The 2011 population of Turkey is 78.8 million with an annual growth rate of approximately 1.2% and an average age of 28.5 years. The country ranks as the 17th most populous in the world, following Germany. Approximately 70% of the population is urban with Istanbul representing the largest of the urban centers, followed by the country’s capital of Ankara. Turks are the largest ethnic group, representing approximately 75% of the total population, followed by Kurds which represent 18%, and the remaining 7% belonging to multiple minority groups. Almost the entire population is Muslim with less than 0.2% of the population representing other religions. Turkey’s overall unemployment rate is 12% with approximately 25% of the total labor force ages 15-24 being unemployed. 17.1% of the population lives below the national poverty line. 87.4% of the population is literate.[i] Turkey’s 2010 Gross Domestic Product (GDP) was $735.3 billion. This amount represents approximately 1.2% of the World’s GDP and 6% of the Euro Area’s GDP, as defined by the World Bank. Taking into consideration purchasing power parity (PPP) and converting the country’s Gross National Income (GNI) to international dollars, Turkey’s GDP (PPP) is $1,116 billion.[ii] Turkey’s GDP growth is 8.95% increase for 2010, or an increase of approximately $120.71 billion, from 2009. Turkey’s 2010 GDP growth outpaced the growth rate of the World and the Euro Area. The World GDP growth for 2010 is 4.22%, or an increase of approximately $4,965.7 billion, from 2009. Turkey’s 2010 rate of inflation of 6.49% outpaced the World and the Euro Area. The World’s rate of inflation for 2010 is 4.75%. The Euro Area’s rate of inflation 2010 is 0.99%.[iii] The 2010 GNI per capital for Turkey is $9,890. This amount represents an increase of $20 from 2009, or 0.2%. The 2010 World GNI is $9,116, or a 4.37% increase from the prior year. The 2010 Euro Area GNI is $38,571 or a 0.32% increase from the prior year. [iv] Turkey’s GNI per capita based on PPP is $15,180.[v]
Turkey has been a member of the World Trade Organization (WTO) since March 26, 1995. The country ranks 33rd and 21st in world trade merchandise exports and imports, respectively. In terms of commercial service exports and imports, Turkey ranks 28th and 24th, respectively. Turkey’s Share in the total world merchandise exports is 0.75%. It’s percentage in world total merchandise imports is 1.2%. Turkey’s share in total world commercial exports is 0.91%. It’s percentage in total world commercial imports is 0.52%. Turkey’s contribution to the 2011 WTO budget is 0.95%. The country’s 2010 current account balance is a deficit of -$48, 445[vi]. Turkey’s 2010 balance of payment is $9.28 billion dollars or 2.8% of the Europe Area’s balance of total trade of $329.9 billion.[vii]
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Exports as a percentage of GDP were 23.18% for 2010, a 0.06% point decrease from 2009. Turkey’s percentage of exports to GDP was performing 13.1% points below the Euro Area. In 2009, Turkey’s exports as a percentage of GDP were 23.24%. The World’s imports as a percentage of GDP were 24.86%. Agricultural products (10.9%), fuels and mining products (8.2%) and manufactures (77.6%) represent approximately 97% of Turkey’s merchandise exports. Turkey’s major exporting partners are the European Union (47.1%), Iraq (5.3%), Russian Federation (4.1%), United States (3.3%) and United Arab Emirates (2.9%). Turkey’s principal commercial services exports are transportation (25.1%), travel (63.5%) and other commercial services (11.4%). Merchandise exports represent approximately $114 billion, a 12% increase, and commercial services exports represent approximately $33 billion, a 2% increase.[viii] Imports as a percentage of GDP was 26.21% for 2010, a 1.79% point increase from 2009. Turkey’s percentage of imports to GDP was more aligned to the World statistic, performing 8.6% points below the Euro Area. The Euro Area’s imports as a percentage GDP was 36.34%.[ix] In 2009, Turkey’s imports as a percentage of GDP were 24.42%. The World’s imports as a percentage of GDP were 24.85%.
The Euro Area’s imports as a percentage GDP was 34.81%.[x]. Agricultural products (6.9%), fuels and mining products (27.4%) and manufactures (62.5%) represent approximately 97% of Turkey’s merchandise imports. Turkey’s major importing partners are the European Union (38.9%), Russian Federation (11.6%), China (9.2%), United States (6.6%) and the Islamic Rep. of Iran (4.1%). Turkey’s principal commercial services exports are transportation (45.5%), travel (26.3%) and other commercial services (28.2%). Merchandise exports represent approximately $186 billion, or a 32% increase. Commercial services exports represent approximately $18 billion, or an 18% increase.[xi] The country is experiencing an increase in Foreign Direct Investment (FDI) following the global financial crisis. According to the Central Bank of the Republic of Turkey, the country received approximately $9.1 billion in FDI in 2010. FDI was obtained in the form of Equity Investment, representing $6.6 billion, and Real Estate Investing, representing $2.5 billion.[xii] The top five sectors to receive FDI in 2010 are electricity, gas, and water supply ($2 billion), financial intermediation ($1.6 billion), manufacturing ($867 billion), wholesale and retail trade ($389 million) and construction ($372 million).
The European Union member countries represent the largest contributors of FDI. Austria invested $1.8 billion, or 27.5%. France invested $600 million, or 9.2%. Germany invested $598, or 9.1%. The Netherlands invested $498 million, or 7.6%. Greece invested $425, or 6.5%.[xiii] Turkey received $4.67 billion of FDI in the first four (4) months of 2011. This amount represents a $2.67 billion increase, or 126%, from the same period of 2010. This funding has been allocated to the following sectors; financial intermediation ($4.3 billion), electricity, gas and water supply ($536 million), manufacturing ($296 million), real estate, renting, business services ($242 million), and healthcare-social services ($156 million). $760 million of FDI was allocated to the purchase of properties by foreigners. Spain is the top contributor of FDI representing $2 billion, followed by Belgium ($1.3 billion), France ($716 million), the USA ($265 million), and the Netherlands ($260 million).[xiv] The FDI projections for 2011 may exceed $11 billion by year end.[xv] Turkey’s 2010 general government revenue was $359.3 billion, or 32.2% of the country’s GDP. The country’s 2010 general government total expenditure was $ 388.5 billion, or 34.9% of the country’s GDP. Expenditures exceed the country’s revenue by approximately $29.2 billion. The general government’s net borrowing amount was $29.2 billion for 2010.
Turkey’s general government gross debt in 2010 was $ 464.6 billion or 41.7% of the country’s 2010 GDP. The government’s gross debt amount increased between 2009 and 2010 from $433.4 billion. The percentage of gross debt to GDP declined during this same period from 45.5%. It is projected that the trend for this statistic will continue to decline through 2016. At which time, the gross debt to GDP ratio is forecasted to be 33.96%.[xvi] The Euro Area’s 2010 debt to GDP percentage was 85%. It is projected that the trend for this statistic will continue to increase through 2016. At which time, the net debt to GDP ratio is forecasted to be 86%.[xvii] Turkey’s gross external debt was $289.4 billion as of 2010, or 26% of the country’s GDP. This amount is allocated to two debt categories, loans and bonds. Loans represent $244 billion and bonds represent $45.4 billion. Loan amounts can be further allocated into two term categories, short term and long term. Short term loans represent $78.2 billion and long term loans represent $165.8 billion. Long term private creditors include monetary institutions such as nonbank financial institutions representing $5.9 billion, private investment and development banks representing $7 billion, foreign commercial banks representing $67 billion and foreign branches of domestic banks representing $32 billion.
Long term official creditors include government organizations such as public finance institutions representing $2.1 billion, central governments representing $365 billion and official development banks representing $5.6 billion. Official creditors also include multilateral organizations such as the International Monetary Fund (IMF) representing $7.1 billion, IMF Special Drawing Rights (SDR) representing $1.5 billion, International Bank for Reconstruction and Development (IBRD) representing $11.5 billion, and other institutions representing $14 billion. Short term investors are limited to private creditors which include monetary institutions representing $24.5 billion and non-monetary institutions representing $28.6 billion.[xviii] Turkey’s total debt service for 2010 was $55.7 billion. This amount represents $47.1 billion in principal payments and $8.6 billion in interest payments. Long term debts represent 100% of Turkey’s 2010 principal debt service and 96% of the country’s interest service. The breakdown of borrowers include the general government representing $8 billion in principal payments and $4.1 of interest payments, banks which represent $6.7 billion of principal payment and $843 million of interest payments, and other sectors which represent $32.3 billion in principal payments and $3.2 billion in interest payments. International organizations represent the largest lenders to Turkey. The top two organizations include the IMF which represents $2.2 billion of principal and $136 million of interest and the IBRD which represents $690 million principal and $135 million of interest. Banks are the largest lending organizations to Turkey representing $40.2 billion in principal and $7.2 billion in interest. International money markets represent the most common form of credit, representing $40.7 billion in principal and $7.3 billion in interest.[xix] The Turkish currency is the Turkish Lira. In 2010, the value of the Turkish Lira as compared to the US dollar was $1.52. As of December 31, 2010, the country maintained $86.1 billion in reserves of foreign exchange and gold.[xx] The country recognizes that a strong foreign exchange reserve is very important to mitigate unanticipated and significant internal and external pressures. To maintain this reserve, the Central Bank holds foreign exchange auctions to accumulate reserves. These auctions take place when foreign exchange supply increases and demand remains unchanged or decreases.[xxi]Turkey has implemented a floating exchange-rate exchange system. Under this system, the Central Bank of Turkey does not have a real exchange rate target.
Turkey was a relatively closed economy up until the 1950’s when the country started to slowly open up its economy. However, the progress of the 1950’s receded as two decades of unclear policies dominated. It was really not until the early 1980’s that Turkey embarked on permanently opening up its economy to the rest of the world.
The new outward looking economic policies came under the Motherland (ANAP) which was in power for most of the 1980’s. The established import substitution policy was phased out and was replaced by a policy that envisioned the country becoming an exporting leader in the global markets.[xxii] This shift can really be seen as the focal point for propelling Turkey to its leading status as an emerging market and rising power player in the region.
The move was made toward opening up trade and towards liberalizing its financial markets. This helped the country warm up to the European Union (EU) countries and in 1987, it applied for membership to the European Community (EC). Turkey’s exports surged over 500% from 1979 to 1990.[xxiii] During this time the country also diversified its exporting capabilities away from mostly agricultural products. By 1990, the share of industrial goods in total exports was close to 80%, increasing from a minimal amount in the 1970’s.[xxiv] In 1995, Turkey became a member of the World Trade Organization (WTO) and also joined the Customs Union established by the EU. However, once again in the mid-1990’s to early 2000’s, Turkey again took a step back in its expansion into the global market. This was mostly due to political instability and poor economic management during this time period. The troubles were also deepened by an earthquake in 1999 and a banking crisis in 2000-2001.
The 2000’s were mostly ruled by the AK Party. The AK Party shifted the focus of Turkey as a regional bit player to a regional leader. In 2004, the AK Party established the Exports Strategic Plan which was set a strategy and established goals for Turkey’s growing export economy. According to WTO statistics, Turkey consistently ranked in the top 25 of leading exporting countries throughout the decade.[xxv] Exports grew at a very high growth rate in the late 2000s and total volume was over $100 billion in 2007 and 2008.[xxvi] Exports to the European Union were roughly half of Turkey’s output. These countries and the European region in general is the most import region to Turkey’s export demand. Like most of the rest of the world, Turkey’s export economy took a significant hit during the financial crisis and exports declined dramatically during 2009. However, the difficulties in 2009 were partially offset due to growing export demand from the Middle East and Africa. While Turkey’s exports to Europe decreased, exports to the Middle East and Africa saw substantial increases (see figure 1). Clearly, with growth slowing in developed Europe, the developing countries in the Middle East and Africa will continue to play an important role in Turkey’s economic growth and expansion.
While Turkey’s economy was relatively closed to imports up until the 1980’s, importing goods is now much easier for foreign companies. In 2001, Turkey established its current import standards and guidelines. These were developed based off of the framework established by the WTO and the EU. The import guidelines are more streamlined and were established to promote import activity. Customs rules are now segregated by industry, are more clearly explained, and are easier to follow.
In order to import goods to Turkey, a firm must be established as a legal importer to the country.[xxvii] This requires registering with the government and established a tax ID number. For the most part, no additional documentation is needed. However, there are some exceptions for certain products. These include: some agricultural products, specific items that could threaten public security, environmental products, and products that may threaten human or animal health. Additional documents may be required for these types of products. The extra standards required for these products are to protect Turkey’s citizens and its security.
Turkey’s economy is now in the top 20 in the world. Its strategic position geographically makes it attractive to foreign investors. As a liberal Muslim country that is growing, it makes it an easy entry point for investing in the region. In addition, compared to the majority of its peers, it boasts a relatively stable political environment and decent financial institutions and regulations. Turkey’s rise has increased its importance in the region. The 2009 World Bank meetings were held in Turkey and it has become as key player in global debates such as Iran’s nuclear ambitions. In addition, tourism is now booming and is allowing for greater GDP growth and economic prosperity in the country. The number of tourists visiting Turkey increased over 200% from 2002 to 2009.[xxviii] Revenues from tourism have increased by roughly the same amount over this time period as well (see figure 2).
Turkey does still face trade issues that continue to be concern among domestic policy makers. When Turkey signed the Customs Union agreement established by the EU, there was no Free Trade Agreement (FTA) involved. Turkey is still not a fully fledged member of the EU and because of this, the country misses out on certain benefits of full membership. First, while Turkey is subject to the terms of EU FTA’s with other countries, but is excluded from the decision making process and does not have a vote in these negotiations. Due to this, the EU can enter into an FTA with another country that Turkey is subject to, but might be detrimental to its interests. For example, the FTA with the new country would be binding to Turkey, but the other country need not honor this when dealing with Turkey. Clearly, this is a double standard and not ideal for Turkey.
Due to these issues with the EU and slowing demand in the developed world, Turkey has been diversifying its interests in the global economy. It has been increasing its trade with Russia, former Soviet Union nations, Saudi Arabia, Egypt, and the Balkans. It has entered into many FTAs with countries in Eastern Europe and the Middle East. This makes since for Turkey as these regions have growing demand, are close geographically to Turkey, and have some of the same characteristics as it does (religion, history, culture).
Foreign Direct Investment (FDI) was close to $90 billion during the period of 2002-2009.[xxix] In general, Turkey has tried to promote an environment to attract FDI. Its laws state that domestic and foreign capital will be treated the same way. The majority of the economy is open to domestic investment, direct foreign investment, and joint ventures between domestic and foreign investors. There are relatively no restrictions on foreign capital, though there are some exceptions. Real estate trading and fishing are basically closed to foreign investors. In addition, there are restrictions placed on how much foreign investors’ can own in certain industries. These industries include: media, ports and maritime transportation, oil, and mining. These restrictions are mainly due to domestic security reasons.
Capital is mostly free to move in and out of Turkey. Profits, fees, and repatriation of transferred funds are guaranteed. Foreign employees and expatriates are legal and often utilized by firms operating inside of Turkey. Licenses and patents are generally protected by the Turkish government. Basically, foreign investment and participation in all major sectors is promoted in Turkey, though there are some exceptions. Foreign investors have played a key role as Turkey has privatized its economy over the recent decades.
Throughout most of Turkey’s modern history up until 1981, a series of different fixed rates were used for the country’s currency, the lira. Turkey has experienced very high inflationary rates through most of its history. The lira has been notorious for devaluations and loss of purchasing power. In 1981, the Turkish government switched to a crawling peg policy. However, this did little to stem inflation. In the mid-late 1990’s the monetary policy was switched to more of a managed float with the lira. Then the financial crisis of 2001 hit Turkey and again the policy shifted, this time to a free float.
In 2005, the government dropped 6 zeros from the lira and the “new lira” was introduced. Since 2005, the currency has been relatively stable, until recently. The increased stability in the latter part of the last decade can be attributed to the free float system currently being utilized, Turkey’s developing status as a player in the global economy, and large amounts of FDI. However, the large amounts of FDI have begun to work against Turkey as the global economy has cooled.
Recently, Turkey’s central bank has been intervening to try and strengthen the lira.[xxx] The central bank has been purchasing its own currency as opposed to raising interest rates, which could choke growth. However, Turkey has relatively low levels of foreign exchange reserves, so this could prove to be fruitless effort. The lira, like many other emerging markets economies has experienced outflows due to the recent fears of a further global slowdown and concerns over the Euro zone sovereign debt issues. These concerns have led many investors to shed assets in emerging markets such as Turkey and take risk off the table. This has forced downward pressure on the lira.
The Central Bank seems to view this action as justified as they perceive that there is speculative activity by traders against the lira. Turkey’s Central Bank is looking to try and dampen the volatility of the lira’s exchange rate. With a history of inflation, Turkey’s central bank seems determined to try and do what it can to protect the value of its currency.
The global economic and financial crisis that began in September 2008 changed Turkey’s short-term outlook considerably. When the CPS was prepared in 2007, Turkey had enjoyed six years of strong economic growth, averaging 6.8 percent annually during 2002-07, and was set on a path of continued robust growth. The global crisis triggered a major downturn in the real economy: output and trade fell substantially, unemployment rose sharply, incomes fell and poverty increased. In Turkey, the main impact of the global financial crisis and economic downturn has been on the real economy: export, production and output, and jobs. When the CPS was under preparation in 2007, Turkey was on a path of robust, export and private sector-led growth, building on 6.8 percent average annual GDP growth between 2002 and 2007.
In 2008 this picture changed, with GDP growth of only 0.9 percent, implying stagnant per capita income, and a forecast for 2009 of a 6 percent contraction. Turkish exports contracted by nearly a third in the first eight months of 2009 compared to a year earlier, as Turkey’s main export markets in Europe experienced a severe recession. The hardest hit industrial sectors have been the automotive sector (output contracted by more than 40 percent y/y in the first eight months of 2009), metal products (27 percent), refined petroleum products (29 percent), radio/TV/communications (18 percent), and electrical machinery (22 percent).
Turkey’s financial sector has proved to be an underlying strength. Turkish banking had already undergone a major reform and restructuring after the 2001 crisis and, with only moderate levels of consumer credit and no “toxic assets”, it was relatively well positioned to withstand the turmoil provoked by the events of late 2008. The Government tapped the Eurobond market in July 2009 with a well subscribed USD 1.25 billion sovereign issue. In total, during January – October 2009 the Treasury has been able to issue Eurobonds in an amount of USD 3.75 billion at improving conditions.
A global recovery and some economic stimulus measures are supporting Turkey’seconomy. The government’s response to the economic downturn has combined monetary easing with FX liquidity and confidence-building actions in the financial sector, some employment measures, and temporary tax cuts (see below). In part due to these measures, the economy now shows signs of bottoming out. Industrial production, adjusting for working days and seasonal patterns, increased slightly (0.8 percent, m/m) in August. The business confidence index rose above 100 (the threshold between optimism and pessimism) in July for the first time since May 2008, but then came down gradually to 94 percent in October 2009. These signals, allied with signs of a weak recovery of demand in some of Turkey’s export markets (most notably the euro zone), suggest grounds for cautious optimism in 2010.
Turkey took several actions to cushion the impact of the recession on employment, some of which can also help begin to address Turkey’s major long-term structural employment challenge, which relates to demographics and skills. The Government first (i) extended an incentive scheme for firms to offer jobs to women and young people until 2010; (ii) lengthened the time period for which workers can claim short-term benefits from the Unemployment Insurance Fund; and (iii) significantly increased targets for the delivery of active labor market programs. Additionally, a further package (May 2009) included both structural measures—most importantly increased flexibility for private temporary work agencies (the draft law is being revised after the President’s veto)—as well as a public works scheme, a new apprenticeship program for high school graduates, and further increases in active labor market program delivery. Combined with earlier measures that supported the hiring of first-time job-seekers, these actions can be expected to benefit population groups with low employment rates (young and women).
In its 2010-12 Medium-Term Program (MTP) the Government has introduced the framework for the transition to post-crisis consolidation, and debt sustainability is being addressed. The MTP targets ambitious but achievable fiscal goals and the stabilization of public debt as a share of GDP. The economic downturn has increased Turkey’s public debt to GDP ratio and there are moderate risks to Turkey’s public debt burden. Under the MTP, total gross public debt (EU definition) is projected to peak at 49% in 2010, before stabilizing in 2011 and then declining to 47.8 percent in 2012. Key fiscal measures supporting this debt reduction are limiting government personnel expenditures, cost containment in the health system, and revenue increases in 2010.
Stress testing by World Bank staff suggests that even under adverse scenarios the gross public debt to GDP ratio would remain below the EU Maastricht criterion of 60 percent of GDP.4 The rise in debt ratios underlines the importance of the measures underpinning Turkey’s fiscal readjustment. According to the MTP, starting in 2011, public financial management will be conducted in line with a fiscal rule, whereby the public sector deficit will be set in line with a debt sustainability framework over the medium- to long-term.
Strong implementation of the fiscal rule, along with other measures in the MTP, should allow Turkey to reproduce, as the economy gradually recovers in the coming years, its proven track record of reducing the public debt burden during the high economic growth period of 2002-08. Finally, the economic slowdown has for now removed the main source of pressure – the current account deficit – on Turkey’s external debt dynamics in recent years. The gradual economic recovery assumed in the MTP and the associated external financing requirements pose no threat of a rapid escalation of public or private external debt in the near future.
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