The Turkish Stream pipeline project, which will carry Russian gas 910 kilometres across the
Black Sea to Turkey’s Thrace region and then on to Europe, means a lot of different things to
To the Russians, it is a strategic project in the vital interests of Russia, since it will act as an
alternative to the current pipeline which passes through Ukraine, which is not aligned with
Russia following the occupation of Crimea and Eastern Ukraine. The project had originally been
mentioned by Russian President Vladimir during a visit to Turkey in 2014 at the height of the
Ukraine crisis. Since the cancellation of the South Stream project , which was to carry natural
gas from Russia directly to Bulgaria through the Black Sea, as result of EU objections, the
Turkish Stream project has become of vital importance to Russia.
To the Turks, the project has much less importance since Turkey is pinning more hopes for a
more secure source of gas from the pipeline being built from Azerbeycan. The tension between
Turkey and Russia after the downing of a Russian jet by a Turkish jet fighter towards the end of
2015 resulted in Russia imposing economic sanctions on Turkey. Since most of Turkey’s natural
gas is being supplied from Russia this was a wake-up call for Turkey. Secure alternative
supplies were essential.
However, the need to reconcile with Russia was of paramount importance to Turkey as it was
fast running out of friends. Russian President Vladimir Putin pushed for the Turkish Stream
project, and he got it. The project agreement was signed between Turkey and Russia on
October 10th, 2016, and ratified by Putin on February 7th, 2017. Project completion was
planned for the end of 2019.
Putin lost no time in ordering Gazprom, the Russian gas producer and distributor firm
responsible for implementing the project, to start laying the Turkish Stream pipeline, and work
started in early May 2017 on the Russian Black Sea coast. The Pioneering Spirit vessel, a 382
metre long and 124 metre wide vessel, which will carry out the laying of the Black Sea offshore
section and was headed to Anapa on the northern Black Sea coast in Russia, arrived at the
Çanakkale Strait at the end of May. The vessel was due to arrive in Anapa on June 2nd.
In May 2017, Russia also started talks with European countries to determine the entry point of
the second pipeline of the Turkish Stream project to Europe. There were two main alternatives
available : Greece or Bulgaria. Bulgaria was chosen.
On June 23rd, aboard the Pioneering Spirit vessel, Putin rang Turkish President Recep Tayyip
Erdoğan to inform him that the pipe laying work of the Turkish Stream project had started in
the deep water section of the Black Sea.
Hungary signed an agreement with Gazprom on July 5th to link the country with the Turkish
Stream pipeline by the end of 2019. Sanctions implemented at the beginning of August
targeted Russia’s energy sector, and Gazprom said that these may cause some delays in its
major gas projects, including Turkish Stream. However, it announced that there was no risk
to the completion of the project.
Few objections to this project have been put forward by Turkey and one must assume that
Turkey’s share of the financing of the project, the estimated cost of which is Euros 11.4 billion
(USD 12.9 billion) is not prohibitive. Turkey will now have the luxury of a third entry point for
natural gas from Russia after Blue Stream and the pipeline through Ukraine. Turkey no longer
wants to rely just on Russia for receiving energy supplies, and the completion of the Trans
Anatolian pipeline from Azerbeycan, the planned expansion of storage space for liquefied gas,
and a possible pipeline to Israel to tap its reserves all offer Turkey its desired more flexibility
in choosing energy sources.
The Turkish Stream project has a planned capacity of 31.5 billion cubic metres of gas, of
which 15.75 billion cubic metres is expected to be used by Turkey. One pipeline will supply
the Turkish Market, while the other pipeline will continue on to Europe. The 910 kilometre
long pipelines across the Black Sea will landfall in Turkey at the Kıyıköy, a village in the district
of Vize in the Kırklareli province of Northwestern Turkey. From there, the pipeline will
continue 180 kilometres to Lüleburgaz.
With the added Turkish Stream project, Turkey will be closer to taking on the role as hub for
natural gas distribution in the region. This will give Turkey extra strategical importance in its
relations with neighbouring countries and natural gas suppliers and users. The Americans
want to export their liquefied gas extracted from their new found shale reserves, and they
see an opportunity to snatch some of Russia’s share of the European market because of
sanctions imposed on Russia as a result of its involvement in Crimea and Ukraine, and Europe’s
fear of being too dependent on Russia for its energy supplies. The energy game in Europe is
becoming very complicated and at least Turkey’s involvement in this game will be from a
position of strength.
The Turkish army has the biggest army in Europe and the Middle East, with some 500,000 men
under arms thanks to conscription. Since the establishment of the Turkish Republic in 1923, the
Turkish army has not been involved in any foreign conflicts with the exception of the Korean War
In 1950 and Cyprus in 1974. Turkey, as a member of Nato and supplied mainly by America, never
felt any need to develop its own arms industry as it was on amicable or at least placid terms with
Matters have changed over the last decade as the Turkish President Recep Tayyip Erdoğan has
taken on a more assertive role in international affairs. Indeed, he has wanted to be seen as a
world leader and for Turkey’s position on certain regional issues in particular to be taken very
seriously. The strengthening and growth of the Turkish economy has meant that Turkey now also
has the ability and know-how to develop military equipment requiring higher technology input.
The Turkish government is now prepared to send its troops into regional conflicts if necessary,
hence its involvement in supporting FSA rebels in northern Syria and setting up a base in Qatar.
Purges of the Turkish army over the last few years and especially since the failed coup attempt
of July 2016 have left the Turkish armed forces very weak. It will take several years to create a
new effective officer corps to lead the armed forces.
A similar situation faces the military hardware at the disposal of the Turkish armed forces.
It is painfully clear that its tanks and other military vehicles for example have become much
outdated and not suitable or adequate for warfare against the new types of confrontation
involving IED’s, suicide bombers and insurgents with effective and deadly handheld weapons.
Since a large proportion of military hardware, spare parts and other equipment comes from
abroad, there is always the possibility that pressure on Turkey may be applied should its new
foreign policy strategies face disapproval.
It is this reliance on foreign suppliers for military equipment which is troubling the Turkish
authorities. Much discussion has arose recently about Turkey developing its own indigenous
military hardware. Indeed, Erdoğan, speaking in Istanbul’s Tuzla shipyard at the launch
ceremony of the Kıaliada Corvette, domestically manufactured under the Turkish Armed
Forces’s national warship development project (MILGEM) on July 3rd, said that Turkey’s
developing indigenous arms industry had defied a “hidden embargo” on the country and
that Turkey would not give up on realising its high ambitions for the defence industry.
The Kınalada corvette is one of five naval corvettes to be built at the Tuzla shipyard and
will become operational by 2020. The indigenous “Ada-class” naval corvettes of 99.5
meters in length have been designed to carry out various missions such as surface warfare,
anti-submarine warfare, air defence, surveillance and reconnaissance, command-control
and asymmetric defence warfare missions. The first was the TCG Heybeliada (F-511),
launched in 2008. The ships, which are named after the Princes’ Islands off Istanbul, are
designed for search and rescue, patrol and anti-submarine warfare duties and are armed
with a 76 millimetre gun, missiles and torpedoes and carry a Seahawk helicopter. The ships
have a displacement of 2,400 tons, a maximum speed of more than 29 knots (33 miles an
hour) and a range of 3,500 nautical miles.
Erdoğan added that Turkey has completed 14 warship projects and is set to finalize 10
further projects in this field. He said that he was proud of Turkey’s ability to design and build
military ships, especially submarines, and that “we will also build our own aircraft carriers”.
Turkey’s Prime Minister Binali Yıldırım said at a logistics support ship launching ceremony on
Julu 8th that “Turkey’s domestic contributions to the defence industry have surpassed 60%”,
a big increase from the percentage of 24% some 15 years ago. He added that Turkey has
completed 14 military ship projects in the last 15 years and provided more than USD 30
billion to the national defence industry in the same period.
On June 16th, Ismail Demir, undersecretary for the Turkish defence industry, provided the
state-run Anadolu Agency with details as to the growing technology capabilities of the
defence sector. Demir said that Turkey aims to mainly use locally designed technology by
2020 in its defence industry.
Demir stated that efforts to support locally manufactured products and a focus on research
and development have brought record investment in the defence industry. He said that the
Defense and Aerospace Industry Manufacturers Association’s 2016 performance report had
recorded that in 2015, USD 904 million had been earmarked for product and technology
development in the defence industry, and that this figure had risen by 39% in 2016 to
USD 1.254 billion. In the 2016 budget, USD 1.14 billion had been allocated to product
development, and USD 110 million for technology development. The budget figures
earmarked for product and technology development for 2014, 2013 and 2012 were USD 887
million, USD 927 million and USD 772 million respectively.
Improvement in product and technology development reflected positively on expenditures
made from equity capital. In 2015, such expenditures stood at USD 287 million, and in 2016
rose by a record 79% to reach USD 513 million. Expenditures from equity capital for product
and technology development were USD 200 million in 2012, USD 237 million in 2013, and
USD 350 million in 2014. State support for the defence industry increased to USD 741 million
in 2016 from USD 616 million in the previous year.
According to the Defence and Aerospace Manufacturers Association’s (SASAD) 2016
performance report published on June 13th, Turkey’s defence industry grew 22% in value to
USD 6 billion in 2016. It stated that exports in the defence and aviation industries were almost
USD 1.7 billion in 2016, with USD 585 million relating to USA and USD 450 million to Europe.
According to the report, In 2016, Turkey received USD 12 billion worth of new orders, an
increase of 55% compared with the previous year’s USD 7.7 billion. The number of employees
in the defence industry was given as 35,000, of which over 10,000 were engineers.
The Defence News’ Top 100 Global Defence Companies List is a prestigious list of the world’s
top 100 defence companies, and three Turkish companies made their mark in this list. Aselsan
climbed up to number 58, closely followed by Turkish Aerospace Industries at number 61 (up
from 72 in the previous year), and missile manufacturer Roketsan at number 98 (entering the
list for the first time).
Aselsan, of which the Turkish Armed Forces is the major shareholder, in its annual report for
2016, declared that its turnover in 2016 had increased 36% to surpass USD 1 billion. The
company employs 5,000 people and as of 2016 yearend had an outstanding order backlog of
USD 6.2 billion. It exports to at least 60 countries in five continents, and has joint ventures in
Azerbeycan, the United Arab Emirates, Kazakhstan, Jordan, Saudi Arabia and Malaysia. The
company states that it provides solutions to its customers in fields such as military and civil
communication systems, radar and electronic war systems, avionics systems, defence and
weapon systems, and naval and security systems.
Turkish Aerospace Industries (TAI), or TUSAŞ as it is known in Turkey, which entered the Top
Global Defence Companies List in 2011 at 83 to reach today’s ranking of 61, has proven itself
through products such as ANKA unmanned aerial vehicles, ATAK helicopters for the Turkish
army, and Hürkuş training planes, and offers services in the areas of aircraft and space
systems, and logistic solutions. TAI’s turnover increased from USD 886 million in 2015 to over
USD 1 billion in 2016, and aims to reach USD 10 billion by 2026.
TAI’s indigenous basic trainer aircraft, Hürkuş, made its first public flight abroad at the Paris
Air Show on June 19th. Hürkuş earned its EASA certification last year and new variants of this
aircraft are under development. TAI also exhibited its drone ANKA and its attack helicopter
ATAK at the air show.
Roketsan, new in the Top Global list at 98 with a USD 364 million turnover, manufactures
land missile systems, air defence systems, naval systems, precision guided missiles and
munitions, ballistic protection systems, and fuse systems.
Through the state-run Anadolu agency, it was announced on June 9th that the Turkish
Armed Forces (TSK) purchased Roketsan’s Omtaş Medium Range Anti-Tank Weapon
System following successful tests of the system carried out. TSK acquired one Omtaş
launching system and anti-tank missiles on June 2nd. Omtaş was developed to eliminate
armoured threats in the range of four kilometres, and it possesses two shooting modes of
fire and forget, and fire and update.
Despite efforts to develop a domestic missile manufacturing potential, there has long been a
need for Turkey to install a new national air defence system. Such a system is currently well
beyond the technological know-how of local companies. It was always assumed that the new
system would be compatible with Nato systems and would therefore be purchased from
western nations. However, tensions with the USA and Europe in recent years has led the
Turkish government to look for alternative suppliers. The first candidate was China with
which discussions had reached an advanced stage where an order could have been placed.
However, accusations that Turkey was distancing itself from the West which then put
pressure on the Turkish government seemed to persuade the latter to relent from adopting
the Chinese system.
With the normalisation of relations with Russia following the episode where Russia imposed
sanctions on Turkey following the downing of a Russian jet by a Turkish jet, the idea of
purchasing the system from Russia was broached. This then developed into full blown
discussions leading to the announcement by the Russian news agency RIA Novosti on
June 29th that Turkey had agreed to buy Russia’s S-400 air defence system. It added that
Russia saw no obstacles to buying their system in connection with Turkey’s membership of
Nato, and that barring the financial conditions regarding credit, the contract had been
The S-400, introduced in 2007, is Russia’s next-generation air defence system, carrying three
types of missiles capable of destroying targets including ballistic and cruise missiles, able to
track and engage up to 300 targets at the same time, and possessing an altitude ceiling of 27
kilometres. This system is apparently more expensive than other air defence systems
available, but the Russians appear to have agreed to transfer the related technology, an offer
which is obviously very attractive to the Turks.
In a television interview given by the Turkish Defence Minister Fikri Işık on July 4th, he
confirmed that Turkey would meet its immediate needs by purchasing the Russian S-400
system, but that they will be cooperating with France and Italy on a project to develop a
national missile defence system. He also admitted that only the financing aspect of the
Russian deal was still to be finalised.
At an address to lawmakers of the ruling Justice and Development Party (AKP) in parliament
on July 25th, the Turkish President Recep Tayyip Erdoğan announced that Turkey and Russia
had signed the deal for delivery of the S-400 missile system. Erdoğan was reacting to
concerns about the deal by the US Joint Chiefs of Staff chair US General Joseph Dunford,
who went even as far as to say that Turkey and Russia had not yet agreed on the purchase.
Erdoğan went on to say that he saw no harm in Turkey purchasing Russia’s air defence
system, and pointed out that another Nato member Greece had been using Russia’s S-300
air defence system for many years.
Another area where Turkey has made progress in developing its indigenous arms industry
is the manufacture of tanks and other armoured vehicles.
On August 8th, the Undersecretariat for Defence Industries (SSM) announced that it had
agreed to purchase 529 tactical wheeled vehicles from the BMC Otomotiv company in order
to meet the Turkish Army’s needs in areas where it is engaged in intense fighting against
terror. BMC will be providing its mine-resistant “Yeni Kirpi” armoured vehicles, which have
4x4 wheel configuration , an automatic fire suppression system, and 10-15 full armed
personnel transport capacity.
Turkey’s army needs to renew its stock of tanks with a more advanced model and there is
some confusion as to how the government will approach this issue. It had been assumed
that Otokar, a Koç Holding company, would get the order for the production of 250 Altay
battle tanks, prototypes of which had been made by the company. However, on Friday
June 9th, a statement from the company announced that their offer had been turned
down due to disagreements over some of the contract terms and pricing. On Monday,
June 12th, the Secretariat for Defence Industries (SSM) confirmed the rejection of
Otokar’s offer and Otokar’s shares fell 9.5% on Istanbul Stock Market.
Indication is awaited from the SSM as to a new tender. In the meantime however, stocks
of Otokar’s competitors, such as Katmerciler and Tümosan have seen significant rises.
Katmerciler is known for its manufacture of riot-suppression vehicles called TOMA’s and
Tümosan is a manufacturer of engines. Neither has any experience in manufacture of
armoured tracked battle tanks. The only other company in Turkey experienced in and
capable of manufacturing tracked armoured vehicles is FNSS, which is owned jointly by
Nurol Holding and a Qatari fund.
Turkey’s determination to use indigenously made military hardware will produce results
as long as the technology is available. With the exception of sophisticated fighter aircraft
and air defence systems, there is no reason why Turkey cannot be self-sufficient in this
sensitive industry. Major investments have been made and much progress made. As more
and more advanced military systems are developed in Turkey, so will the potential rise for
these to be marketed abroad.
Turkey’s clothing sector has expressed its concern over the dangers to its exports to Germany, its
biggest European export market for ready-made clothing as a result of the on-going political tension
between Turkey and Germany. Some German buyers have apparently cancelled their trips to Turkey.
This has come at a time when exports of ready-made clothing have just been showing clear signs of
improvement, following the negative effects caused by the failed coup attempt in Turkey in July 2016.
The clothing sector represents Turkey’s second largest exporter after the automotive sector. Total
clothing exports were USD 8.2 billion in the first half of 2017. Of this, some 70% was exported to the
EU with USD 2.5 billion going to Germany.
The clothing sector is not the only sector that will suffer. Total exports to Germany were USD 14.2
billion in the 12 months to June 2017 and total imports from Germany were USD 20 billion in the
same period. This makes a total USD 34.3 billion trade activity between the two countries in the 12
month period to June 2017.
Relations between Turkey and Germany have been deteriorating ever since the failed coup attempt
when Turkey accused Germany and other western countries of not showing quick and close support
for the Turkish government in those troubled times. Turkish leaders continued to lambaste Germany
for not acting against outlawed groups, whilst Germany politicians strongly criticized Turkey
regarding human rights and freedom of the press issues.
Relations between the two countries took a turn for the worst when Germany banned Turkish
ministers from campaigning in its country before the April 16 constitutional referendum in Turkey.
In retaliation, Turkey refused to allow German lawmakers to visit the Incirlik base in the southern
province of Adana, causing Germany to withdraw its Tornado aircraft stationed there. Turkey then
refused a visit to German troops based in Konya under the auspices of Nato because Erdoğan had
been refused permission to meet the Turkish community during his attendance of the G20 summit
held in Germany. The visit to Konya was subsequently allowed after the Nato Secretary-General
Jens Stoltenberg intervened to help resolve the issue.
However, with the recent arrest of 10 human rights activists, including Peter Steudner a German in
Istanbul, and the earlier arrest of a Turkish-German journalist Deniz Yücel in February, relations
between the two countries met a low point not seen in recent memory.
With only just over a month left before the general election in Germany on September 24th,
Chancellor Angela Merkel’s coalition government has felt obliged to take a harder line against
Turkey, and is indeed considering adoption of a number of economic measures in order to increase
the pressure on the Turkish government. Germany has asked the EU Commission to suspend the
process on upgrading Turkey’s Customs Union agreement with the EU and pre-accession financial
The Turkish government has woken up to the possible economic fall-out from the political turmoil
with Germany. The Turkish Prime Minister Binali Yıldırım held a meeting with senior representatives
of leading German companies in Turkey on July 27th. These companies included Bosch, Siemens,
Mercedes, Metro Group, Frankfurt Messe, and Thyssen Krupp. Yıldırım reassured the German
companies that his government did not want any harm to their interests despite the on-going
political tensions. In particular, he assured them that there is no legal investigation into German
companies in Turkey as a part of on-going probes into the Gülen movement, believed to be
behind the failed coup attempt.
The representatives of the German companies were satisfied with the positive outcome of the
meeting, and said that there were not as yet any negative effects from the political tensions, but
that they were concerned about future investments. However, it would appear that the German
government does not share this satisfaction, hence the economic sanctions it is considering.
Turkey’s Deputy Prime Minister Mehmet Şimşek, responsible for the Turkish economy, in an
interview with the Der Spiegel magazine on July 29th, has also since assured that the investments
of German companies in Turkey were safe, and that Turkey would remain an “open, liberal and
Following the recent reports in the German media that hundreds of German companies were
being investigated by the Turkish authorities on suspicion of supporting a terrorist organisation,
Şimşek said that he got a reassurance from the interior and justice ministers that there has not
been an investigation against a single German company on suspicion of terrorism financing. He
went on to explain that the Turkish authorities had only requested relevant information from all
countries via Interpol as a part of their investigation into the international business ties of local
firms owned by people linked to the Gülen movement. He said that in the list of some 9,800
companies, there were companies not only from Germany but also from more than 50 countries.
In a speech on August 12th at an opening ceremony in the western city of Isparta, Turkey, Turkish
President Recep Tayyip Erdoğan said that tension with Europe was due to European domestic
politics and relations would improve after Germany’s general election in September. Erdoğan
said that relations would normalise as soon as the elections were over, but the origins of these
tensions go much further back. Deep fundamental differences between the two countries have
surfaced and they are not going to go away because of the completion of an election. Erdoğan
should have thought about this before his own onslaught on Germany before his own referendum
election in April.
Statistics produced by countries relating to the performance of their economies are a
vital indication as to the healthiness of their economies. All kinds of investment and
financing decisions are based and depend on these statistics. Consequently, the
soundness and reliability of the calculation of these statistics are essential if investors
and financial institutions are going to feel confident in their decision making.
Turkey’s economy has earned and recieved much praise over the last 15 or so years
for the way it has developed and been managed. It has been shown as a success story
and an example of how intelligent and sensible economic policies can be successfully
implemented in an emerging market. Moreover, international investors and financial
institutions were impressed by the government institutions responsible for running
the Turkish economy, and learned to trust the forwardness and openness of their
statements and explanations regarding developments in the economy.
However, with the slowing down of the Turkish economy in 2016, especially following
the failed coup attempt, certain question marks began to arise regarding the reliability
of statistics coming out of Turkey.
On March 31st, 2017, the Turkish Statistical Institute (TÜİK) released the country’s
fourth-quarter economic growth figure for 2016 and thereby the overall rate for 2016.
The emerging figures came as a surprise. Following a contraction in the third quarter,
the Turkish economy rebounded strongly in the fourth quarter, growing 3.5%. This
resulted in an overall 2.9% growth rate for 2016.
The Turkish government was determined to show that the economy was back on track,
but there were already strong doubts as a result of TÜİK’s announcement in December
2016 of a retrospective revision of its growth related sets of data using a new
calculation method. TUİK’s new growth statistics did not comply with many other
indicators about the state of the Turkish economy. For example, the most obvious
inconsistency is between the growth and unemployment data, with the jobless rate
at 10.9% on average in 2016, with an especially fast rise in the last quarter, for which
improved growth data was proclaimed.
The introduction of a new calculation method last year resulted in a staggering upward
revision in the gross domestic product (GDP) for 2015. The revised figure stood at
USD 861 billion, a 20% increase from the original figure. With regards 2016, when the
Turkish lira figure in current prices is divided by TL 3.04, the US dollar’s average 2016
exchange rate, the GDP amounted to USD 857 billion. This placed Turkey among the
world’s 18 largest economies, with the per capita income calculated at USD 10,807,
which is USD 207 less than the figure for 2015. The Turkish government was naturally
more than happy with these figures.
Based on the USD 857 billion figure, the current account deficit of USD 32.5 billion
amounted to 3.8% of GDP, and the country’s USD 404 billion foreign debt stock at the
end of 2016 amounted to 47.1% of GDP. It was therefore seen that the unexpectedly
relatively successful growth rate of 2.9% for 2016 was achieved despite the very fragile
state of the Turkish economy, a weakening Turkish lira, continuing current account
deficits, and a high foreign debt burden.
In its calculation of the 2.9% growth rate for 2016, TÜİK’s retrospective revisions
affected the quarter results during the year. Though the 4.5% growth rate for the first
quarter of 2016 remained unchanged, the 4.5% rate for the second quarter was revised
up to 5.3%, and the 1.8% contraction in the third quarter was revised down to
1.3%. Without those positive revisions, the overall growth rate for the year would have
The Turkish government proudly paraded its declared 2.9% growth rate for 2016, and
used this rate to try and ridicule the international credit rating agencies for cutting
Turkey’s grades. The satisfactory growth result was desperately needed. The economy
was seen to come back from the verge of recession despite global financial trends that
diverted money from emerging economies. People were concerned about the effect of
the decline in tourism revenues as a result of the crisis with Russia and a string of
terrorist attacks, shrinking agricultural production and the political and economic
fall-out from the failed coup attempt in July 2016.
We can indeed see a big contrast between the two halves of 2016. The failed coup
attempt of July 15th, 2016 and the resulting purges aggravated all of Turkey’s risk
factors, creating a climate much different from the first half of the year. Large outflows
of foreign capital and negative assessments by credit rating agencies followed, which,
in turn, caused the Turkish lira to fall much faster. This all had an adverse effect on
economic activity in Turkey, and this is All this resulted in a blow to economic
production, as behold by the difference between the growth rates for the first and
second halves of the year, 4.9% and 1.1% respectively.
There was much criticism from Turkish economists about the new calculation method
for GDP. Some economists said that data under the new calculation method should be
completely rejected and called for alternative growth calculations based on the old
method. It was claimed that TUIK had far outreached the revision recommendations by
the statistical agencies of the United Nations and the European Union.
Economists have summarised that the previous GDP calculations relied on databases in
line with international standards that covered production, business and turnover
statistics in the industry and service sectors and that were complete with corresponding
sets on employment, wages and salaries. In the new calculation method, however, the
database has shifted to administrative and bureaucratic records by the Finance Ministry,
especially the tax authority, the Interior Ministry and the Banking Regulation and
Supervision Board. Economists now see that most data now originates from accounting
records such as tax returns instead of production analyses, and that the new calculation
method therefore now relies on a concept where data is compiled from sources
detached from real economic variables. It has been seen that Turkey’s GDP level and
growth trend after 2002 have been raised excessively, that the shares of sectors have
been changed significantly and that the levels of investment and saving have been
It is clear that Turkey’s new calculation method for GDP is likely to become the target for
some tight scrutiny. It will be interesting to see whether international financial
organisations such as the IMF use the new GDP data.
An interesting post about the new GDP calculation method versus the old method is by
Erik Meyersson of the Stockholm School of Economics. Click here to view
With the publication of the Gross National Product statistics at the end of March 2017
for 2016 by the Turkish Statistical Institute (TÜİK), all the statistical data relating to
that year has been duly accumulated. We are now therefore in a position to take an
overview of the performance of the Turkish economy in 2016.
2016 was another interesting year for the Turkish economy. As if the political and
security pressures emanating in 2015 were not enough already, the economy was hit
by the fallout from the failed coup on July 15th, 2016. In addition, Russian sanctions
began to bite as tourism revenue and fruit and vegetable exports to Russia suffered.
Tourism revenue fell 29.7% in 2016. Security tensions in the south-east of Turkey
were at their highest and Turkey was becoming more and more entangled in the
conflicts in Iraq and Syria.
Despite all the negative impacts of the above, the Turkish economy incredibly managed
to survive and pull through. The resilience of the Turkish economy has to be admired.
Though there was some statistical massaging as a result of the Turkish Statistical
Institute (TÜİK) changing the method it calculated gross national product, the foreign
trade figures were very satisfactory.
The global lower cost of energy was clearly very useful in helping to keep the import
figures at a more favourable level. Exports remained sturdy, with exports in automotive
products in particular showing a steady improvement. The result has been a more
manageable current account deficit. Indeed, despite worries about the ever increasing
foreign exchange debts of the Turkish private sector as a result of the continuing
devaluation of the Turkish lira, interest rate hikes by the FED, and never ending political
tensions, the Turkish banking sector has held firm and international financing has not
been a problem.
The Turkish Statistical Institute (TÜİK) published the Gross National Product figures on
March 31st,2017, showing that the Turkish economy had grown 2.9% in 2016. It is
now difficult to compare this growth rate with those of previous years because the
method of calculating this figure has been revised in accordance with European Union
accounting norms. The result was that GNP increased by some 20%. The previously
calculated quarterly and annual growth figures have been turned on their head, and
the Turkish authorities have rightly come under much criticism. The timing of this
revision in December 2016 after the publication of the poor growth rate for the 3rd
quarter of 2016 has raised many eyebrows. The 3rd quarter 1.8% contraction in the
economy was revised down to 1.3%. In order to provide means for yearly comparison,
TÜİK revised the growth rate for 2015 to 6.1% from the previous 4% in accordance
with the new accounting guidelines.
One of the most important developments affecting the Turkish economy in 2016 was
the devaluation of the Turkish lira. Against the US Dollar it fell 20.6%, compared with
25.4% in 2015. This created concern about the foreign exchange debts of the Turkish
private sector and the effect on inflation. The Turkish Central Bank had the option to
increase interest rates, but was reluctant to use this instrument because of the
political pressure on it not to increase rates, despite its declared independence.
The inflation rate (Consumer Price Index) for 2016 was 8.53%, compared to 8.81% for
2015. The rate remained very steady during 2016 but the failed coup and the
accompanying fall in the value of the Turkish lira finally broke inflation’s back causing
the rate to shoot up to 11.29% by March 2017.
Foreign direct investment (FDI) to Turkey in 2016 fell to US Dollar 12,116 million from
US Dollar 17,550 million in 2015. This reflects the waning of confidence in investing in
Turkey during this time of political tension and security concerns. It is hoped that the
recent serious deterioration in the relationship between Turkey and Europe will not
harm future investment from European companies in Turkey.
The upward revision in the calculation of GDP had a dramatic effect on income per
head of population, which improved to US Dollar 10,807 in 2016, compared to the US
Dollar 9.261 figure for 2015. In reality, income per head of population must have fallen
significantly as a result of the worsening economic situation in Turkey and the
devaluation of the Turkish lira.
The population of Turkey was announced as 79.8 million in December, 2016, an
increase of 1.36% on the figure for the previous year. The annual unemployment rate
was 12.7% as of December 2017, another figure which has reflected the worsening
state of Turkey’s economy.
Overall, the Turkish economy’s performance in 2016 compares well in comparison
with other emerging markets. This performance is despite all the ills and adversities
the Turkish government has brought down upon itself. It is hoped that once the
April 16th referendum is out of the way and relations with Europe and the country’s
neighbours have normalised, the Turkish economy will get back on track to achieve
its high expectations.
The tensions between Turkey and the European Union have reached such traumatic proportions,
one can be forgiven to believing that it will take a very painstaking and very determined effort
before relations can possibly be normalised.
It all began with the Netherlands’ refusal for security reasons to allow Turkish politicians to
campaign in its country to solicit support from Turkish nationals living in this country for the
April 16th referendum in Turkey on the new constitution which will boost the Turkish President
Recep Tayyıp Erdoğan’s powers. Dutch police broke up using surprising roughness protests by
Turks at the Dutch government’s decision. A Turkish minister who went to the Netherlands to
partake in the planned rally was deported. The Turkish government reacted strongly and
accused the Dutch authorities of using “Nazi methods”. An election was eminent in the
Netherlands and it proved prudent for the ruling Dutch government to show a hard line to
avoid votes going to the far right wing party. The Turkish government also profited from this
dispute in its effort to gain “Yes” votes for the April referendum from Turks living in Europe,
by showing Turks being badly treated.
The Turkish government started to continually criticise European governments, which reached
a hiatus when Turkish President Recep Tayyıp Erdoğan openly threatened that Europeans
“will not walk safely” on the streets if they kept up their current attitude towards Turkey.
Erdoğan said that “Turkey is not a country you can pull and push around, not a country whose
citizens you can drag on the ground”. He continued that “Europe will be damaged by this. We,
as Turkey, call on Europe to respect human rights and democracy”.
There has appeared to be no limit to what Erdoğan is prepared to say to provoke Europe.
Incredibly, he said recently in a speech in Eskişehir, Turkey which was directed to the 4.6
million-strong Turkish diaspora in Western Europe “Go live in better neighbourhoods. Drive
the best cars. Live in the best houses” and “ Make not three but five children. Because you
are the future of Europe. That will be the best response to the injustices against you.”
Earlier this month, Erdoğan accused the EU of starting “the war of the cross and the
crescent” after the European Court of Justice allowed employers to demand that workers
not wear Muslim headscarves. In another speech, he said “The masks of the EU member
countries fell and their real face appeared. ... These (EU countries) have no humanity, no
conscience, no compassion. ... This Europe is the racist, fascist Europe of the pre-Second
World War (period). This Europe is the medieval Europe that was the enemy of the Turks
Erdoğan’s accusations have inspired other Turkish government representatives to make similar
comments and the result has been a sharp deterioration in ties with the European Union, which
Turkey still aspires to join. Erdoğan openly said that Turkey would reassess ties with the
European Union after the referendum on April 16th. Germany’s President Frank-Walter
Steinmeier warned Erdogan that he risked destroying everything his country had achieved in
recent years, and that he risked damaging diplomatic ties.
The Germans have been especially upset by the comparisons of them to “Nazis”, a very
sensitive issue for Germans, and Erdogan has repeated the message in speech after speech.
The German Chancellor Angela Merkel has demanded that the Turkish government stop this
There are some 1.4 million Turks alone in Germany eligible to vote in the referendum, and
Erdoğan is aware of the potential of this electorate to support him in the referendum. There
are also elections being fought in Europe during this period, and European politicians feel
obliged to respond to the Turkish accusations. It is these reactions which Erdoğan is
extracting from Europe and which is exactly what he wants to feed his cause to appease
Turkish nationalists to get their support in the referendum.
German Chancellor Angela Merkel has taken a more sober approach as she is aware of
the reasons behind the Turkish rhetoric. She has said that the Turkish behaviour will be
discussed after the referendum, after which it is highly likely that Erdoğan will try and
repair the damage caused. Indeed, it is very unlikely that Erdoğan is seriously considers
himself as a sultan running a crawling Muslim demographic invasion of Europe. The only
question that remains is whether relations between Turkey and Europe can be repaired
after all these traumatic events.
Indeed, the Turkish Prime Minister Binali Yıldırım has recently said that relations between
Turkey and the European Union member states will “relatively normalise” after the
completion of a series of elections in Europe. He reiterated Erdoğan’s earlier statement
that a referendum could be held in Turkey at a later date to determine whether the Turkish
people wanted to join the European Union. Yıldırım added that Russia wants to further
develop ties with Turkey, but that Russia’s cooperation with the Syrian Kurdish People’s
Protection Units (YPG) limits the extent of this cooperation. In fact, the normalisation of
relations with Russia following the downing of a Russian fighter plane has not gone to plan
with Russia still keeping some economic sanctions in place, forcing Turkey to enforce
some sanctions in response. Russia is not going to be a clear alternative to Europe as was
It has not only been the European Union states which have borne the brunt of Turkey’s
attacks. Norway, which is not a EU member, has been strongly criticized for granting
asylum to Turkish military officers suspected of links to the religious network accused
by Ankara of orchestrating last July's coup attempt. The Turkish Foreign Ministry
summoned the Norwegian ambassador to Ankara in order to express Turkey's concerns
over Norway's decision to grant asylum to the individuals. There have also been some
tension between Turkey and Bulgarian, relating to alleged Turkish interference in the
The political furore will be over on April 16th with the holding of the referendum in Turkey.
However, what now concerns many is the extent of damage done and what can be done to
repair It. The economic ramifications could be serious. Erdoğan’s threat that Europeans may
no longer be safe on the streets does not bode well for the millions of Europeans who are
considering visiting Turkey as tourists this coming Summer
Technical negotiations to be started between Turkey and the EU to upgrade the customs
union agreement between the two sides could be delayed. The Turkey-EU summit at the
leaders’ level planned for May or June will now not happen until the end of the year.
Turkey was hoping that the EU Council would approve the mandate in the first half of 2017
so that it could begin negotiations with the European Commission by July 1, when the
Estonian term presidency will begin. This now looks very difficult.
Turkey and the EU had agreed to upgrade their two-decade-old customs union on industrial
goods by expanding it to agriculture products, services and public procurements. The
European Commission notified the European Council that it was ready to negotiate with
Turkey and duly called for a mandate in late 2016. Turkey had wanted to start negotiations
Austria is one of the countries that loudly voiced its opposition to issuing a mandate, while
some other countries are also cold to the idea of taking such a step under the current
political conditions. More importantly perhaps, Germany made clear to its EU partners that
there will be no such summit and no action will be taken on visa liberalisation for Turkish
nationals before the German elections in September. Another possible obstacle is Greek
Cyprus which will emphasize that Turkey has not implemented the existing customs union
rules to open its ports and airports to Greek Cyprus’ vessels. The EU will also most likely
bringing up the human rights situation in Turkey during the customs union negotiations as
a result of the current decline in democratic norms in the country.
Turkey’s Economy Ministry predicts that an upgraded customs union agreement will add
around USD 40 billion a year to Turkey’s foreign trade. Negotiations are estimated to last
two years once they begin.
Many financial institutions and international companies with investments in Turkey must
be concerned as to the repercussions on the Turkish economy as a result of the current
negative political tensions. The President of the European Bank for Reconstruction and
Development (EBRD) Suma Chakrabarti, at a ceremony in London to sign a financing deal
between the bank and NEF, a Turkish real estate developer has said the bank does not expect
Turkey’s strained ties with Europe to spill over to their economic relations. Of course, any
deterioration in relations between Turkey and Europe will seriously compromise the banks’
future investment decisions in Turkey which is expected to be the top recipient of the bank’s
funds in 2017.
EBRD has invested Euros 7 billion in Turkey since 2009, and the country again became the
top recipient of the bank’s funds in 2016 with an investment of Euros 2.7 billion in over 40
projects. EBRD is owned by 65 countries from five continents, including the European Union
and the European Investment Bank.
Turkey’s biggest export market is the European Union with close to 50% of its exports. A
large proportion of these exports are from factories in Turkey with European capital and
financing. Europe has considerable investments in Turkey and there is therefore unlikely
to be an immediate adverse effect on Turkey’s trade with Europe.
According to the European Union’s Eurostat report of March 29th relating to EU’s biggest
trade partners in 2016, EU imports from Turkey were shown as Euros 66.7 billion, 4% of
the EU’s total imports, and EU exports to Turkey were shown as Euros 78.01 billion, 4%
of the EU’s total exports. Turkey was the EU’s 5th largest import partner and EU’s 4th
largest export market. Total trade between Turkey and Europe is Euro 145 billion, making
Turkey the EU’s 5th largest trading partner, with 4.2% of the EU’s total trade volume.
Despite the strong economic ties between the Turkey and the EU, under the present state
of affairs, Europeans will nevertheless be reluctant to enter into new trade and investments
which will increase their risks in a country run by a hostile government.
It would appear that the Turkish President Recep Tayyıp Erdoğan is hell-bent on ending the
close relationship previously enjoyed with Europe. The prospect of Turkey joining the EU
now looks like a far off dream. Even after the April 16th referendum in Turkey, there is
unlikely to be a rehabilitation with Europe in the near future. Erdoğan is willing for Turkey
to adopt capital punishment, and if implemented, this will be the nail in the coffin for
Turkey’s aspirations to join Europe.
Turkey has transfered state investment holdings in Ziraat Bank, Halkbank, the Borsa Istanbul
stock exchange, Turkish Airlines, pipe operator BOTAŞ, Türk Telecom, oil company TPAO, the
PTT post office, satellite communications company TÜRKSAT, Eti Maden mining company and
tea producer ÇAYKUR, estimated as worth over USD 8 billion.
The transfers were announced on February 5th and 6th. The state’s 49.1% holding in Turkish
Airlines Is worth around USD 1 billion, and its 51.1% holding in Halkbank around USD 2 billion.
Funds worth some TL 3 billion under the control of the defense industry support fund and
some 2.3 million sq.m of land owned by the treasury and locatedin tourism locations will also
The purpose of this new fund is to generate an additional annual growth in the economy of
1.5% over the next ten years. Among other things, the fund will help to finance big
infrastructure projects by providing collateral, such as shares in the companies included in
the fund to secure loans at lower rates.
The fund was recently founded with an initial paid-in share capital of TL 50 million
(USD 13.5 million). The government has set a target of USD 200 billion for the fund to manage.
The Director General and the Chairman of the Board of the fund is Mehmet Bostan, who was
previously the head of the government’s Privatisation Administration (OİB). Other board
members will be Yiğit Bulut, a top advisor of the President Recep Tayyıp Erdoğan; Himmet
Karadağ, Borsa Istanbul Chair and CEO: and academics Kerem Alkin and Oral Erdoğan.
The government’s decision to transfer shares in the country’s top public companies to the
Newly established wealth fund has attracted a great deal of criticism from opposition
members of parliament and economists. The initial main criticism was that there was no
indication that the fund would be audited, which, critics believe, would create big risks for
the economy, since the fund will become in effect a “parallel” treasury and subsequently
weaken the country’s fiscal discipline. Indeed, the companies transferred to the new
wealth fund were previously under the control of the Turkish Treasury, which would
receive revenue in the event of their privatisation. These companies have now left the
Critics point out that such sovereign funds are usually established by energy-rich countries
or countries with high trade surpluses. Examples are Norway and the Gulf States. To the
contrary, Turkey imports almost all of its energy needs and runs trade deficits. It is claimed
that the shares transfered to the wealth fund would better be used to help reduce Turkey’s
national debt, and that the new wealth fund would create new financing opportunities which
would only benefit pro-government businesses. Others see the risk of an increase in foreign
debt as a result of a rise in fund inflows generated by the fund.
Following the criticism that the new sovereign wealth fund would be unaudited, on February
7th, the Turkish Finance Minster Naci Ağbal announced that this fund would in fact be
audited and adhere to international standards. Ağbal said that there will be a three-staged
audit structure. The first stage is an independent audit system governed by international
standards. The second stage is the audit procedure executed by an audit team appointed by
the prime ministry and the third stage includes the submission of reports emerged from the
first two stages to the Cabinet and the Plan and Budget Committee of the Turkish Grand
Ağbal emphasized that there will be no change in the management and operational
activities of the companies in the fund, and that only the shareholdings had been
transferred. He said that the fund will be run in line with international standards and will
never interfere with the strategies of the companies, each of which has its own
management board. He added that the privatisation of these assets will again be decided
by the government.
Ağbal said that Turkey would become a key player in international projects thanks to the
synergy which will have been created by the combined resources in the new fund, which
in turn will be strenthened in the future through new decisions and international partnerships.
In a press interview, the Director General of the fund Mehmet Bostan said that Turkey’s
sovereign wealth fund was established to surmount the structural problems of the economy
in order to enable Turkey to form a more robust financial mechanism that could finance the
country's mega infrastructure projects, such as the Istanbul New Airport, Kanal Istanbul,
nuclear power plants as well as energy investments, and in oder to guarantee the country's
Bostan explained that though the concept of the sovereign wealth fund (SWF) is a new
phenomenon in Turkey, there are now more than 80 SWF’s around the world in around
50 countries with a total asset value of some USD 8 trillion, the first being established in
1953 in Kuwait in order to manage the excess oil revenues.
Bostan said that they were still working on calculating the asset value of the fund.
According to the latest financial data released by the Treasury, the total value of the assets
transferred to the fund is around USD 160 billion, with dividends having reached some
USD 270 million and the value of the external resources of the fund around USD 35 billion.
Bostan confirmed that Turkey’s SWF will contribute to the diversification of capital market
instruments by collaborating and participating in the Istanbul Finance Center (IFC), which
is expected to start operations around 2020. He sees Turkey’s SWF as being an important
platform to invite foreign investors to the Istanbul Finance Center.
Bostan also confirmed that the fund and its company assets will be audited according to
internationally accepted standards, and that a transparent governance model will be
adopted, The governing principles adopted will be in accordance with the Santiago
Principles for sovereign funds that are members of the International Forum of Sovereign
Wealth Funds . These principles are designed to promote good governance, accountability,
transparency, and prudent investment practices.
Bostan added that the fund aims to be the driving force behind the Turkish economy by
creating and attracting the investments the economy needs through collaborations with
other funds, investors and investment banks around the world. He summarised the three
primary goals of the fund as firstly to add value to the public assets, secondly to help
finance the investments that Turkey needs, and thirdly to facilitate the growth of capital
markets in Turkey.
Turkey’s new SWF has been resembled by analysts to a national development bank
because of its aim to create a funding vehicle by leveraging up assets and finance public
spending seperate from the government. They point out that sovereign wealth funds are
generally used by commodity-exporting countries to enable them to save a portion of
their large external surpluses to hedge against commodity price falls. They see that
Turkey does not fit into this category, since it does not operate an external surplus, but
instead a deficit.
Following the transfer of public companies to the Turkey SWF at the beginning of
February and the subsequent declaration of its chairman Mehmet Bostan that the fund
would work closely with other funds, on March 10th, Turkey and Russia signed an
agreement for the establishment of a joint investment fund which is to reach USD 1 billion.
The parties to the Memorandum of Understanding signed were Turkey’s SWF and the
Russian Direct Investment Fund (RDIF), who agreed to further increase bilateral economic
ties and increase investment flows between Russia and Turkey.
The biggest threat facing the Turkish economy over the last fifteen years since the AK Party
took control has always been perceived as originating from global financial markets. Indeed,
the world financial crisis of 2008-9 had a very serious braking effect on the Turkish economy,
as it did with most other economies. The fact that Turkey was an emerging market requiring
cheap and available finance from global financial markets to meet its growth targets and
cover its significant recurring current account deficits meant that it was susceptible to any
tightening of international finance markets. Turkey was fortunate in one sense in that the
global economy has been plagued by low growth rates as it struggled to recover from the
2008-9 financial crisis. Turkey was a good alternative target for investors faced by poor
rates of return in the developed markets and investment and hot money flowed in to Turkey.
Turkey followed very closely American monetary policy, and was terrified of any tightening by
the FED which may upset its access to cheap liquidity. However, the fall in world commodity
prices over the last two years has much benefitted Turkey which relies largely on imported
energy. Current account deficits have retracted and two FED interest hikes in the last three
months have had surprisingly negligible effect on the Turkish lira.
However, a new threat to the Turkish economy has arisen in recent years, and this is largely
one of Turkey’s own making. Turkey’s new interest and involvement in regional politics has
created awkward and negative relationships with neighbouring countries. The shooting
down of a Russian fighter aircraft resulted in sanctions by Russia which seriously affected
the Turkish economy. The commencement of hostilities with the outlawed Kurdish Workers’
Party in the south-east of Turkey, as from June of 2015, and the bombing activities of ISIL,
the Islamic State of Iraq and the Levant, in Turkey created a continual environment of
insecurity in Turkey. When one adds the two elections in 2015, the failed coup in July 2016,
a deteriorating relationship with the European Union, and the up-and-coming referendum
on the Turkish constitution in April 2017, we can see that political uncertainty has taken its
toll on general confidence in the Turkish economy.
Faced with all these adverse events outside of its control, the Turkish Central Bank has
been heavily involved in damage control management. The two areas which the bank has
foremost had to continually deal with has been rising inflation and a weakening Turkish lira.
The standard cure for these ills was to increase interest rates. Indeed, on January 29th,
2014, the central bank increased the one week repo interest benchmark rate from 4.5%
to 10% to protect the Turkish lira against speculation following the 17-25 December 2013
corruption scandal. The central bank has since brought this rate down to the current 8%,
but the expectation of the government is a much lower rate in order to boost investment
and economic growth.
Though it is loath to admit it, the Turkish Central Bank finds itself restricted in the options
it has open to in trying to find solutions to the macro-economic problems faced by Turkey.
Whether government ministers responsible for the economy, whether top government
party officials or whether leading economy analysts, everybody appears to agree in theory
that the Central Bank should be independent to react in the way it believes best to protect
the economy from pressures and challenges faced. However, in reality, the government
has continually pressurised the central bank to reduce interest rates further. Though the
central bank has successfully resisted these pressures, it cannot bring itself to increase
interest rates for fear of the fierce reaction it will receive. It is not surprising therefore
that the central bank should look to use alternative strategies and instruments to
countermine adverse trends in economic indicators.
During the last several months, the Turkish Central Bank has been faced with a fast
devaluing Turkish lira and an upward creeping inflation rate, and though it raised the
one-week repo benchmark interest rate on November 25th, 2016, it has made it clear
that it would in future be looking at unorthodox ways to support the Turkish lira.
The Turkish Central Bank recently decided that it would hold the one-week repo
benchmark interest rate firm while increasing the upper band of the interest rate
corridor (the overnight and late liquidity window lending interest rates). In effect,
though, this action had the same result in increasing the borrowing costs of banks.
The central bank has said that it was in favour of employing a single interest rate,
but the current system of an interest rate corridor with upper and lower bands
would seem to be very useful to the bank in its efforts to avoid criticism.
With regards inflation, the Turkish Central Bank has revised it inflation forecast for
the end of 2017 from 6.5% to 8% as it is aware that the devaluation of the Turkish lira
will incur upward inflationary pressures. Its inflation forecast for 2018 and 2019 is 6%
and 5% respectively.
The international credit rating agency Fitch Ratings downgraded on January 27th
Turkey’s sovereign debt rating, Turkey’s last remaining investment grade among the
credit agencies, to “junk”. Fitch Ratings is perhaps the most respected of the agencies
and, in addition to the prospect of more expensive financing, its decision will be an
indication that Turkey has not been implementing the right policies.
The indecisiveness of the Turkish Central Bank as it dithers between growth and high
inflation must have been instrumental in Fitch Ratings downgrading. A central bank
which knows what path it wants to follow and acts accordingly is preferable to a
a central bank which says that it will be flexible and dynamic to handle every problem
that may arise. Decisiveness and consistency, backed by necessary reforms, are
required and expected, and not a time biding policy. The advent of the up-and-coming
referendum on the Turkish constitution will be an important water mark and a more
decisive strategy will be expected following the referendum.
There are now very many unpredictables in the global economy. One of these is
undoubtedly the President of the United States, Donald Trump. In this environment,
Turkey must put its act together and establish a long-term strategy which incorporates
structural reforms, political certainty, confidence in the judiciary and human rights,
and educational reform.
The Transportation, Maritime Affairs and Communication Minister Binali Yıldırım presented an updated analysis of progress on the various mega infrastructure projects currently in progress throughout Turkey. The minister said that he believed that these projects will make a great economic and social contribution to the country’s economy.
Seven major projects currently under construction were discussed. These included Istanbul’s third airport; the third bridge over the Bosphorus Strait; the new highway between Istanbul and Izmir with its suspension bridge over the İzmit Bay the world’s fourth longest; the Eurasia Tunnel, an underground road tunnel linking Istanbul’s European and Asian sides; the Gebze-Halkalı commuter train link in Istanbul; the Ovit tunnel in north-eastern Anatolia; and the Baku-Tbilisi-Kars railway.
The Transportation Minister disclosed that the above projects have so far created some Turkish liras 8.6 billion (USD 3 billion) for the economy and created more than 65,500 jobs, the majority of which are qualified workers and office staff in addition to more than 2,100 engineers. He added that these projects would create much more employment, as well as other social and economic benefits once they are completed, noting that the third airport of Istanbul alone will create around 210,000 jobs when opened. The minister disclosed that Turkey has invested around Turkish liras 253 billion (USD 90 billion) into major transportation and communications projects in the last 13 years.
The minister said that they had made great efforts to preserve natural and historical heritage, having built 37 viaducts at Atatürk Airport, Istanbul’s third airport, the third bridge over the Bosphorus and the İzmit Bay Bridge in a bid to preserve ecological environment and historical remains there.
Istanbul’s third airport
The Cengiz-Kolin-Limak-Mapa-Kalyon Consortium, a joint venture of Turkish companies, won a tender for the third Istanbul airport in May 2013. According to the contract, the Consortium will pay the state Euros 22.1 billion, plus taxes, over 25 years starting in 2017. The project, with an estimated total investment value of around Euros 33 billion, is the largest project ever undertaken in the country. The first section of the airport comprising two runways and one terminal is planned to open in 2018 and serve 90 million passengers. The airport is expected to become one of the largest in the world when it is completed and serve 150 million passengers. Around Euros 1.5 billion has been invested in the project so far and some 13,000 people, including subcontractor personnel, are estimated to be working on the project.
Third Bosphorus bridge
Istanbul’s third Bosphorus bridge, which was named after Yavuz Sultan Selim, was designed as a “hybrid bridge” in shape. The third bridge, which will have eight road lanes as well as two rail tracks, will be about 1.4 kilometres in length and 59 meters in width, making it the longest suspension bridge in the world carrying a rail system and the widest in the world. The bridge tower is 322 metres tall, representing another world record. The projectis estimated to have created around 6,000 jobs and the construction activities have contributed an annual Turkish liras 1.75 billion (USD 611 million) to the economy.
The Istanbul-İzmir highway
As a part of the Istanbul-İzmir Highway project, the İzmit Bay Bridge will be the fourth largest in the world due to the length of its central span. The bridge is planned to open in May, and will shorten travel time to the other side of the bay enormously. The project’s cost is at around USD 6.3 billion and is estimated to have created close to some 8,000 jobs.
Gebze-Halkalı commuter train links
This project involves the renovation of the Gebze-Halkalı commuter train links in order to connect the outlying districts on both the European and Asian sides of the Bosphorus. The project, which is expected to be completed in 2018, has a total investment value of Euros 1 billion.
This tunnel, which is also known as the Istanbul Straight Road Crossing Project, will be 3.34 kilometres long and will connect the European and Asian sides of the Bosphorus. The project, which will be completed at the end of 2016 and employs some 1,800 people, is expected to result in fuel savings of around 38 million litres annually and reduce carbon emissions by an estimated 82,000 tons a year.
This project aims to connect Azerbaijan, Georgia and Turkey by rail, and when completed will carry a total of 1 million passengers and 6.5 million tons of cargo. The capacity of the railway is expected to increase to 3 million passengers and 17 million tons of cargo by 2034. This joint project has created some 8,200 jobs in Turkey and made a contribution of around Turkish liras 988 million (USD 345 million) to the Turkish economy so far.
The Ovit highway tunnel in the north-eastern region of Turkey will be one of longest tunnels in the world. The tunnel will cut through the Ovit Mountain, which is located between İkizdere, a district in the north-western province of Rize, and Ispir, a district in the eastern province of Erzurum. The dual-tubed project will eventually exceed 14.7 kilometres, including the linking roads around it. Some 600 people are working on the project, in which some Turkish liras 719 million (USD 251 million) has been invested so far.
With the disclosure of the growth figures by the Turkish Statistical Institute at the end of March 2016, all the figures relating to the performance of the Turkish economy have now been completed.
Despite the two general elections held in 2015, geopolitical tensions in the region, the on-going dispute with Russia, the clashes with the Kurdistan Workers’ Party(PKK) in the south-east of Turkey, and the general security concerns, the Turkish economy has shown itself to be remarkably resilient. Indeed, the growth figures in the last two quarters of 2015 surprised all analysts. The growth of 4 % in the third quarter and of 5.7 % in the final quarter, brought the growth rate for the year of 2015 up to 4 %.
The question that everyone is asking though is whether the performance of the manufacturing and other sectors of the real economy reflect this growth rate. The general response is that it does not and that investment in Turkish manufacturing in particular has indeed been very poor over the last year or so. The redeeming point is that the growth rate in most industrialised countries and indeed many emerging markets has been also very poor. With the global economy not yet fully recovered from the 2009 recession, investment levels throughout the world are poor to say the least.
So what is happening in the Turkish economy which is keeping growth levels so buoyant ? Turkey is a country with a growing youthful population, now backed up by over 2 million Syrian refugees. The population has enjoyed a relatively vibrant and growing economy over the last decade and spending levels are high. Therefore, domestic consumption has been a major factor. Secondly, public spending has continued to be high. The government has pursued many mega projects which have indeed greatly improved Turkey’s transportation infrastructure in particular. The third bridge over the Bosphorus and the third airport terminal in Istanbul are just two on-going examples.
The Turkish governments under the Justice and Development Party (AKP) have over the last 14 years that they have been in power always relied on the availability of liquidity to finance growth and the resultant high current account deficits. They have not been afraid to double their bets each time around. However, the pressure on the Turkish lira and inflation rates over the last two years has forced the Turkish Central Bank to raise interest rates, much to the annoyance of the government. There now appears to be a stand-off between the government and the central bank. The government is still critical of the central bank’s refusal to reduce rates, but the central bank is loath to raise rates any further for the fear of more rhetoric from government sources.
The government wants to revive the real economy, but with interest rates high, the only alternative appears to be to increase public spending. The government has been fortunate in that energy costs have tumbled with the fall in petrol prices, and is no longer faced with daunting current account deficit figures. There is still much the government can do in terms of improving the real economy in the medium to long-term and this includes introducing the long overdue structural reforms and increasing research and development levels to improve the general low added value of Turkish goods. The economy as a whole would also be in a much more sound state if domestic savings were higher, and this is something that the government must address.
Over the last year, there have been many predictions of gloom and doom about the Turkish economy. However, it has managed to keep standing steadily on its own two feet, and indeed compares well with many other emerging markets now in much direr straits. However, 2016 will be a critical year for the Turkish economy as it is likely that we will see the true nature of the state of the economy this year following the punishment it received in 2015. It would also be preferable if the government would not make life more difficult than it already is. Better relations with neighbouring countries would be a help for a start and a solution to the on-going struggle with the PKK would greatly help the tourism and agricultural sectors in particular.
The pressure on the Turkish lira was most felt during 2015 when it devalued 25.4 % against the US dollar and reached the level of TL 3 to the dollar. The Turkish lira has since regained some of its value in the first quarter of 2016 and is presently in the range of TL 2.8 to 2.85 to the dollar. Since the statistics for the Turkish economy are based in US dollar terms, there is bound to be a deflationary effect on the 2015 figures as a result. Since almost half of Turkey’s exports are to the European Union and income thereby earned are in Euros, the weakness of the Euro against the US Dollar has resulted in some significant parity losses for Turkey.
The inflation rate for 2015 is 8.81 %, which compares to 8.17 % for 2014. Many would claim that this figure does not reflect the real level of inflation as experienced by the populace. However, higher interest rates and cheaper energy factors have played a significant role in containing inflation despite the weakness of the Turkish lira.
Total exports were USD 143.8 billion in 2015, compared with USD 207.2 billion for imports. The foreign trade deficit decreased by 28.2 % to USD 63.3 billion in 2015, compared to USD 84.6 billion in 2014. Exports decreased by 8.7 % and imports decreased by 14.4 %.
The current account deficit for 2015 is USD 32.1 billion, 4.5 % of Gross Domestic Product. This compares with USD 43.6 billion in 2014, which was 5.5 % of Gross Domestic Product.
Foreign direct investment (FDI) to Turkey in 2015 was USD 16,583 million, compared with USD 12,523 million for 2014 and USD 12,384 million for 2013.
Income per head of population for 2015 was USD 9,261, compared with USD 10,395 for 2014. Obviously, the weak Turkish lira against the US dollar had an important impact here.
Income from tourism in 2015 was USD 31.5 billion, down 8.2 % on 2014. This is likely to fall very substantially in 2016 as a result of the Russia crisis and security concerns in general.
The annual unemployment rate for 2015 was 10.3 %. The rate was 10.8 % as of December 2015. Though this rate is not good, especially when one considers that unemployment amongst the younger generation is much higher and closer to 18 %, it compares as reasonable considering the slowdown of the global economy and unemployment rates in many industrialised and emerging countries.
The population of Turkey is 78.7 million, of which 48.3 % is under 30 years of age. The annual rate of increase in population is 1.34 %. With the influx of more than 2 million Syrian refugees in Turkey, it is likely that many will stay settled in Turkey. Many will also receive Turkish citizenship in time. Their birth rate is higher than the average for Turkey and the Syrians may therefore have an increasing effect on the population size of Turkey.
2015 appears to have been a good year when one considers all the pressures the Turkish economy has been put on. However, there will be an acceptable limit below which even the most robust of economies will begin to crack with the strain. The Turkish economy is getting close to that limit and the Turkish government needs to address the geopolitical tensions which have engulfed it and bring its time and energy back to getting the economy back on track to meet its objectives for 2023, the 100th anniversary of the founding of the Turkish Republic.
The Turkish Industry and Business Association (TÜSİAD) has published its report, the “Turkish Economy and World Economy at the Onset of 2016.” This is an objective report which is more open about the current risks which face the Turkish economy. TÜSİAD is an employers’ association which swayed much influence in the past and whose announcements and evaluations were taken very seriously. However, since the Justice and Development Party (AKP) came to power in 2002, this organisation has lost much of it influence owing to its fundamentally different cultural values and work ethics than those of the government. Despite the government’s disapproval, the association still represents the largest businesses in Turkey, The association’s announcements and evaluations are therefore still taken very seriously, and especially by foreign businesses investing or wishing to invest in Turkey.
In its report, TÜSİAD recognises that the world economy has not as yet fully recovered from the global economic crisis seven years earlier, and indeed it shares its view that there is still very much uncertainty as to what the problem is and how best to fix it. Many central banks have injected huge amounts of money into the markets for the last seven years to generate liquidity. However, individual consumer spending has been inadequate and companies have not invested further because of the lack of growing demand. Despite the efforts to create demand in developed countries, we have not seen any rise in the inflation rate there. The plunge in oil and other commodities has lowered prices further. Monetary policies are clearly not working. TÜSİAD’s report recognises that there is an air of desperation which has falsely led governments and central banks to adopt quantitative easing policies and even negative interest rates. TÜSİAD believes that despite all such policies, low growth rates will be unavoidable in the world economy over the next two years..
TÜSİAD is not optimistic for emerging markets, such as Turkey, since they no longer have access to cheap financing from developed countries. It was thanks to this available liquidity that they were able to record high growth rates, but the scenario is now very different, with large capital outflows last year cutting their growth rates by almost half. TÜSİAD’s report mentions that there are some countries, such as China, which have been caught between higher private sector debt and lower consumer demand. It is however more confident for India, which it sees as the only emerging market which may be able to maintain a higher growth rate. Russia, an emerging market, like some other oil exporters, has been dragged into recession by the oil price fall, in addition to sanctions.
TÜSİAD, in its report, emphasises that emerging markets are now generally encountering falling exports and fast rising debt burdens. These developments are being experienced despite significant devaluation in their local currencies.
TÜSİAD notes that Turkey’s economy, in addition to the global economic uncertainties and the slump in global demand, is also being effected by geopolitical risks not only within Turkey itself but also in its immediate region. Russia’s active involvement in the Syrian war and the shooting down of a Russian jet by the Turkish air force have caused a stand-off between Turkey and Russia, resulting in Russian economic sanctions against Turkey. Turkish trade in general has also suffered in the middle east region. Turkey is also burdened by some 2.5 million Syrian refugees, and if this was not all enough, is now fighting a war of attrition with the Kurdistan Workers’ Party (PKK) in the south east of Turkey.
Despite the above de-habilitating factors, TÜSİAD’s report said the Turkish economy is expected to close 2015 with a growth rate of around 4 %. It added that this growth was however mainly due to a rise in domestic demand and public expenditure, whereas the increase in investments was limited and exports made a negative contribution to GDP growth. Since 2011, Turkey has experienced a weakening growth trend and the report questions how long growth can be sustained by domestic demand and public expenditure, rather than exports.
On a positive note, TÜSİAD reminds us that higher growth rates have a negative effect on the current account balance, and indeed Turkey has experienced worrying current account deficits over the last decade. However, the dramatic fall in oil prices has been very opportune as it has enabled the current account gap to decline as a result of falling energy costs, and this was very much the case for Turkey in 2015. This positive development would have been much more beneficial if it were not for the fall in exports.
According to TÜSİAD’s report, the fall in energy costs and the loss in the euro’s value against the dollar by around 18% stimulated domestic demand in several sectors in Turkey, mainly in automotive and home appliances sectors, especially in the first half of 2015. The report added that domestic demand was later adversely affected by the uncertainties following the June elections as well as the loss in the Turkish Lira’s value. Though some recovery was seen both in loans and consumer confidence following the November 2015 elections, this positive trend has lagged behind the pre-June levels. The reason for this was no doubt the escalating terror in the south east of Turkey and the tensions arising from the Syria conflict. TÜSİAD believes these geopolitical tensions will have a detrimental effect on the Turkish economy in 2016 in terms of exports and tourism. TÜSİAD also warns that the Turkish banking sector may also face a difficult year in 2016 due to contraction in loan growth and an increase in loan defaults as the economy slows.
TÜSİAD notes that in recent years the world has been under deflationist rather than inflationist pressure, with the inflation rate being lower than 2% in many developed countries. In Turkey, the inflation rate has been around 8% annually for the last six years, much higher than the 3-4% average of developing countries as a whole. The high rates in Turkey have continued despite decreases in budget deficits and public debt. TÜSİAD says that the main reason for inflation being above the Turkish Central Bank’s 5% target is the inability of the bank to implement policies to reach this target. TÜSİAD adds that it accepts that structural problems in the agriculture sector have caused abnormal increases in food prices.
TÜSİAD has criticised the Turkish Central Bank for not making the necessary changes to its policy to address the capital outflows which started after 2013. Indeed, capital outflows accelerated in 2015 with around USD 15 billion of capital flowing out of Turkey’s bond and stock exchange markets. This made the need for the Central Bank to take action even more pressing. Even the Turkish lira devaluation against the US dollar of around 25% an interest hike by the U.S. Federal Reserve (FED) did not perturb the Central Bank. TÜSİAD added that the 30% rise in the minimum wage rate at the beginning of 2016 will also have increased inflationary pressure by raising direct costs and domestic demand. The association believed that monetary policy would be crucial for decreasing inflation. Any attempts to reduce food prices through sectoral structural reform would not for example produce a short-term solution.
TÜSİAD has estimated that the 2015 growth rate will be around 3.8 %, to be followed by 3.6 % in 2016. The association has also forecast an inflation rate of 9.1% in 2016, a current account deficit of around 5% of GDP, an unemployment rate of 10.6%, and an increase in private sector investments by only around 2.8%.
To summarise, TÜSİAD has not painted a very rosy picture for 2016, whether for Turkey or the global economy. Turkey faces the prospect of double-digit inflation rates, lower growth, continued lack of investment, problems in the banking sector, deceleration in capital inflows and potential losses due to geopolitical tensions. 2016 will be a difficult year.
On the premature death of Koç Holding’s Chairman Mustafa Koç from a heart attack on January 21st at the age of 55, the important role of the Koç Group of Companies in the development of the Turkish economy has once again been reasserted. Mustafa Koç was from the third generation of the Koç family and was credited with steering the Koç Group through a successful period of growth in the last twelve years since he took over the flag from his father Rahmi Koç.
The founding grandfather, Vehbi Koç, who worked at his father’s grocery shop from the age of 17, started his journey in 1926 with the registration of his enterprise under the name of Koczade Ahmet Vehbi with the Ankara Chamber of Commerce on 31st May, 1926. Vehbi Koç expanded his commercial activiites to construction materials, building materials, and hardware, and became the representative for foreign companies such as the Ford Motor Company and Standard Oil (presently Mobil) in Turkey. In 1938, Vehbi Koç established his first joint stock company under the name of Koç Ticaret A.Ş., which under the name of Ram Commercial Corporation, was the first Turkish company to set up a business in the USA.
Having convinced General Electric, Vehbi Koç signed an agreement in 1948 to build a light bulb factory, which opened in 1952. Koç took important steps in industry in the 1950s and manufactured automobiles, household appliances, radiators, electronic devices, textiles and matches. Factories like Bozkurt Mensucat, Arçelik (1955), Demir Dokum (1954), Turkay,Aygaz (1962), Gazal, Turk Elektrik Endustrisi and a joint cable factory with Siemens were founded. In addition tractor production started under the Fiat license.
The first initiative by Koç in the automotive sector turned eventually to a full-scale industry. Following an agreement with Ford Motor Company in 1959 to assemble trucks, today's prominent automotive company Otosan came to life. Following the production of the first domestic mass-production car Anadolu in 1966 and in line with improving economic activities in Turkey, Vehbi Koç collaborated with the Italian company Fiat to establish Tofaş in 1968 resulting in the production of the second domestic car Murat in 1971.
Koç Holding A.Ş. was founded in 1963 to gather the multitude of companies under one roof and facilitate the growth and development of the Koç Group companies through a central organisational structure. Vehbi Koç was elected as the Chairman of the Board of Directors of Koç Holding A.Ş. By the 1970s, Koç felt that it was ready to make a public offering of the shares of its companies to generate additional finance for further investments. During the 1970s, Koç gave special impetus for increasing exports through its foreign trade company. In the 1980s, Koç entered the finance sector through its partnership with the American Express Company in Koç-American Bank. It then purchased the entire stock of Koç-American Bank in 1992, and changed its name to Koçbank.
In 1987, Vehbi Koç handed control of the Koç Group of Companies to his son Rahmi M.Koç who was elected Chairman of the Board of Directors of Koç Holding. Vehbi Koç continued however as the Honorary Chairman of the Board of Koç Holding until his death in 1996 at the age of 95. Rahmi Koç handed over the Chairmanship of Koç Holding to his son Mustafa Koç, representing the third generation, in 2003. Rahmi continues until this day to hold the title of Honorary Chairman.
Koç consolidated its financial services in 2004 with the purchase of 57% of Yapı Kredi Bank for USD 1.5 billion from the Çukurova Group in 2004, a deal it undertook in partnership with Italy’s Unicredit SpA, followed by the amalgamation of Koçbank into Yapı Kredi Bank, which thereby became one of the largest banks in Turkey. In 2005, Koç purchased 51% Tüpraş, a giant petro-chemical company and sole crude-oil refiner in Turkey, from the government for USD 4.1 billion. Koç then focused on creating high productivity and profitability, and on developing its activities in the energy, automotive, durable goods and finance sectors.
The Koç Group of Companies is involved in the following sectors :
As of 31.12.2014, 5 Koç companies were amongst the largest 10 companies in Turkey in terms of sales. Tüpraş was first with Turkish lira 37,502 million in sales, Ford second with TL 10,539 million, Arçelik third with TL 8,521 million, Tofaş ninth with TL 6,001 million, and Aygaz tenth with TL 5,692 million. Total Koç Group sales were USD 31.4 billion in 2014, about 5% of Turkey’s GDP.
Koç, in terms of its sales, exports, share value in the Istanbul Stock Exchange, and number of employees, is the largest group of companies in Turkey, and is considered the driving force in the Turkish economy. It is one of the most admired companies in the world and, as the only Turkish company to be listed in Fortune Global 500, was ranked at 381 for the year 2014. Koç Holding currently makes 45% of Turkey’s car production and 43% of the country’s total car exports. Its share in the country’s exports is around 10%. The shares of 16 Koç Group companies are traded on the Istanbul Stock Exchange. The group comprise 113 companies, 90,000 employees, and 14,000 dealers, agencies, and after-sales services people.
Turkey is currently in an environment where all the rules seem to be dictated from outside. Being an ambitious emerging market, Turkey has long been dependent on the availability of cheap global liquidity. The proposed future interest rate hikes, albeit gradual, by the US Federal Reserve (FED),in response to a recovering US economy, in themselves present a veritable risk because of their likely tightening effect on global liquidity.
The positive aspect to Turkey resulting from global economic developments over the last year has been the dramatic fall in the price of petrol. Turkey’s energy import bill has fallen such that Turkey’s current account has now reached a very manageable level. Since petrol prices appear to remain low for the foreseeable future, the threat of high current account deficits to the Turkish economy now seems to be something of the past. The tighter monetary policy pursued by the Turkish central bank also has had a dampening effect on imports, if not also on consumption demand as a whole. It is the balancing of Turkey’s current account which will greatly alleviate the pressures brought about by any contraction of global liquidity.
The fall in world commodity prices will continue to have a positive effect on the Turkish economy which is so dependent on imported energy in particular. Turkish exports reliant on commodity materials input will be adversely affected but the overall picture is clearly positive. Two negatives faced by the Turkish economy are the likely continued low level of growth in the global economy and the relative lack of competitiveness of Turkish products in terms of value added content. This will only be rectified through a determined government programme to encourage an increase in the levels of research and development.
Some of the Turkish government’s concern about a possible flight of foreign currency has undoubtedly been caused by the sale of shares by foreign investors from the Istanbul Stock Market totalling some USD 1.9 billion in November and December, 2015. The resilience of the Turkish economy has been proved by the unexpectedly good growth figure of 4% in the third quarter of 2015, and it would therefore appear that the Turkish government is not so much worried about the performance of the economy than it is about the growing geopolitical tensions in the region. Though some of these tensions are of the government’s own making, it is clear that the government no longer has a great deal of control over the development of these destabilising events and their eventual detrimental effects on the Turkish economy.
The Turkish government must be worried about how its disastrous foreign policy strategy will play out. Its shooting down of a Russian jet on the Syrian border has angered Russia which is now continually looking at ways it may wreak revenge. Russia, through its new found influence in the region, is in a good position to put Turkey under economic pressure indirectly if not directly. Turkey, feeling the isolation, has now made overtures to Israel to normalise relations with that country, a big surprise considering Turkey’s previously antagonist stand towards Israel.
Internally, Turkey has perhaps its most serious problem with the resumption of hostilities with the Kurdistan Workers’ Party (PKK) in July of 2015. Most serious clashes with the PKK have so far taken place in the southeast of Turkey, but there is a risk that they will spread to Turkey’s western cities. If the PKK is not contained within a few months, there is also the possibility that Turkish tourism will suffer severely as scared foreign tourists stay away. As if there are not already enough problems ISIL, the Islamic State of Iraq and the Levant, has just perpetrated a suicide bombing attack in Sultanahmet, the heart of Istanbul’s tourism sector.
There is now a fear that popularist actions by the Turkish government have gone so far that there is no longer any way of reversing what has been done. Aware of the possible outcome of its policies, the Turkish government now seems to be taken precautions to offset the possibility of a future flight of foreign currency abroad. The target is not just foreigners but also ordinary Turkish citizens. The Turkish government has now tightened the country’s liberal foreign exchange rules which had been in effect for the last 26 years. Travelers exiting Turkey are now required to make declarations of cash and credit cards over certain levels or face sanctions on charges of money laundering and smuggling.
On December 30th, 2015, Decree No.32 relating to the protection of the value of Turkish currency, enacted in 1989 to liberalise the foreign exchange market in Turkey, was amended. Until 1989, foreign currency transactions and the gold trade were subject to tight control under the 1930 Law on the Protection of the Value of Turkish Currency. The 1989 reform, a legacy of the then Prime Minister Turgut Özal, liberalised the foreign exchange market and Turkish citizens were allowed to open foreign currency and gold accounts in banks. Exchange offices were allowed to operate alongside banks, the restrictions on carrying foreign currency while entering or exiting Turkey were removed, and the rules of declaration at customs were relaxed.
Under the new December 30th amendment, travelers exiting Turkey with cash of more than 25,000 Turkish lira (USD 8,263) or more than 10,000 euros or an equivalent sum of foreign currency are now obliged to declare the money to customs at airports and border crossings. A newly added provision says that in cases where the money is not declared, or incorrect or misleading declarations are made, the money in question will be taken by customs and considered suspicious. Customs officials will then notify MASAK and refer the case also to prosecutors on charges of trafficking. The amendment covers also “documents enabling payment in Turkish lira,” which means that credit cards with a limit of more than 25,000 Turkish lira are also liable for declaration.
The amendment is most likely to affect business people, investors and exporters, who will be now be required to complete declaration forms at airports or risk confiscation of the currency and possible prosecution.
Rather than concentrating minds on restricting a possible flow of foreign currency by Turkish citizens, perhaps the Turkish government should find ways of reassuring foreign investors in Turkey. The lack of independence of the judiciary and freedom of expression very much concern foreign investors who want to see a fair environment for doing business in Turkey. The Turkish economy is in need of effective structural reforms and new direction. Internal and external conflicts need to be resolved rather than exacerbated. The Turkish economy has proved its resilience by weathering out two elections in 2015 amongst great political uncertainty and by maintaining its position despite global economic slowdown, and therefore deserves the full support of the Turkish government.
According to calculations made by the World Federation of Exchanges (WFE), the domestic value of the Istanbul Stock Exchange at the end of 2014 was USD 220 billion. This compares with its value of USD 68 billion in 2003 and reflects a threefold increase during this period. The average annual investment return in USD terms during this same period was 14.9 %. The admirable performance of the Istanbul Stock Exchange reflected the strengthening and growth of the Turkish economy over the last 14 years.
However, the Istanbul Stock Exchange (known as Borsa Istanbul or BIST locally) has suddenly become unstuck, having performed dismally in 2015. The BIST 100 index reached an all-time high when closing at 91,412.74 points on 26.01.2015. The index closed at 71,726.99 points as of 31.12.2015. The loss in Turkish lira terms was 16.33% and in USD terms 33.07%.
The Daily Telegraph newspaper, in its article published on 06.01.2016, about the best and worst performing stock exchanges in 2015, has listed the Istanbul Stock Exchange as the 4th worst performing stock exchange in the world in 2015. In its article, the Istanbul Stock Exchange was marked as 24% down, behind Brazil (35%), Columbia (40%) and Greece (55%). It wrote “In local currency terms Turkey’s stock market has not had a disaster, losing 9pc. But when factoring in currency swings losses are much bigger. The Turkish lira has depreciated heavily against both the US dollar and the British pound. At the start of the year £1 bought 3.63 Turkish lira. Today (December 30) £1 is worth 4.31 Turkish lira.”
So what went wrong. Over the year there has no doubt been a combination of factors which has brought about this demise.
The most commonly sited reason given has been the uncertainty in global financial markets during 2015 which has taken away the appetite of investors to take on risks. Turkey is an emerging market and as such was always seen at risk from any tightening of gobal liquidity. Worries about the effect of any interest hikes by the US Treasury (FED) were at the back of everyone’s mind. The flight of foreign investors has been given as a major reason for the resultant weakening of the Istanbul Stock market. Net sales in November 2015 alone was some USD 1.9 billion and these were aimed mainly at the Turkish banking sector, one of the best performing sectors in the Turkish economy. The Bank index, which is made up of shares from the banking sector and is the driving force behind BIST 100, finished 2015 with a 25% loss which would have had a detrimental effect on the BIST 100 index.
With the rising expectations of a FED interest rate hike sometime in 2015 and the subsequent weakening of the Turkish lira against the US dollar, worsening geopolitical developments in the region, and the political uncertainty leading up to the two general elections, the BIST 100 index started a downward trend from the end of January onwards throughout 2015.
It would certainly appear that the fate of the Istanbul Stock Exchange is very much dependent on external factors. Should global financial markets stabilize, should geopolitical tensions in the region calm, should fears about the independence of the Turkish Central bank be allayed, and should the government carry out the necessary structural reforms, then there is no reason why the Istanbul Stock Exchange’s BIST 100 index should not surpass 90,000 again in 2016.
The European Bank for Reconstruction and Development (EBRD) has recently shown its confidence in the Istanbul Stock Exchange through its purchase of a 10 percent stake in Borsa Istanbul. The acquisition, which had been announced about six months ago, was signed by EBRD First Vice President Phil Bennett and Borsa Istanbul Chief Executive Officer Tuncay Dinç in the presence of Turkish Deputy Prime Minister Mehmet Şimşek at Borsa Istanbul’s headquarters in Istanbul on 11.12.2015. In a statement, the bank said that its “long-term investment demonstrates the EBRD’s confidence in the potential of Borsa Istanbul and the Turkish economy as a whole. It also underscores the bank’s support for the country’s comprehensive capital market reform programme and the plan to develop Istanbul into a financial centre for the region spanning central Asia, south-eastern Europe and north Africa.”
As an emerging market, there is always a risk that Turkey’s stock exchange will be sensitive to volatility in its markets. The overriding essential factor is the performance of the Turkish economy which has indeed shown great resilience during 2015 despite formidable external pressures. Assuming that the Turkish economy will continue to maintain growth, adopt structural reforms and win confidence from investors, the Istanbul Stock Market will continue to be a long-term viable investment.
The ruling AK party has always been open to foreign direct investment (FDI) in Turkey. From its early years in power, it encouraged foreign investors to invest in Turkey. The Investment Support and Promotion Agency of Turkey (ISPAT), which is responsible for marketing the potential of investments in Turkey to foreigners, reports directly to the Prime Minister’s office.
The results of Turkey’s endeavours to attract investment soon proved successful. In 2006, FDI to Turkey reached USD 20,185 million. This was followed by USD 22,047 million in 2007 and USD 19,851 million in 2008. The global financial crisis took its toll in 2009 with FDI of USD 8,585 million in 2009 and USD 9.099 million in 2010. However, a recovery was achieved in 2011 with USD 16,176 and FDI to Turkey settled in at a stable level in the following years with USD 13,282 million in 2012, USD 12,457 million in 2013, and USD 12,530 in 2014. The total FDI for the first ten months of 2015 is USD 13,424 million. These figures are based on data provided by the Ministry of Economy.
Much of foreign direct investment to Turkey was attracted by the Turkish government’s privatisation programme and business friendly policies. Turkey also has a very central geographical location, good connections with the Caucasus and the Middle East, and a young population. Turkey also saw itself as an ambitious emerging market with aims to get into the G20 which it achieved. With most of the developed world encountering serious problems in recovering from the 2009 financial crisis, Turkey became an attractive place for investment with higher returns and an opportunity for corporate growth.
Economic growth has been a major target of the government. FDI has played a very useful role here in greatly helping to improve the quality of Turkish goods and services, and open up international markets to Turkish products. Turkey, through its newly won international connections and experience, and backed up by a relatively sound banking system, weathered out the global financial crisis in 2009 despite the fact that it is an emerging market and heavily reliant on global liquidity availability to finance its growth needs. The Turkish economy has indeed proved very resilient and the globalisation of the Turkish economy helped through foreign direct investment has been a major factor in ensuring this.
The Turkish Ministry of Economy also regularly updates a list of foreign capital companies registered in Turkey. As of October 2015, out of a total of 46,251 companies, 20,429 (44.2%) are from the EU (27 countries), 13,687 (29.6%) are from the Middle East, 4,636 (10%) are from other Non-EU European countries, 3,333 (7.2%) are from Asia, 1,920 (4.2%) are from US and Canada, and 1,560 (3.4%) are from Africa. The author does not believe that these figures correctly represent the actual number of foreign capital companies operating in Turkey, since many have been closed down, have become dormant or no longer have a foreign shareholder. The correct figures are probably closer to half of the numbers given. The figures do however no doubt give a good indication as to the proportional representation of the various regions in the world.
It is not a surprise that 27,882 (60.3%) companies of the total 46,251 foreign capital companies are based in Istanbul. Of the total; 16,627 (36%) are operating in the Wholesale and Retail sectors; 7,467 (16.1%) are in the Property sector; 6,076 (13.1%) are in the Manufacturing sector; 4,437 (9.6%) are in the Transportation, Communications and Warehousing sectors; and 4,131 (8.9%) are in the Construction sector.
The first ten months of 2015 show a somewhat different picture. Of the 4,146 companies founded in this period, 2,182 (52.6%) are from the Middle East, and 991 (23.9%) are from the EU. Despite geo-political tensions in the region, there is clearly a serious interest from such countries as Iraq.
The number of companies established in Turkey from each region does not necessarily reflect the amounts of cash inflow from these regions of the world. Of the USD 9,652 million in direct foreign investment after deduction of property purchase investment (USD 3.356 million) in the first ten months of 2015; USD 5,327 million (55.2%) was from the EU; USD 1,462 million (15.1%) from the USA; USD 1,146 million (11.9%) from Asia; and USD 769 million (8%) was from the Middle East. Of this USD 9,652 million; USD 3,464 million (35.9%) was in the Manufacturing sector; USD 3,335 million (34.6%) in the Financial Services sector; and USD 1,335 million (13.8%) in the Electricity/Gas/Water sectors.
Foreign investors will certainly have been pleased with the end to political uncertainty with the election of AKP back as the single party government after two parliamentary elections within five months. They will nevertheless be somewhat worried about the on-going conflict in the mainly Kurdish southeast of Turkey and the potential of this to spread to the major cities of Turkey. They will also be monitoring the simmering tensions with Russia, whether the new government will be introducing the necessary structural reforms to promote economic growth in the future, and politically-motivated attacks on corporations which are not seen as favourable to the government party.
It is comforting to foreign investors that the ruling government party of 14 years always seems to put business and practicalities first. Though the government has worryingly become more involved in internal and external conflicts and tensions this year, the priorities have always been keeping power and maintaining economic growth. This would explain some extraordinary u-turns in Turkey’s foreign policy strategy in recent months.
Turkish imports in millions of US dollars
7 month ranking
(2014 – 2015)
|4. United States||12,728||6,868||4||7,729||(11.1)|
|8. South Korea||7,548||4,179||7||4,239||(1.4)|
All country total
|Europe (Non EU)||36,367||17,698||21,321||(17.0)|
Table 2 : Top 15 Turkey countries from which Turkey imports (% of total imports)
in millions of US dollars
|% of total Turkey exports|
|4. United States||12,728||6,868||5,3||5,5|
|8. South Korea||7,548||4,179||3,1||3,3|
All country total
|Europe (Non EU)||36,367||17,698||15,0||14,2|
Turkish exports in millions of US dollars
(2014 – 2015)
|12. Saudi Arabia||3,047||2,150||11||1,793||19.9|
All country total
in millions of US dollars
|% of total Turkey exports|
|12. Saudi Arabia||3,047||2,150||1.9||2.5|
All country total