I am often asked by foreign investors visiting Ankara who want to take the pulse of our politics and economy whether Turkey is still a safe place to invest against the background of the Gezi Park protests, violent flare-ups from marginal groups, unresolved Kurdish and Alevi issues, the unfinished democratization and reform process, worrying signs of consolidation of power in the hands of the government, signs of corruption and favoritism and security challenges in Turkey’s tough neighborhood. My answer is undoubtedly “yes,” not only because the fundamentals of the Turkish economy are still sound and strong, but also because the rising entrepreneurial middle class in a predominantly young population has been a real driving force in Turkey’s political, economic and social transformation.
Especially for long-term investors, I would say Turkey represents one of the best and safest places to deliver good returns in the turbulent Middle East. Since establishing a presence in Turkey takes time, sometimes merely looking at the eye-catching events that appear on the sensational 24-hour media may cause some to lose sight of the forest for the trees. This country has accomplished a lot in the last three decades, with its current performance standing out from the crowd of countries straddling Europe and the Middle East. In the West, the European Union is still trying to pull up from its rock-bottom economic crisis; in the East, the region is plunging deeper into political instability and uncertainty. Turkey is a shining beacon in the middle.
There is a new wind blowing in the world economy, which brings both good and bad news for Turkey. Its exports may bounce back in the EU, but it may see capital outflows because of new signals being made by the US Federal Reserve. In any case, Turkey has a better chance of riding out this new storm with its young demographic and dynamic, competitive economy that is closely monitored and managed by a well-qualified economic team in government. The fact that sustained political stability with a single-party government is expected to continue, despite three elections lined up ahead, gives further hope.
I suppose that just like everyone else, we will have to accustom ourselves to low growth figures in the world economy from now on. Turkey’s gross domestic product (GDP) expansion, which was 2.9 percent in the first quarter of 2013 and 4.4 percent in the second quarter, is expected to be over 3 percent by year’s end. Thank God the effects of the neighborhood challenges placed on the Turkish economy, be it from Syria, Iraq or Egypt, have been very limited so far. Unfortunately, the main structural problem of a large current account deficit (CAD) is still there, although it had been on the decline in recent years. When the gold trade with Iran was taken out of account — a temporary blip on the radar that skewed the data — the CAD was 9.2 percent in 2011 and dropped to 6.8 percent in 2012. It was expected to be 6 percent by the end of the year. But compared with the GDP and financial capabilities of Turkey, it is not a big threat to the Turkish economy.
The data also indicate that the brouhaha made over capital outflows after the Gezi Park protests had little relation with reality. There has been no unusual activity in capital outflows in Turkey since the protests started in late May. The net capital outflow since then has been only some $2 billion. Considering that foreign investors have a $60 billion portfolio investment in the stock market, this amount is peanuts. The same situation can be seen in government bonds and Treasury bills. Only $1 billion out of some $60 billion in investment left the country permanently. The outflow in the foreign exchange (FX) swap market was $8 billion, which is not unexpected, either, considering the rate volatility we have experienced. Similar outflows in the Turkish economy have been recorded almost every two years since 2006. The government does not seem to be worried because the fundamentals in the economy are strong and the public has maintained its confidence in the government to handle the situation. The Financial Stability Committee and the Economy Coordination Board, two key watchdogs that monitor, evaluate and implement prudent fiscal and economic measures, are important governmental tools to respond to these challenges.
While our partners in Europe were increasing their debts with fiscal expansion, Turkey was able to bring its debt down from 46 percent of GDP to 36 percent. After subtracting liquid assets held by the government, the net public debt in Turkey is actually 17 percent of GDP. Thanks to $34 billion of assets in foreign bonds, the government does not have an external public debt and is immune to rate volatility in the local currency as well. The budget is also performing well. It is expected that the 2013 budget deficit will come in at below its target of 2.2 percent of GDP. The primary surplus will exceed its target of 1.2 percent of national output this year. What is more, the quality of debt, public and private, has also improved over time, with longer maturity periods and therefore reduced risks.
Turkish banks are well capitalized, with adequate liquidity and promising balance sheets. A target capital-adequacy ratio of 12 percent has been maintained for years, well above the Basel II requirement of 8 percent. Today, banks have only 2.8 percent credit on their collections. They pass periodic stress tests with flying colors. The Turkish private sector’s foreign debt, which has increased by $12.8 billion to reach a total of $183 billion between the end of 2012 and July, does not seem to be a major issue, either, as banks continue to lend to companies, allowing them to roll over debts without major difficulties. Yet a sharp reversal in capital flows may spell danger for private companies. That is why increasing domestic savings and enhancing the competitiveness of industry are important for Turkey.
The June unemployment rate, announced on Monday by the government, was 8.8 percent, with the number of employed individuals at 26.3 million. In contrast to unemployment figures in Europe, which are still in the double digits, Turkey has not only decreased unemployment but also broken records with employment figures. The economy created 742,000 jobs in the last 12 months. Inflation decreased in August, bringing the annualized consumer price to 8.17 percent. The central bank forecasts that 2013 inflation will reach a mid-point of 6.2 percent.
Morale among Turkish consumers hit its highest level in July since March 2012, with a 2.9 percent rise on the previous month. This high overall confidence comes as consumer expectations about employment levels, household incomes and the overall economic situation remained high at 85.7 points, 94.3 points and 105.1 points, respectively. Industrial production saw a month-on-month rise of 1.4 percent in June, and also grew on average by 3.2 percent in the second quarter. Turkey has seen its exports slightly increase by 1.3 percent to $98.9 billion between January and August year-on-year and estimates indicate that exports will reach $158 billion by the end of the year. In terms of foreign direct investment (FDI), Turkey will continue to attract FDI, albeit at a lower level because of a possible reversal of US liquidity policies. The country enjoyed an FDI inflow of $19.5 billion in 2008, when the US-centered global financial crisis broke out. Last year it totaled $12.6 billion. FDI to Turkey dropped to $2.4 billion in the first quarter of the year from $4.6 billion in the same months of 2012.
Having tripled per capita income in the last decade and with an average growth rate of 6.7 percent in the economy for the last three years, Turkey will continue to grow. One advantage of the Turkish economy is that it is driven largely by private industry. The government’s role is only 27 percent of Turkey’s GDP, much lower than the 35 percent average of the Organization for Economic Co-operation and Development (OECD) countries. This figure is almost doubled in France. The limited role of government in the economy brings dynamism, productivity and competitiveness. This country stands at a very strategic market junction, with easy access to 1.5 billion customers in Europe, Eurasia, the Middle East and North Africa, allowing access to markets with a total GDP of $23 trillion. I would say Turkey is still a safe bet for investors when Europe is still in tatters and the US is giving mixed signals. The fact that both global credit ratings agencies Moody’s and Fitch Ratings upgraded Turkey’s rating to investment grade is testament to the strength of the Turkish economy.
On a side note, for those who worry about press freedom in Turkey, I would say the vibrant and very dynamic media landscape in Turkey renders government attempts to muzzle the press ineffective. Just look at the figures: There are 400 national, regional and local TV channels in addition to 1,100 radio stations. With satellite dishes, Turks can gain access to hundreds of international channels. Over 7,000 newspapers and magazines are being published in Turkey. According to government data, almost 50 percent of Turkish households have broadband Internet access. Less than half of Internet users go online with mobiles and smartphones. Three-quarters of them say they read or download online news, newspapers or news magazines. Turks are also very active users of social media. For example, Turkey is the number-six presence on Facebook globally, with more than 32 million users. The number of Twitter users in Turkey climbed to 9.6 million in 2013 from 7.2 million in 2012. The daily number of tweets sent by Turkish Twitter users increased from 1.7 million in 2012 to 8 million in 2013.