June 2011 The study analyzes the macroeconomic scenario in Turkey and its effect on the investment prospects. We believe domestic consumption will be strong and the core driver of growth in this new era. Closing output gap and maintaining low cost of capital suggest a strong investment outlook which in turn would attract sizeable FDI into the country. Executive Summary Turkey s improved macro fundamentals and its proven resilience to external shocks during the global crisis warrant an increased share of global liquidity. 2011 is likely to be the year of graduation. The country deserves an upgrade to investment grade for four reasons: 1) the cyclical recovery has proven to be strong; 2) the macro fundamentals have improved relative to peers; 3) economy has proved to be resilient to external shocks and domestic political cycle; and 4) the economic administration has successfully pulled the country out of the recession without seeking international support. The Gross Domestic Product (GDP) grew 9.2% Y-o-Y in 4Q10 and 8.9% in 2010. 1 Private sector expenditures boosted growth, while net external trade became a drag. Turkey posted a GDP of $735.8 billion on the back of growing domestic demand and increasing exports. The structural current account deficit (CAD) has been a matter of concern for Turkey in 2010. CAD reached 6.6% of GDP in a relatively early phase of the expansion cycle on the back of rising commodity prices, and rising domestic demand complemented by accommodative monetary policy. As a young and middle-income country, Turkey will have an upper edge to deal with its current account problem on the back of decreasing youth dependency ratio and higher prime saver ratio. The current labor force of 26.0 million people is 4th largest compared to EU countries. 2 There has been significant improvement in the employment scenario with unemployment rates falling to its pre-crisis level. Turkey has been one of the very few countries that brought down the public sector debt in 2010. This trend is likely to continue in 2011. Despite record low levels of inflation in 2010, inflation is expected to see an upward trend in the future. Saving the cyclical recovery in the budget (possibly after the elections) might be a good starting point to control excessive price appreciation, together with controlled interest rates and a competitive exchange rate. Focusing back on the structural reforms after the elections would not only help to increase the economy s competitiveness in the medium-term but would also support the long term growth outlook. TresVista Financial Services Page 1
$ Billion $ (Absolute) Economy Turkish economy has shown remarkable resilience tackling the global meltdown in 2008, emerging as a promising destination for investment in Europe. Turkey is labelled as Europe s BRIC. Turkey s growth can be attributed to its robust banking system, which evolved from 2001 domestic downturn, and proactive fiscal and monetary stimulus initiated by the government. Turkish economy grew from $23 billion in 2002 to $735.8 billion in 2010. In constant terms, Turkey grew at a CAGR of 4.8%, surpassing economies like Russia, Brazil, South Korea, and Thailand. This growth is largely attributable to the rising domestic demand and growth of exports and investments in the country. In 2010 Turkey s real GDP grew at 8.9%, outperforming estimates of the most bullish analysts. Turkey s GDP is expected to reach $1.2 trillion mark by 2016. 5.0% 3.0% 1.0% 4.8% 4.7% 2002-2010 Real GDP Growth CAGR 4.5% 3.8% 3.6% 3.4% Turkey Russia Thailand Brazil Chile South Ukraine Czech Slovania Mexico Hungary Korea Rep. 2.5% 2.2% 1.4% 1 9.0% 8.0% 5.0% 3.0% 1.0% 8.9% Turkey 2010 Real GDP Growth 7.3% Emerging and developing economies 5.0% World 4.2% Central and Eastern Europe 1.8% EU-27 Source: Invest in Turkey Website The per capita GDP is expected to reach $15,181.6 by 2016 from current $10,398.7, which is more than countries like China ($4,00) and Brazil ($10,00). Young and growing population and a high urbanization rate supports long term uptrend in consumption. As of 2010, there were 35.0 million internet users, 62.0 million GSM users, and 42.0 million people using credit card in Turkey. 1,40 1,30 1,20 1, 1,00 90 80 70 60 50 40 30 20 GDP Growth 8.9% 1 6.9% 1,159.2 8.0% 4.5% 1,082.6 4.7% 943.4 1,011.6 876.6 742.1 797.6 4.1% 735.8 4.1% 648.8 616.7 526.4 0.7% () (4.8%) () () (8.0%) (1) 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 16,00 14,00 12,00 10,00 8,00 6,00 4,00 2,00 Per Capita GDP 15,181.6 13,552.2 12,012.1 10,44 14,340.2 10,079.0 12,782.5 9,234.0 11,054.3 8,578.0 7,583.0 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E Nominal GDP ($ billion) Real GDP Growth Source: Turkish Statistical Handbook, 2010 and IMF The growth in 2010 was fuelled by industry and services that contributed 3.6% and 3.5% respectively to the overall growth. In line with EU's Lisbon Strategy, Turkey focused its industrial development policy on knowledge and innovation, and targeted to become the production base of Eurasia in medium and high-tech products. The Average Industrial Production Index which dropped to 102.9 in 2009, the lowest in last four years, bounced back to 116.4 in 2010. As of March 2011 the index hovered at its 6 year high at 127.8. TresVista Financial Services Page 2
$ Billion 13 12 11 Confidence Indices 15 14 116.7 13 12 11 Industrial Production Index 9 93.5 8 71.6 9 7 6 8 5 59.7 7 4 6 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jan-05 Oct-05 Jul-06 May-07 Feb-08 Dec-08 Sep-09 Jun-10 Apr-11 127.8 Real Sector Confidence Index Consumer Confidence Index Source: TurkStat Website The consumer sector confidence index came down to 59.7 in January 2008, and reached 93.5 in April 2011. Consumer confidence is reflected in improving domestic credit in the country that saw a 30.4% growth in 2010 compared to 2009, in tight monetary scenario. The domestic credit to private sector is low as compared to major emerging economies of the world; increase in domestic credit is expected to improve the growth prospects in Turkey. $60 $50 $40 $30 $20 $ $ 162.0 Domestic Credit Growth 229.4 245.8 18.5 34.8 48.0 321.0 72.0 376.5 379.8 89.4 83.5 495.0 486.4 114.6 114.3 2004 2005 2006 2007 2008 2009 2010 Feb-11 Total Domestic Credit Total Consumer Credit 16 14 12 10 8 6 4 2 Domestic Credit to Private Sector % of GDP 141.1% 138.2% 127.3% 110.2% 84.5% 73.3% 71.3% 55.3% 5 48.3% 46.8% 45.3% 36.5% Source: Undersecretariat of Turkey, Central Bank of Turkey Website and World Bank Domestic consumption is expected to be strong and the core driver of Turkey s growth story in coming years. Adjusting output gap and interest rates should enable to attract sizeable FDI into the country. Exports are also expected to see a growth as global economy experiences revival. Demographic Scenario The population structure of Turkey lends a demographic dividend to the economy, with majority of the population in the working age group. With a total population of 73.0 million, Turkey ranked 17 th in the world in 2010. With a median age of ~29 years, Turkey has the largest youth population when compared with EU nations. The male to female ratio is ~1.0. Young population along with improving per capita income increases the potential for high domestic demand in the country. The population is expected to grow at a CAGR of 1.1% to 85.4 million by 2025 from 73.0 million in 2010. Turkey has high literacy rate, with 9 of total population (excludes population which is 6 years and below) educated, with male literacy at 97.8%, female literacy at 90.3% and 69.6% of population completed graduation. In 2010, ~0.5 million graduated from 156 universities, and 0.6 million students TresVista Financial Services Page 3
completed high school. The unemployment rate has cooled to around 10.6% after touching 14.8% in 2009, which is the highest point in last 6 years. However there is still room for improvement with employment rate staying above the pre-crisis level of 1. The labor force has seen addition of 3.2 million people between 2005 and 2010, compared to 2.6 million jobs created between the same periods. Prices and Monetary Policy Inflation in Turkey gradually declined from 29.7% in 2002 to 6.4% in 2010 and at a 41 year low of 3.9% in March 2011. Government was not able to realize expected inflation rates in the beginning of the second half of the decade, however 2009 & 2010 have been different, with inflation expectations realized or staying below their targets. This exhibits effectiveness of CBT s role and usage of policy tools in bringing inflation under control. 1 Headline Inflation v/s Core Inflation 1 1 8.0% 3.9% 3.7% Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 7.6% 7.4% 7.2% 6.8% 6.6% 6.4% 6.2% 7.2% 6.9% Expectation of Consumer Price Index 7.2% 7.5% 7.1% 7.4% 7.1% 7.2% 7.1% 6.8% 6.8% 6.9% 6.9% 6.7% 6.6% 6.7% 6.4% 6.6% 6.5% 6.6% 6.4% 6.3% 6.2% 6.2% Headline Inflation Core Inflation Next 12 Months Next 24 Months Source: TurkStat Website and Central Bank of Turkey Website Despite record low inflation figures in March 2011, inflation concerns for upcoming period are mounting. Pressure has started to accumulate on cost push inflation on the back of jump in producer prices seen as a result of rise in the oil and energy prices. A $1/barrel increase in oil prices adds as much as 0.5 percentage point to headline inflation. Besides, increase in imports and growth in domestic demand, and post-election administrative price hikes will also contribute to higher inflation. CBT and the Banking Regulation and Supervision Agency (BRSA), have set a goal of limiting bank credit growth in 2011 to around 25.0%. It is expected that there will be a further increase in the RRR to contain the domestic demand. It is expected that policy rates will reach 7.3% by 2011, however CBT will maintain a status quo till the elections, and then start increasing interest rates by the end of the year. Fiscal Position Turkey witnessed fiscal deterioration due to various structural problems in its economy in the past which reached its peak during the 2001 crisis. However, due to its continued focus and various economic reforms and development programs, the scenario is rapidly changing. Over the years the fiscal deficit to GDP ratio has drastically fallen from 1 to its current level at and is expected to be 1.6% by 2013 according to the medium term program, lower compared to 3.0% required in accord with Maastricht Treaty criterion. Fiscal Position 2006 2007 2008 2009 2010 2011E 2012E 2013E General government revenue ($ billion) 120.7 145.8 160.6 138.7 167.7 178.5 196.4 214.1 General government revenue (% of GDP) 22.9% 22.6% 22.1% 22.6% 22.9% 23.0% 22.9% 22.5% General government total expenditure ($ billion) 123.9 156.3 173.9 172.7 197.0 199.9 217.0 229.7 General government total expenditure (% of GDP) 23.5% 24.2% 23.9% 28.2% 26.9% 25.7% 25.3% 24.2% Fiscal Deficit ($ billion) (3.2) (10.5) (13.4) (34.0) (29.3) (21.5) (20.6) (15.6) Fiscal Deficit (% of GDP) (0.6%) (1.6%) (1.8%) (5.5%) () (2.8%) (2.4%) (1.6%) Source: Ministry of Finance Website TresVista Financial Services Page 4
$ Billion $ Billion Budget expenditure at $197.0 billion in 2010 grew at 10.7% Y-o-Y, due to reduction in interest payments by 7.3% and purchase of goods by 1.2% respectively. Sound banking system helped government avoid outlay in bailout to financial institutions, which was an issue across the world. Budget revenues stood at $167.7 billion in 2010. In the coming months, the budget deficit will increase because more appropriations will be released by the Ministry of Finance, besides the election season will also contribute towards higher spending. On the other hand, higher tax revenues will be generated from rapidly growing demand in the economy. Turkey has recorded $6.6 billion worth of restructuring application (tax amnesty), which is not included in budget plans. Debt and Foreign Exchange Reserves Sustainable economic growth accompanied by favorable budget performance and low real interest rates helped Turkey bring down public debt figures. The debt stock dropped from 73.7% in 2002 to 41.6% in 2010 as a % of GDP. This is less than the Maastricht Convention criterion of 6. As of 2010, Turkey held a gross debt stock worth $329.5 billion. Turkey s debt to GDP ratio is small compared to various developed economies including EU and G7. 8 7 6 5 4 3 73.7% 67.3% Government Debt Indicators 59.2% 52.3% 46.1% 45.5% 39.4% 39.5% 41.6% 40.6% 38.8% 36.8% 12 10 8 6 4 112.2% 98.7% Debt to GDP Ratio - 2010 79.5% 46.9% 41.6% 39.2% 35.1% 31.0% 2 1 14.8% 12.9% 10.1% 6.1% 5.8% 5.3% 5.6% 4.4% 3.9% 3.9% 3.4% 2 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E Gross Debt Stock (% of GDP) Interest Payments/GDP Major Advanced Advanced Economies Economies (G7) European Union Central and Eastern Europe Turkey Other Advanced Economies* Emerging and Developing Economies Developing Asia Source: Turkish Macroeconomic Presentation, Ministry of Finance Website and World Bank, Note: * indicates (Advanced economies excluding G7 and euro area) Gross Domestic borrowing comprises ~75.0% of the total government debt holding, however, a closer look at the debt structure shows that FX denominated net debt stands at 0.8% of GDP protecting the government from volatile fluctuations. The medium term program of government estimates that debt to GDP ratio will fall to 36.8% while interest to GDP ratio will come down to 3.4% by 2013. External Debt to GDP Forex Reserves 35 30 25 20 15 5 35.3% 84.0 15.4 39.5% 38.5% 120.5 15.7 160.1 15.8 37.8% 43.6% 14.1 13.3 11.8 188.1 172.0 39.5% 189.6 70.4 71.6 73.5 78.3 83.5 88.9 2005 2006 2007 2008 2009 2010 Public Sector Borrowing CBT Borrowing Private Sector Borrowing External Debt To GDP Ratio 5 45.0% 4 35.0% 3 25.0% 2 15.0% 1 5.0% 9 8 7 6 5 4 3 2 1 86.0 90.2 76.4 74.2 74.8 63.3 52.4 37.6 35.2 28.1 2002 2003 2004 2005 2006 2007 2008 2009 2010 Apr-11 Source: Turkish Macroeconomic Presentation, Undersecretariat of Treasury TresVista Financial Services Page 5
$ Billion Gross External debt to GDP is stable around 39.5%, while its composition between banks and non-financial corporates balance. As of 2010 the gross reserves to short term external debt stood at 102.6%. As of April 2011 Turkey held forex worth $90.2 billion. With an expected principal payment of $36.1 billion and short term debt of $78.5 billion, the bank reserves suffice for 78.7% of the 2011 debt payments. This indicates need for more reserves, however sound banking sector and availability of abundant liquidity will help government roll over debt. Besides, inflow of reserves is expected to increase on account of growing exports, FDI, and privatization of state companies. Foreign Trade Turkey has historically been a net importer, however it has drastically improved its export to import ratio, from 51.0% in 2000 to 61.4% in 2010, with the ratio touching a high of 72.5% in 2008. Turkey s foreign trade was affected by the global meltdown, resulting in to a negative growth in 2009 and reversed back in 2010, on back of rising demand and a lower base. Exports and imports grew at a CAGR of 15.2% and 13.0% respectively, between 2000-2010. As of 2010, total exports and imports stood at $114.0 billion and $185.5 respectively. 25 20 15 5 (5) () Turkey Trade Scenario 170.1 139.6 132.0 116.8 107.3 97.5 85.5 27.8 69.3 63.2 73.5 54.5 41.4 51.6 31.3 36.1 47.3 3.8 202.0 185.5 140.9 114.0 102.1 56.1 31.5 (9.9) (0.6) (7.5) (14.4) (22.3) (14.0) (22.1) (32.2) (38.4) (42.0) (48.4) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Mar-11 Total Exports Total Imports Current Account Balance Source: Undersecretariat of Treasury Website Rising demand in domestic market, relatively high energy costs and slow growth in exports, on account of a slowdown in major exporting nations resulted in current account deficit of $48.4 billion (6.6% of GDP) in 2010, the highest in the last decade. The import of petroleum products in 2010 in terms of price and volume grew at 28.0% and 9.5% respectively, and total gross energy bill of Turkey rising to $38.5 billion (5.2% of GDP) in 2010. 1.0% (1.0%) () (3.0%) () (5.0%) () () (0.3%) (0.3%) (2.5%) Source: Macro Economic Presentation, Undersecretariat of Treasury, May 2011, Turkey Statistical Handbook and IMF * Note: 2002 oil prices Current Account Deficit (1.8%) (2.5%) (2.5%) (3.7%) (4.6%) (6.1%) (3.0%) (5.9%) (2.9%) (1.3%) (5.7%) (2.3%) 0.5% 2002 2003 2004 2005 2006 2007 2008 2009 2010 CA balance/gdp CA balance/gdp (excluding oil prices*) (3.4%) (6.6%) (2.5%) (2.3%) (0.3%) (6.1%) (3.7%) (5.7%) (4.6%) (4.8%) (6.6%) (5.9%) 2002 2003 2004 2005 2006 2007 2008 2009 2010 TresVista Financial Services Page 6 1 1 8.0% () () () (8.0%) Current Account Deficit and GDP Growth 6.2% 5.3% 9.4% 8.4% CA balance/gdp 6.9% 4.7% Real GDP Growth 0.7% 8.9%
Turkey aims to reduce current account deficit to 5.2% by 2013 in its medium term program. However deficit is likely to widen further in 2011 on the back of high commodity prices and strong capital inflows due to rising domestic demand. CBT s action of lowering domestic demand has not been quite successful as demand remains strong despite the hike in Required Reserve Ratio. With election not too far, government is not in a mood to bring about drastic changes in its policies. Outlook The low level of interest rates, the strongest banking sector in EEMEA region and a relatively stronger currency has supported the domestic demand driven recovery. Consequently, Turkey has become the fastest growing EEMEA country in 2010, and is likely to hold on to that position in 2011. The headline inflation is expected to slow down, however, the recovery will get broader largely driven by internal demand. As a young and middle-income country, Turkey will have a stronger hand in the future to deal with its current account problem. There is a clear upside in potential GDP growth towards 6.7% in the next decade. 3 FDI may well smooth this transition if the macro stability is sustained and graduation to investment grade materializes. Since the economy troughed in 2Q09, output gap has been closing, real wages have been increasing sharply and high commodity prices have been pressuring the prices. QE2 has flushed the economy with excess liquidity. Turkey has managed to reduce its fiscal deficit in a year of inflation concerns, and high current account deficit. Proceeds from privatization and restructuring plans (tax amnesty) will be helpful to maintain fiscal stability. A slower domestic debt roll over ratio on account of Turkey s fiscal stance will open more resources for growth. The current account deficit is expected to stay, and widen further in short term. This is due to strong domestic demand, driven by accommodative monetary policy and global commodities prices. No major announcement on interest rate hike, to tame domestic demand is expected till the elections. Although the economy has proved relatively resilient to domestic political cycle lately, the early parliamentary elections in June still constitute a watermark for 2011 outlook. Following AKP s comfortable win in September, 2010 referendum, and its promise to focus on drafting a new constitution after the elections, there is little on the way that will prevent AKP to secure another strong single party government in the forthcoming elections. References 1 - Turkstat Website 2 - Invest in Turkey Website 3 - OECD forecasts Bibliography IMF Article IV consultation report, 2010 Turkey Quarterly Macroeconomics Update, Invest in Turkey, December 2010 Turkey Economic Survey, Embassy of Switzerland, 2009 Turkey Economic Survey OECD, September 2010 Undersecretariat of Treasury Website Ministry of Finance Website TresVista Financial Services Page 7
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