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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