3 25 2 15 1 5 Source: Eurostat (217), The Digital Economy and Society Index. 24
R&D expenditures are low but rising R&D expenditure, % of GDP 1.8 Turkey OECD 1.8 1.6 1.6 1.4 1.4 1.2 1.2 1. 1..8.8.6.6.4.4.2.2. 1995 2 25 21 215. Source: OECD Main Science and Technology Indicators database. 25
The credit costs of all firms can be reduced considerably 5 4 EMBI spreads Basis point TUR CHL CZE MEX POL 18 16 14 EMBI spread and domestic interest rate 3-year moving averages Real interest rate on business loans (left axis) EMBI spread (right axis) 6 55 5 3 12 45 2 1 8 4 35 1 6 3 4 2 25 2-1 213 214 215 216 217 218 25 27 29 211 213 215 217 15 Source: Thomson Reuters Datastream (database) and Central Bank of the Republic of Turkey. 26
Equity risk premia are high Price/earning ratio, average first half 218 3 3 25 25 2 2 15 15 1 1 5 5 RUS TUR HUN KOR POL CZE DEU ITA CHN MYS ESP MEX BRA USA Source: Thomson Reuters Datastream (database). 27
POLICY RECOMMENDATIONS To reduce the funding costs of the economy improve the international credibility of governance institutions, fiscal transparency and price stability. Carry out a strategic review to identify and address the most binding constraints to the development of the currently weak ecosystem for equity financing of investment. Evaluate the uptake of the various recent social security contribution cuts granted and make permanent those which have proven most supportive of formalisation, financing this through better tax enforcement. Encourage family firms through technical support and awareness campaigns to develop standard corporate governance, professional management and financial transparency. 28
POLICY RECOMMENDATIONS (cont.) Enforce the compulsory auditing rules of the new Company Law. Reduce audit costs - while maintaining audit quality standardsvia tax incentives in the early years of audited financial reporting. Undertake a cost-benefit analysis of the credit guarantee system and normalise its size, tighten the macroprudential rules and contain the quasi-fiscal activities of public financial institutions. Complete and enforce a holistic strategy of digitalisation, encompassing education, life-long learning and infrastructure and internet access policies. 29
STRENGTHENING TURKEY S INSTITUTIONAL AND HUMAN CAPITAL BASIS 3
The quality of institutions can be improved 7 (Rule of law, control of corruption, government effectiveness) 7 6 6 5 5 4 4 3 3 2 2 1 1 26 211 216 26 211 216 26 211 216 Rule of Law Control of Corruption Government Effectiveness Source: World Bank (217), Worldwide Governance Indicators. 31
The quality of education should be improved Secondary students' mathematics skills Turkey OECD average 5 14 48 12 46 1 8 44 6 42 4 4 2 38 26 212 215 PISA score 26 212 215 Share of top performers, %¹ 1. Proficiency level 5 or above on a scale of 1 to 6. Source: OECD (216), PISA 215 Results: Excellence and Equity in Education (Vol. I) and OECD (216), Skills Matter: Further Results from the Survey of Adult Skills. 32
The skills of the working age population should be strengthened Adult population's numeracy skills % of 16-65 year-olds 1 9 8 7 6 5 4 3 2 1 Below level 1 Level 1 Level 2 Level 3 Level 4/5 1 9 8 7 6 5 4 3 2 1 Chile Turkey Poland OECD Czech Republic Source: OECD (216), PISA 215 Results: Excellence and Equity in Education (Vol. I) and OECD (216), Skills Matter: Further Results from the Survey of Adult Skills. 33
Future growth prospects hinge on reforms Projected gains in real GDP per capita from gradual convergence with OECD good practices, % difference from baseline 35 3 Rule of law Labour market policies Educational attainment Product market regulation Total 35 3 25 25 2 2 15 15 1 1 5 5 22 225 23 235 24 Source: Estimations based on "OECD Long-term Scenarios for the World Economy" database. 34
POLICY RECOMMENDATIONS Strengthen the rule of law, judiciary independence and step up the fight against corruption. To reorient spending to top priority areas, implement the strategic and performance-oriented budgeting objectives of the Public Finance Law 518 to help reorient spending. Grant more autonomy and resources per student to education institutions, against greater performance accountability. Facilitate further women s labour force participation, notably by increasing the provision and quality of early child education and child and elderly care. Assess the additional impact on carbon emissions and use economic instruments such as harmonised pollution taxes and emission permits to reduce them 35
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