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Turkey – why FDI? Status quo and salient factors Simon Quijano-Evans, Senior Economist, CAIB/HVB Group [email protected] Why does Turkey need FDI? • To sustain future economic growth rates • To increase competition and maintain productivity at home • To cater for a growing population and labour force • To cover a wider current account deficit, without raising foreign debt • To secure net FDI as Turkish firms increasingly look to invest abroad • To maintain competitiveness versus EU accession peers • To help secure a peaceful development in the surrounding region 2 Turkey – market volatility has calmed – pre-condition for FDI T-bill benchmark paper compound yield 120% Crisis f ollow ing 110% f ree-f loat 100% 9/11 90% Govt . crisis 80% Iraq crisis IM F loan f ree f loat delay 70% 22 Feb IM F loan 60% 50% IM F loan delay US-Turkey t ensions PM t aken ill 40% Banking crisis 30% Govt .-M il. Tensions,Cyprus issue et c Recovery period Nov elect ions & EU euphoria 20% Oct -05 Jul-05 Apr-05 Jan-05 Jul-04 Apr-04 Jan-04 Oct -03 Jul-03 Apr-03 Jan-03 Oct -02 Jul-02 Apr-02 Jan-02 Oct -01 Jul-01 Apr-01 Jan-01 Oct -00 10% Oct -04 Dec Eur. Council Source: Reuters, HVB Group 3 Factors of relevance to FDI 1. First increase confidence at home 2. Then look to secure foreign investor confidence 3. Foreign investors need reform anchors – EU and IMF 4. Do lower corporate tax levels make a difference to FDI? 5. Important to look at Turkey from a regional perspective 6. A young population – plenty of water – room for infrastr. investments 4 First increase confidence at home – Strong rise in TRY deposits FX Deposits of Residents in USDbn (LS) TRY Deposits of Residents in TRYbn (LS) Ratio of FX deposits to total deposits (RS) 160 60% 140 55% 120 50% 100 80 45% 60 40% 40 35% 20 Sep-05 Jun-05 Mar-05 Dec-04 Sep-04 Jun-04 Mar-04 Dec-03 Sep-03 Jun-03 Mar-03 Dec-02 Sep-02 Jun-02 30% Mar-02 0 Source: Central Bank of Turkey, HVB Group 5 First increase confidence at home - Substantial domestic investment Components of GDP (% y-o-y real change) 60% 50% Gross fixed capital formation 40% 30% 20% 10% 0% -10% -20% Priv. Cons. Exports Govt. Cons. Q101 Q201 Q301 Q401 Q102 Q202 Q302 Q402 Q103 Q203 Q303 Q403 Q104 Q204 Q304 Q404 Q105 Q205 -30% -40% Source: Central Bank of Turkey, HVB Group 6 Factors of relevance to FDI 1. First increase confidence at home 2. Then look to secure foreign investor confidence 3. Foreign investors need reform anchors – EU and IMF 4. Do lower corporate tax levels make a difference to FDI? 5. Important to look at Turkey from a regional perspective 6. A young population – plenty of water – room for infrastr. investments 7 Then increase confidence abroad – Huge jump in portfolio investment 30 Total foreign holdings of Turkish domestic FI instruments and equities (float) in USDbn 25 20 Equities (float) Note: as of May-04, Takasbank (settlement & custody bank) data for equities, which differs from ISE data that was stopped in Feb-05 15 10 TRY & FX-indexed domestic debt 5 FX-denominated domestic debt Apr-02 Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 0 Source: Central Bank of Turkey, ISE, Takasbank 8 Then increase confidence abroad – LT loans on the rise, FDI follows 10,000 Net FDI net foreign long-term loans to private sector in Turkey 8,000 in USDmn 6,000 4,000 2,000 0 2 J a 004 nAu g0 5 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 19 95 -2,000 Source: Central Bank of Turkey, HVB Group 9 Factors of relevance to FDI 1. First increase confidence at home 2. Then look to secure foreign investor confidence 3. Foreign investors need reform anchors – EU and IMF 4. Do lower corporate tax levels make a difference to FDI? 5. Important to look at Turkey from a regional perspective 6. A young population – plenty of water – room for infrastr. investments 10 Investors need reform anchors – EU talks & IMF program Duration of accession talks in yrs 8 From start of talks to EU accession 7 6 5 Maastricht debt levels by end-07 4 CAIB baseline scenario 3 2 1 100% Public sector gross debt/GNP IA U AN IA M AL T PO A LA N D R O M A SL NIA O VA KI SL A O VE N IA TH TV LI LA AR Y G N IA U N H TO ES R U . YP R EP C H ZE C C BU LG 80% S 0 AR IA 90% 70% EU talks quicker than others? 60% 50% We see possibility for EU accession 40% around 2012 30% 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E Source: European Commission, CBT, HVB Group. 11 Note: For BG and RO, assumption is they join EU in Jan-07 May-05 Sep-04 Jan-04 May-03 Sep-02 Jan-02 May-01 Sep-00 Jan-00 May-99 Sep-98 Jan-98 May-97 Sep-96 Jan-96 Investors need reform anchors – bring positive ratings dynamics S&P CREDIT RATING 1st wave negotiation candidates (CZ, EST, HU, PL, SL) A 2nd wave negotiation candidates (LAT, LIT, SK) BBB BG & RO BB B Turkey Start of 1st wave of EU accession negotiations Start of 2nd wave of EU accession negotiations 12 Source: S&P, Bloomberg, HVB Group Factors of relevance to FDI 1. First increase confidence at home 2. Then look to secure foreign investor confidence 3. Foreign investors need reform anchors – EU and IMF 4. Do lower corporate tax levels make a difference to FDI? 5. Important to look at Turkey from a regional perspective 6. A young population – plenty of water – room for infrastr. investments 13 Do lower corporate tax levels make a difference to FDI? • Not at first sight, but picture 9% blurred by: 8% • Extra taxes (municipal) • Tax holidays • So also important: • Red tape and legal costs • Cost of labour FDI/GDP (Avg 2000-05) • Special tax incentives • Education of workforce • Stage of privatisations BG SK 7% CZ 6% CR 5% 4% RO HU 3% LT 2% PL SL 1% TR 0% 10% • Domestic company landscape 15% 20% 25% 30% Corporate tax rate (Avg 2000-05) Source: Finance Ministries, Reuters, HVB Group 14 35% CEE Corporate tax rates as of Jan-2006 35% 30% 25% 20% 15% 10% 5% Li th ua Bu nia lg a H ria un ga R om ry an Po ia la Sl nd ov ak C ia C roa ze tia ch R Sl ep ov en ia EU -2 Tu 5 Eu rke ro y -z on e 0% Source: Finance Ministries, Reuters, HVB Group 15 Factors of relevance to FDI 1. First increase confidence at home 2. Then look to secure foreign investor confidence 3. Foreign investors need reform anchors – EU and IMF 4. Do lower corporate tax levels make a difference to FDI? 5. Important to look at Turkey from a regional perspective 6. A young population – plenty of water – room for infrastr. investments 16 Turkey’s purchasing power in line with Bulgaria and Romania… GDP per capita - in EUR in 2004 GDP per capita - Purchasing Power Standard (EU-25=100) 140 35,000 121 30,000 107 28,900 26,400 100 25,400 25,000 22,300 82 73 20,000 10,000 6,400 5,100 Source: Eurostat, HVB Group ria lga Bu ma nia y Ro rke Tu d l NM S1 0 rtu ga Po Au 25 3,370 2,700 2,500 str ia y rke Tu ria lga Bu nia ma d Ro lan Po S1 0 NM al rtu g Po ce ee Gr EU rm an Ge EU -25 0 y 0 -15 5,000 str ia 20 EU 29 15 31 EU 31 rm an y 40 12,900 lan 47 Au 15,000 15,000 Po 54 60 Ge 80 ce 100 ee 109 Gr 120 Source: Eurostat, HVB Group NMS10 = 10 New EU Member States EU25 = EU15+NMS10 = All current EU Member States 17 …but GDP/capita of large part of population closer to Poland • 37mn people in the Aegean/Mediterranean/ Marmara area account for 64% of GDP (with percap GDP of € 4,170) Marmara € 4,830 18.5mn Central Anatolia € 3,310 12.4mn Black Sea € 2,540 9.0mn GDP/capita Population • Marmara comes close to level in Poland and around € 1,600 below average level of 10 New Member States • The Marmara region makes up for around 26% of the estimated 72m population and 37% of GDP • And GDP/GNP data to be revised soon in line with ESA95 standards Aegean € 3,870 9.5mn Mediterr. € 3,140 9.3mn S.E. Anatolia € 1,740 7.0mn E. Anatolia € 1,540 6.5mn Source for Map: http://www.e-cografya.com Data Source: Central Bank of Turkey, with forecasts by CAIB 2004 estimates 18 Factors of relevance to FDI 1. First increase confidence at home 2. Then look to secure foreign investor confidence 3. Foreign investors need reform anchors – EU and IMF 4. Do lower corporate tax levels make a difference to FDI? 5. Important to look at Turkey from a regional perspective 6. A young population – plenty of water – room for infrastr. investments 19 Turkey’s population will remain young Age bracket 15-59 to rise to 63% by 2025 in TR and fall to 55% in GER Turkey to make up for 15% of EU-29 population in 2025 By 2025, TR median age to rise to 33 from 25 - In GER to 48 from 40 Share of EU-29 population in % % of Population between age 15-59, in: 65 2000 2025 20% 2050 Turkey/EU29 18% 60 Germany/EU29 75% 16% 14% 55 80% 70% 12% 10% 50 65% 8% 60% 6% 45 4% 2% 40 55% EU15/EU29 0% Turkey Germany W.Europe USA 50% 1950 1975 Source: United Nations, HVB Group EU29=EU25+Bulgaria+Croatia+Romania+Turkey. 20 TR=Turkey, GER=Germany 2000 2025 2050 There’s plenty of water – and potential elsewhere • • Turkey has abundant freshwater – an economic imperative Internet and mobile telephony have potential – require investments Total freshwater resources – yearly avg. 250 Internet access and mobile phones 25,000 cubic metres (bn) mobile phone subscriptions per 100 inhabitants 80 cubic metres per capita 200 90 20,000 70 60 60 150 15,000 100 10,000 56 47 50 47 45 40 34 26 30 17 20 50 5,000 14 14 12 7 10 5 % of households with internet access ia key lga r Bu Tur ia uan ary Lith nd Hu ng Po la ece Gre al rtug Po nce Fra a ria Au st eni Slo v EU -15 ny rma Ge Hu U K ng ary Sp a Au in s Slo tria va k Gr ia ee c Po e l Ro and ma Slo nia ve Cz nia ec hR . Fr Tu rke y an Ge c e rm a Sw ny ed en Ita ly 0 UK 0 0 Source: Eurostat, HVB Group Source: Eurostat, HVB Group Internet data for 2004, except Bulgaria and Poland for 2003. Phone data 2002 21 Conclusions • FDI needed to sustain future growth rates and EU convergence • Government has secured domestic confidence… • …and is now securing foreign investor confidence • Low financial/political volatility is imperative for securing FDI • Corporates require transparency on taxation etc & need reform anchors • Plenty of room for public sector infrastructure investments • FDI is important to secure Turkey’s role in the region 22 Important Information Analysts' Certification The analysts certify that their views regarding the companies and the securities in this report are truly expressed and that they have not received nor will receive direct or indirect compensation in exchange for publishing specific views or recommendations in this report. 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