Turkey country assessment

• Further reforms in the energy sector are needed. Progress should be made in unbundling the state-owned transmission company and improving its operational efficiency.
  
• A more commercial approach to municipal financing should be developed. The introduction of service contracts and, more generally, commercialisation, particularly in smaller operators, would improve operational and financial performance.
  
• Credit growth should be curtailed, but longer-term sources 
of funding should be developed. Continued rapid credit growth could pose risks for financial stability, especially as the economy is exposed to further shocks in the eurozone. However, the corporate bond market and institutional investors who could provide long-term local currency funding are small and need further development.

The economy is increasingly showing signs of overheating. Economic activity has rebounded strongly from the crisis, with growth estimated at 8.9 per cent in 2010 and 10.2 per cent in the first half of 2011. Confidence, production and order indicators have reached pre-crisis levels or beyond, although some of them showed a modest cooling in the middle of 2011. The capacity utilisation rate still remains below the pre-crisis level. Growth is driven by domestic demand, fuelled by capital inflows and loose fiscal and monetary policy stances. Private sector credit has expanded rapidly, by about 40 per cent year-on-year in August 2011, despite government policies aimed at restraining the booming domestic demand. Import growth has outpaced export growth by a factor of 2.5, as a result of rapid domestic demand growth and increased energy prices. The current account deficit widened to 9 per cent of gross domestic product (GDP), on an annualised basis, in the first half of 2011. Although foreign direct investment (FDI) is also growing, the deficit is increasingly financed by portfolio investment and public and private sector short-term borrowing. Formal and informal repatriation of assets held abroad by the Turkish private sector also appears to have been an important form of financing in the first half of 2011.
 

Fiscal and monetary policies have been loose. Concerned about the potential impact of rapidly deteriorating global economic conditions and of the widening euro area sovereign debt crisis, the Central Bank of the Republic of Turkey (CBRT) unexpectedly loosened monetary policy at the beginning of August 2011 by cutting the weekly repurchase agreement lending rate from 6.25 to 5.75 per cent. At the same time, it raised its main overnight borrowing rate from 1.5 per cent to 5.0 per cent, gradually narrowing the interest corridor. The CBRT has also acted to ease depreciation pressures by suspending daily foreign-exchange buying auctions and reducing reserve requirements for foreign-exchange deposits. Despite loose monetary policy and current devaluation of the lira, inflation of 6.3 per cent in July 2011, remains within the official target of 5.5 per cent ±2 percentage points for the end of 2011. Citing worsening external conditions in September 2011, the Central Bank announced a number of measures aimed at boosting banks’ liquidity, including lower reserve requirements for banks’ FX and lira liabilities and renewed FX interventions. Nevertheless, the lira has continued to depreciate, and as of 5 October 2011 has lost about 20 per cent of its value since the beginning of the year. Fiscal policy, if implemented as announced, will be broadly neutral in 2011.
 

Risks of overheating and an abrupt reversal of capital flows are rising. At the same time, fiscal tightening has not yet been mooted in the public debate. The government has also shown its readiness to act promptly if needed to smooth the possible adverse impact of the new global financial turmoil and economic slow-down by the means of monetary and fiscal policies.

Structural reforms are ongoing in several areas, with current reform priorities being to raise labour market efficiency and reduce energy dependence. Excessive labour market regulation discourages both the formal labour market and the formal economy in general. The widening current account deficit has raised policy-makers’ concerns about competitiveness and Turkey’s energy dependence. The latter has resulted in an increasing policy interest in energy efficiency and the renewable energy sector.
 

The renewable energy sector and the ongoing privatisation of electricity distribution grids are attracting investor interest. A generous endowment in reliable wind and hydropower resources, supporting measures introduced by the 2005 law, as well as high wholesale electricity prices have made significant renewable energy investments profitable, notwithstanding the fact that the feed-in-tariff price floor for renewables is relatively low by international standards. A new law passed in December 2010 introduced feed-in tariffs differentiated by technology, with subsidies for firms using components “made in Turkey”. This will further improve the return to investors. In 2011 Enel Green Power (EGP), the renewable subsidiary of the Italian company Enel, reached an agreement with the Turkish industrial group Uzun to develop geothermal plants in Turkey. The non-renewable electricity generation system, however, remains mostly in state-owned hands although the government is in the process of privatising parts of it, with mixed success so far. Turkey’s Privatisation Administration (ÖİB) announced that 2011 “will be the year of the privatisation of power plants”, with 16,000 MW of power plants to be privatised. The last round of electricity distribution assets privatisations, however, stalled as the five awarded companies failed to secure the necessary financing worth US$ 9 billion.
 

Privatisation of Ankara’s natural gas distributor, Başkent Doğalgaz, Turkey’s second-largest gas distribution company, has been postponed until the end of October 2011. In March 2008 a consortium led by Turkey’s Global Yatırım Holding submitted a bid of US$ 1.61 billion for the gas distribution grid. The offer from the second-highest bidder, Elektromed, was US$ 1.55 billion. After several legal problems which occurred during the transfer of Başkent Doğalgaz to Global Yatırım Holding, the auction was awarded to the runner-up, Elektromed. However, the Ankara Municipality then cancelled the tender because Elektromed failed to meet its responsibilities.
 

Large public infrastructure companies continue to be privatised and new projects are being implemented. To improve logistics and increase passenger turnover the government is planning to build seven new airports by 2013. The privatisation process for the motorways and bridges by the method of “Transfer of Operation Rights” started in 2011. A deadline of 15 December 2011 has been set for applications. The whole network of existing motorways and bridges will be privatised as a single package. Also, the tender for the Northern Marmara Highway “build, operate, transfer” (BOT) concession, which will also include the construction and operation of the third Bosporus bridge, is planned for the end of 2011. With an estimated cost of US$ 6.5 billion it will be the second-largest infrastructure project in Turkey after the Izmit Bay Crossing. Construction of Çandarlı Port is on schedule, and the facility is due to accept its first vessel in 2013. The port is intended to cater for Turkey’s growing maritime trade and also to function as a regional hub port, offering connections to the Middle East and the Black Sea states, and potentially competing with the Greek port of Piraeus.
 

Inefficiencies and protectionism remain significant in the agricultural sector, but there is growing investor interest in primary agriculture. Ziraat Bank intensified its subsidised agricultural lending in the run-up to the 2011 parliamentary elections. Nevertheless, large corporates are increasingly showing interest in entering primary agriculture and engaging with the fragmented universe of small, informal and inefficient family farms, for example, through longer-term off-take relationships. The large corporates (and their banks) are also beginning to see investment opportunities in improving health standards in dairy and meat farming.
 

The Government’s 2011 Annual Programme targets an improved investment climate. The new programme, announced in July 2011 by Prime Minister Recep Tayyip Erdogan focuses on the development of an enterprise-friendly system, in which efficiency is increased and bureaucracy reduced. To achieve these goals the National Competition Authority continues to strengthen its anti-trust regulation and competition advocacy activities. Recently, effort has been made to further coordinate competition policies with public procurement practices and sector regulators in the network industries. The government is already focusing on employment and education reforms. A new draft of the national employment strategy, prepared in 2011, focuses on severance payments. If implemented, this will make Turkey’s labour market more competitive and will reduce the large burden on firms.