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Turkish Economic Developments in the
Context of the Lisbon Strategy
“Recent Developments in The Turkish Economy”
Eve Paarendson & Ekrem Keskin
Kayseri, July 2006
EP-EK; EU-Turkey:ESC
July 2006
0
Economic Policy Framework
•Turkey is an open economy
•Capital flows are free, no exchange rate restrictions for investors
•No discretionary regulation for international investors
•The public sector has played a dominant role in the economy
•Inflation is still high for implementing of free market economy efficiently
•Despite the positive changes recently, long term stability is still concerned
•Unemployment rate is notably high
•Financial sector is small and has low degree of deepening; the state-owned banks
account one-third of the market.
EP-EK; EU-Turkey:ESC
July 2006
1
Main features of the economy
•Population is 73 million, second largest in the EU
•GNP is Euro 298 billion, seventh biggest in the EU
•Income per capital is Euro 4,103, the lowest before Romania and Bulgaria
•Foreign trade volume to GNP is 52
•Trade with the EU accounts for 50 of the total
•Trained young and dynamic population, skilled entrepreneurs using high
technology
•Strong ties and easy access with in the region which may be called “sleeping
beauty”
•Since 2001, developments have sustained confidence gradually, and led to better
expectations
EP-EK; EU-Turkey:ESC
July 2006
2
Main targets of the economic policy
•Setting stable rules and institutions; eliminating discretionary
measures for well functioning market economy
•Undertaking fiscal responsibility, focusing to reduce debt to GNP
ratio through primary surplus
•Curbing inflation, sustaining price stability and financial sector
stability for channelling sources to private sector, to reach an annual
growth rate of 5 percent,
•Improving fiscal transparency and ensuring better management in
the public sector, increasing role of private sector and foreign capital
inflows
EP-EK; EU-Turkey:ESC
July 2006
3
Main targets of economic policy
•Strengthening financial sector
•Reaching sustainable stability through structural reforms;
shrinking the size of the public sector, social security, widening tax
base, bankruptcy law.
• Meeting the EU main economic criteria by 2008
•Improving sovereign credit ratings, currently BB•Stronger institutions and rules for market economy.
EP-EK; EU-Turkey:ESC
July 2006
4
Recent developments
• Macro economic policies in conjunction with a positive
international environment led to economic performance to
improve considerably since 2002.
• Disinflationary monetary and tight fiscal policies supported by
some the structural reforms created an environment for higher
growth led by the private sector.
• Capital inflow and foreign direct investment increased.
• The start of accession negotiations further reinforces the
dynamism of Turkey to complete economic reforms enhancing
Turkey’s integration with the EU.
EP-EK; EU-Turkey:ESC
July 2006
5
Selected macro economic outcomes of the
recent developments
EP-EK; EU-Turkey:ESC
July 2006
6
Inflation has came down historically, the lowest during the free
market economy although declining trend halted recently and
reversed slightly.
Inflation (yoy,%)
35
30
25
20
15
10
5
0
02
03
04
Wholesale
EP-EK; EU-Turkey:ESC
05
06 prg
07
08
Consumer
July 2006
7
One of the main reasons behind these positive outcomes was the
tight fiscal policy which led to a substantial decline in PSBR and
budget deficit
Public sector balance and budget balance
(as % of GNP)
5
0
02
03
04
05
06 prg
-5
-10
-15
Public sector balance
EP-EK; EU-Turkey:ESC
Budget balance
July 2006
8
Public sector debt stock to GNP has declined steadily
Public sector debt as % of GNP
90
85
80
75
70
65
60
02
03
EP-EK; EU-Turkey:ESC
04
05
06 Prg
07
08
July 2006
9
Banking sector also expanded loans to private sector as
government reduced its borrowing
Public sector borrowing requirement and
banking sector loans (As % of GNP)
33
18
31
29
13
27
25
8
23
21
3
19
17
-2
99
00
01
02
03
Public sector borrowing requirement
EP-EK; EU-Turkey:ESC
04
05
15
Loans
July 2006
10
Eased pressures on domestic sources and increased
capital flows led to better environment for private sector
investments
Fixed capital investment (as % of GNP)
22
20
18
16
14
12
10
02
03
Total
EP-EK; EU-Turkey:ESC
04
05 exp
06 prg
Private
July 2006
11
Sustainable growth; over the long term average
GNP growth (%)
35
30
25
20
15
10
5
0
02
03
04
in TL terms
EP-EK; EU-Turkey:ESC
05 exp
06 prg
07
08
in USD terms
July 2006
12
Income per capita in USD terms almost doubled in 2005
from 2002
Income per capita (USD)
6000
5500
5000
4500
4000
3500
3000
2500
2000
02
EP-EK; EU-Turkey:ESC
03
04
05 exp
06 prg
07
08
July 2006
13
Despite higher level of income, savings in the private
sector fell dramatically.
Savings (As % of GNP)
26
24
22
20
18
16
02
03
Total
EP-EK; EU-Turkey:ESC
04
05 thm
06 prg
Private sector
July 2006
14
Private sector gave savings gap since 1986, while public
sector’s gap narrowed further; total savings gap widened
sharply.
Savings gap (as % of GNP)
15
10
5
0
-5
02
03
04
05 exp
06 prg
-10
-15
Savings balance
EP-EK; EU-Turkey:ESC
Public
Private
July 2006
15
As a result, current account deficit widened rapidly;
mainly due to strong domestic demand fuelling for
imports.
Current account (as % of GNP)
0
-1
02
03
04
05
06
-2
-3
-4
-5
-6
-7
EP-EK; EU-Turkey:ESC
July 2006
16
CB fx reserves recovered substantially
CB fx reserves and ratio to short term external debt
%
65
60
55
50
45
40
35
30
25
180
160
140
120
100
02
03
04
Fx reserves (USD bn)
EP-EK; EU-Turkey:ESC
05
06 May
CB reserves/st debt (%)
July 2006
17
Although better economic performance created new jobs,
unemployment rate has remained high due to labour force saving
investment and rising participation rate.
12
Unemployment rate and
Real wage index in private sector
%
Index (99=100)
95
11
90
10
9
85
8
02
03
Index
EP-EK; EU-Turkey:ESC
04
05
Unemployment rate
July 2006
18
Turkey; labour force status by non-institutional civilian population
2005
Unit
Non-institutional civillian population
Population over 15 years
Labour force
Employed
Labour force participation rate
Unemployment rate
Non-agriculture unemployment rate
thosand person
thosand person
thosand person
thosand person
%
%
%
Total
71.611
51.202
24.034
21.332
47
11
14
Urban
44.811
32.085
14.624
12.691
46
13
14
Rural
27.274
19.117
9.411
8.641
49
8
16
Source: Turkish Statistical Institute (Türkstat)
EP-EK; EU-Turkey:ESC
July 2006
19
Turkey; employment by activity
15+ age, % share in total
2005
Total
Agriculture
Industry
Construction
Services
EP-EK; EU-Turkey:ESC
Total
Urban
100
26
21
5
48
Rural
100
4
28
6
62
July 2006
100
58
11
3
29
20
Turkey; labour force status by educational level
2005
Total
Labour
force
Illeterate
Less than high school
High and vocational high school
Higher education
EP-EK; EU-Turkey:ESC
thosand person
thosand person
thosand person
thosand person
1.178
14.656
5.220
2.981
Labour force Unemployment
particip. rate (%)
rate (%)
19
46
57
80
July 2006
6
11
14
10
21
Challenges for the near future
•Quick preparation for internal and external shock, elimination imbalances,
keeping reform on track, stability seeking macro economic policies for growth,
savings, investments and higher employment.
•Confidence of households and investors depends solely on the success of
disinflation.
•Fiscal policies must target discipline in public finance
•Wage increase should be forward looking and follow productivity.
•Education and training of young generation
•Higher spending on research and human resources.
•Encourage investments in financial sector
EP-EK; EU-Turkey:ESC
July 2006
22
Challenges for the near future
•
Competitive taxation policy and fighting for unrecorded economy.
•
Regulation and implementation in line with international best practice, to
sustain confidence, to encourage investment based on knowledge-based
innovation, high technology, education
•
Increased competition in all areas of activities
•
Rules of law and better implementation of rules
•
Improve investment environment for domestic and foreign direct investors
•
Infrastructure investments in all regions to curb regional disparities
EP-EK; EU-Turkey:ESC
July 2006
23
Thank you.
According to the Government programme public sector
deficit targeted to reduce to 3% of GDP by 2008
Government deficit
As % of GDP
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
-11
-12
-13
-14
-15
-16
-17
-18
-19
-20
95
.
.
.
.
'00
.
Turkey
EP-EK; EU-Turkey:ESC
.
.
.
'05
.
.
'08
EU-15
July 2006
25
Inflation is down 4 percent in 2008
Inflation
100
75
50
25
0
95
.
.
.
.
'00
.
Turkey
EP-EK; EU-Turkey:ESC
.
.
.
'05
.
. '08
EU-15
July 2006
26
Government debt is likely to meet EU level in 2008
Government debt
As % of GDP
120
110
100
90
80
70
60
50
40
95
.
.
.
.
'00
.
Turkey
EP-EK; EU-Turkey:ESC
.
.
.
'05
.
.
'08
EU-15
July 2006
27
Selected banking sector inditacors
EU-25
2004
Income per capita
Total assets per capita
Total assets to GDP
Loans to GDP
Housing loans to GDP
Consumer credits to GDP
Loans to deposits
Number of credit institutions
Number of branches
Number of employment
Euro
Euro
%
%
%
%
%
per inhabitants
per inhabitants
per inhabitants
Turkey*
2005
22.508
63.027
4.225
3.468
280
118
40
8
123
81
32
3
6
65
54.965
2.306
151
1.538.298
11.574
547
* Figures for deposit and invest&developmen banks
EP-EK; EU-Turkey:ESC
July 2006
28