The Report: Turkey 2015

Despite some recent turbulence, Turkey has strong fundamentals that underscore its potential for long-term economic growth. With a young and growing population of 77.7m, a strategic location within four hours’ flying time of around 1.5bn consumers and a diversified economy, the country has much to offer investors. Lower oil prices have helped reduce the chronic current account deficit, but major structural reforms in areas ranging from education to the labour market will likely be necessary to return growth to the levels seen in recent years, and much will also need to be done to restore investor confidence.

Country Profile

Many have hailed Turkey’s growth over the past decade, and for good reason. The country averaged expansion of 5.4% between 2003 and 2013, one of the highest rates in the world. This was accompanied by drops in unemployment and poverty, as well as gains in school enrolment, home ownership and life expectancy. Since 2013, however, there has been a sharpening of disagreement over the direction of Turkey’s development and the role of its leaders and institutions, and the political discourse in early 2015 was dominated by the run-up to parliamentary elections in June.

This chapter contains a viewpoint from President Recep Tayyip Erdoğan.

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Trade & Investment

Turkey has spent the last decade trying to maximise the potential of its geographical position to fuel export-led growth. While this has been hampered by a heavy dependence on imports, especially hydrocarbons, and a bulging current account deficit, the country has made great strides in increasing trade volumes and diversifying markets. With strong domestic growth and a sense of economic stability following the difficulties of the 1990s and the 2001 banking crisis, the country has been able to radically transform the investment environment, garnering record foreign direct investment in the last 10 years. The coming year is likely to see Turkey’s trade deficit shrink as a number of factors converge to boost exports.

This chapter contains an interview with Richard Moore, UK Ambassador to Turkey, and a viewpoint from Dr Jim Yong Kim, President, World Bank Group.

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Throughout 2014 Turkey had to shoulder its fair share of international financial turbulence, especially in terms of currency volatility. However, despite investor concerns, the country has largely retained its appeal and long-term growth potential, provided appropriate structural reforms are enacted. The past decade has seen the economy thrive. A young and growing population and a strategically important location have helped make Turkey a potential economic heavyweight. However, concerns remain over renewed political uncertainty and the private sector’s exposure to external debt. If the country can overcome the current investor uncertainty and improve productivity through much-needed reforms, the ambitious growth targets set by the government could eventually be reached.

This chapter contains interviews with Mehmet Şimşek, Minister of Finance; Mark Lewis, Former Senior Resident Representative in Turkey, International Monetary Fund; and Ömer Cihad Vardan, President, Foreign Economic Relations Board of Turkey.

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Turkey’s banking sector has proved resilient in the face of both the global economic crisis and more recent fluctuations in the economy. Loan growth remains fairly high by developed-market standards but has fallen in recent years, reflecting the market’s increasing maturity as well as regulatory moves to contain credit expansion with an eye on risk profiles. In the medium to long term, the market should benefit from the large population, the scope for growth in a country with moderate levels of banking penetration and the expansion of a diversified economy. The outlook for the longer term remains positive. Turkey is one of the world’s largest emerging economies and has a sizeable and growing population and a diversified economic base. The continued entry of new players to the market is indicative of the sector’s potential.

This chapter contains interviews with Erdem Başçı, Governor, Central Bank of the Republic of Turkey; Ali Fuat Taşkesenlioğlu, CEO, Halkbank; Suat İnce, Deputy Chief Executive, Türkiye İş Bankası; and Hikmet Ersek, President and CEO, Western Union.

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Capital Markets

Turkey’s stock exchange, Borsa Istanbul (BIST), had a bumper year in 2014. It was the fifth-best-performing exchange globally, with the BIST 100 index rising by 26% and closing at a record year-end high. While the early months of 2015 were more muted, the appeal of the exchange and many of its listed stocks to investors is still strong. Turkey’s equity and bond markets felt the impact of cooling investor sentiment and the related fall in the lira in the first few months of 2015. A degree of uncertainty over the fiscal and monetary policy outlook ahead of the election had an effect as well. However, the reforms of the past few years have left the country’s capital markets larger, more liquid, more accessible to foreign capital and all together better-off. Tough as some periods may be, the market’s future is founded on that of its economy, and in this regard Turkey’s large, young populace and diverse economic base are major assets.

This chapter contains interviews with Vahdettin Ertaş, Chairman, Capital Markets Board, and İbrahim Turhan, Former Chairman and CEO, Borsa Istanbul.

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While the global insurance industry saw growth slow over the course of 2013 and 2014, Turkey’s insurance sector displayed resilience, making the country an attractive market for investment and expansion. Despite fluctuations in other sectors and a depreciation of the local currency, in real terms Turkey’s insurance sector experienced significant growth in both the life and non-life segments. Overall, the expectation is of continued premium growth in 2015, with companies also taking greater control of their technical results, boosting profitability. Pensions will likely continue seeing positive growth as well, although potential uncertainties may impact consumers negatively in the period up to elections in 2015. In addition, the diversity of products on offer is set to expand.

This chapter contains interviews with Mehmet Bostan, General Manager, Vakıf Emeklilik, and M Uğur Erkan, CEO, Anadolu Hayat Emeklilik.

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Industry & Retail

Turkey’s industrial sector includes a wide variety of manufacturers, primary producers and traders, responsible between them for a sizeable share of the country’s GDP. Steel, chemicals, pharmaceuticals, electrical and electronic equipment, building materials, cars, jewellery and clothing are all major export earners and magnets for international investors. All have benefitted from – and, indeed, driven – much of the country’s recent economic growth, with goods bearing the “Made in Turkey” label now more prevalent than ever in world markets. With the size of the retail market widely expected to double over the next decade, Turkey represents a major opportunity for retailers. Yet recent years have seen big internationals pulling out or downsizing their involvement, and as the pace of economic growth slows, consumer confidence is weakening and some challenges do remain. For foreign investors, the lesson would appear to be that retail businesses still need a strong dose of local knowledge. Good geographical positioning and local partnerships may therefore be the way forward.

This chapter contains interviews with Bora Yalınay, CFO, Ülker; Sadettin Korkut, General Manager, Petkim Petrokimya Holding; and Muharrem Dörtkaşlı, CEO, Turkish Aerospace Industries.

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Given its reliance on energy imports and the economy’s recent slowdown, Turkey has benefitted from the sharp decline in oil prices in late 2014 and early 2015. The country has boosted energy supplies to support future economic growth, while seeking to reduce its energy dependence. In addition, a long-running dream to become an energy hub is starting to become a reality. Significant investment from the private sector and an increase in renewable in its power-generation mix can help the government meet the ever-rising demand for power. Finding new sources of oil and gas, including domestic ones, while expanding its burgeoning role as an energy transit hub are central to its strategy.

This chapter contains an interview with Besim Şişman, CEO and Chairman of the Board, Turkish Petroleum.

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Construction & Real Estate

Over the last decade, the construction sector has transformed the skyline of Istanbul and other cities, renewed and extended Turkey’s transport infrastructure, and built new communities and facilities from the Aegean to the Caucasus. Construction employs tens of thousands directly and has also established a range of related industries— such as construction machinery, building materials, engineering and architecture. With the domestic market providing a strong base, and with Turkish contractors having successfully diversified their markets and projects in recent years, the construction sector is well positioned to continue growing. From residential to retail property, the real estate market has also flourished in the last few years. With strong fundamentals in terms of population and income growth, the market should be able to maintain its expansion in the years ahead.

This chapter contains a dialogue with Ergil Ersü, Chairman, Gama Holding, and Orhan Paçacı, Member of the Executive Committee and Shareholder, Mesa Holding, and an interview with Emin Sazak, CEO, Yüksel İnşaat, and former President, Turkish Contractors Association.

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Substantial rainfall in the winter and spring, coupled with heavy snow in many regions, broke the drought that hit Turkey’s agriculture sector hard in 2013-14, with farmers looking forward to improved yields and higher earnings, and rebounding from a lean year that saw one of the region’s leading agriculture producers having to import grain and other foodstuffs. Agriculture provides jobs for around a quarter of the workforce, a figure that rises further when the value-added component of processing and agribusiness is factored in. Self-sufficient in many products, Turkey is also a major agricultural powerhouse internationally. It is ranked first in Europe in terms of agriculture output and seventh globally. Yet, obstacles to investment persist, primarily the fragmented landholding structure. The government has said it wants to unify the rest of Turkey’s fragmented farms and bring water to all irrigable areas by 2020. This will help the country reach its 2023 target of $150bn in gross harvests.

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Turkey has easy and direct access by road, sea and, to a lesser extent, rail to markets with 1.5bn people and a combined GDP of $25trn. In 2012 Turkey handled 1.2% of global trade, and this is expected to exceed 1.5% by 2025. The 2014 budget allocated €16.72bn to transport, of which €2.04bn was earmarked for rail, almost double that going to the road network. At €3.27bn, the Marmaray project topped the list of spending in 2014. Dozens of construction projects are on the current agenda. Among them are high-speed rail links, bridges, motorways, the world’s largest airport and a 50-km channel that will transform half of Istanbul into an island. Carrying out so many grand plans will prove costly, and inevitably some will be scaled back or scrapped altogether, but judging by what Turkey has accomplished so far, many of these projects may well be realized.

This chapter contains interviews with Turgut Erkeskin, President, Association of International Forwarding and Logistics Services Providers, and Mümin Kahveci, General Manager, Istanbul Electric Tramway and Tunnel Establishments.

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Telecoms & IT

The telecoms sector in Turkey has long been viewed as a rising star, with a young, digitally adept population and rising personal incomes driving demand in the mobile voice and data segments. In recent years, the industry has been affected by macroeconomic issues, including a weaker lira, as well as some restrictive regulatory changes. Even so, Turks spent more than TL35.5bn (€12.5bn) on telecoms in 2014, up from TL32.2bn (€11.34bn) in 2013, according to the Information and Communication Technologies Authority. Turkey’s IT sector is benefitting from the rapid, widespread development of internet services, infrastructure investment and e-commerce activity. Internet growth is being driven by fibre-optic expansion, increased adoption of 3G mobile internet and planned nationwide 4G network services that will require significant investment from the public and private sectors. Internet speeds are increasing and Turks are embracing the latest offerings in record numbers. Infrastructure investment by domestic and foreign firms is on the rise, buoyed by demand from a young and tech-savvy population, and all signs suggest that the telecoms and IT sectors are poised for expansion in 2015 and beyond.

This chapter contains an interview with Mehmet Nalbantoğlu, CEO, KoçSistem.

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Great strides have been made in Turkey’s health care sector since 2003, when the government launched its far-reaching Health Transformation Programme (HTP). The HTP eventually led to the establishment of universal health insurance, while opening services and private hospitals to the majority of Turks. Improvements in patient satisfaction and health indicators have been steady, with infant and maternal mortality declining while life expectancy rises. Ratios of hospital beds, doctors and nurses to patients remain low by European standards. There are also concerns that the national health insurance system may not be sustainable in the long term, as the import-dependent pharmaceuticals market has shown tremendous growth in recent years, while patient numbers and hospital visits continue to rise. The private sector offers some solutions: public-private partnerships will see the number of doctors and hospital beds increase and patient care improve, while rapid expansion in medical tourism will bolster revenues and help the sector mature. As Turkey builds more facilities, 2015 should see a continuation of the trends that have already brought investors, professionals and new patients flocking in.

This chapter contains an interview with Hasan Ulusoy, Chairman, Nobel İlaç.

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Education & Research

Driven by government reforms, increased private sector investment, and one of the largest and youngest populations in Europe, Turkey’s education sector has grown and matured impressively over the past decade. As the country moves forward on a host of education targets, including Vision 2023’s goal of reducing unemployment to 5%, key indicators such as literacy and enrolment have shown improvement. However, stakeholders have highlighted continuing challenges, including low enrolment across the secondary and tertiary levels, gender and regional disparities at the primary and secondary levels, and serious capacity constraints in the post-secondary system. The government has taken note, increasing its annual education budget each year and launching new projects aimed at expanding research and development (R&D) at post-secondary institutions. Turkey’s sizeable young population is poised to capitalise on a growing and increasingly inclusive education system that should help to improve employability and employment levels in the years to come.

This chapter contains an interview with Turgut Şenol, General Manager, Teknopark Istanbul.

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With a selection of archaeological ruins to rival that of Italy and Greece, 7200 km of scenic coastline, Istanbul’s unique blend of rich heritage and cosmopolitan culture, and an advantageous location at the crux of three continents, Turkey’s diverse visitor offerings have seen its popularity grow rapidly over the past decade and the country is now becoming a leading international tourism hotspot. The country ranks as the world’s sixth-most-popular tourist destination, after France, the US, Spain, China and Italy. In terms of source markets Germany remains the number one tourist market for Turkey, recording 5.2m visitors in 2014, and is closely followed by Russia (4.48m) and the UK (2.6m). The country is well on its way towards meeting many of its Vision 2023 tourism goals, including the overarching goal of welcoming 50m visitors annually. With new hotel and transport infrastructure, as well as increased government promotion of various tourism sub-segments, the sector is expected to remain healthy.

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This chapter examines the tax environment in Turkey, looking at a pending new income tax as well as how the tax law deals with corporations. It also includes an analysis on the various ways that Turkey’s investment climate could be improved in the context of taxation.

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Legal Framework

This chapter examines the legal environment in Turkey, focusing on how changes in regulations are enabling investment across the country’s many business sectors. It also contains a viewpoint from Harun Kılıç, Partner at Kılıç and Partners.

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The Guide

This chapter contains useful information for visitors to Turkey, including visa requirements, listings of recommended hotel, and contact information for foreign missions, travel agencies, hospitals and other important institutions. It also contains features pieces exploring the history of Istanbul’s famed Maiden’s Tower and the Aegean island getaway of Bozcaada.

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