Changing conditions transform Turkey’s economic picture in 2008

The effects of the global crisis on Turkey resulted in declining economic growth, which stood at an average rate of almost 7 percent in the 2002–2007 period. The Turkish economy grew 0.5 percent in the third quarter, the lowest in the last 27, and economists warn that the country could enter recession if no external funding is provided.

 

The inflation rate returned to double-digit figures in 2008 lead by sharp rises in food and energy costs. This trend is however expected to reverse as demand falls and commodity prices decline despite a likely increase in the dollar.

 

The lira lost ground against major currencies as investors pulled out of the money markets. The Turkish currency lost around 30 percent against the dollar and around 20 percent versus euro in 2008.

 

The Turkish stock exchange lost more than half of its value, making 2008 the worst year in the bourse’s history.

 

The yield on the benchmark borrowing rate reached a high of 21 percent during the year, falling to its lowest of 15 percent after the central bank’s latest 125 basis points cut in December.

 

The indicators of deterioration and falling external demand hit Turkish manufacturers hard. The negative atmosphere led to wide spread job cuts, from the automotive and textile sectors, to the banking and media sectors - no sector remained immune.

 

Industrial output fell in 2008 as exports, traditionally the main driver of Turkey’s economy, declined as recession struck the country’s largest trade partner, the European Union. Many companies, especially in the automotive and textile sectors, suspended production and laid off thousands of workers.

 

Turkey’s unemployment, which hovers over 10 percent, is likely to be a headache for the government in the coming year.

 

The Turkish government came under fire from business leaders and investors for underestimating the global crisis and for being reluctant to take measures ahead of the local elections.

 

The delay in signing what is seen as a much needed stand-by agreement with the International Monetary Fund (IMF) was one of the main reason of this criticism. A deal with the IMF is seen as transparency-increasing and credibility-generating for Turkey.

 

Turkish Prime Minister Tayyip Erdogan's administration was also widely criticized for failing to disclose a comprehensive economic stimulus package, such as was implemented by a number of countries, to limit the effects of the crisis.

 

While the government's performance for crisis administration received little praise, the Turkish Central Bank took every possible step necessary to curb the impact of the external economic pressures on Turkey.

 

The central bank implemented a series of measures to relax the liquidity squeeze in the markets, including the resumption of the foreign exchange depot market and interest rate cuts, as well as introducing foreign exchange auctions.

 

GLOBAL CRISIS

The disquiet in the U.S. financial markets first began to emerge in the summer of 2007 and transformed into a full-blown global financial crisis in the fall of 2008 with the fall of Lehman Brothers. As the crisis intensified, the effects of the financial turmoil on developing countries increased in line with tumbling equity markets, falling exchange rates and declining capital flows.

 

A bailout plan worth as much as $700 billion to rescue the financial system from collapse was approved by the United States government after the bankruptcy announcement of Lehman Brothers.

 

The bailout includes some major U.S. companies, including mortgage finance giants, Fannie Mae and Freddie Mac. Banks, and the world's largest insurer AIG, were also supported.

 

In a move to prevent the economy from sinking deeper into ruin with the collapse of one of the country’s major employers, the auto industry, the U.S. government pushed through a rescue package rejected by the senate.ÂAutomakers, General Motors, Ford Motor and Chrysler, will receive a share of the U.S. bailout funds in return for implementing significant restructuring measures necessary to achieve long-term viability.

 

Many countries followed the U.S. initiative with nearly $5 trillion in rescue packages disclosed globally.

 

In this climate, growth in world gross product (WGP) is expected to slow to 1.0 per cent in 2009, a sharp deceleration from the rate of 2.5 per cent estimated for 2008 and well below the more robust pace of previous years.

 

IMF RELATIONS

Turkey’s ruling Justice and Development Party (AKP) government had hoped to be the first administration to cut relations with the IMF after successfully completing its latest $10-billion stand-by program in May. However, changing global economic conditions have proved that this will not be the case.

 

Although, investors and business leaders pushed the government to secure a new loan accord, which is widely accepted as a strong anchor that would help Turkey weather the crisis more easily, the government at first remained reluctant.

 

The upcoming local elections in March were cited as the main reason behind the government’s reluctant stance, since it was said they would not be keen to implement IMF recommended spending restrictions ahead of the polls.

 

As 2008 drew to a close, the government revealed a major shift from its previous stance announcing it was close to a deal with the IMF which was expected to include access to loans of between $20-40 billion. An IMF delegation is expected to visit Turkey in early 2009 to seal the deal.

 

CENTRAL BANK

In 2008, the Turkish Central Bank maintained a tight monetary policy approach inline with its inflation targeting policy, but implemented a series measures aimed at easing the liquidity squeeze. As energy and food prices showed a significant decline from summer highs, the bank started rate cuts, a move which was also consistent with the aim of boosting the slowing economy.

 

In an important move as markets faced a squeeze in liquidity, the central bank cut the lending rate to 17.50 percent and narrowed the range between lending and borrowing rates. The bank also announced it would continue to trim the range if the liquidity pinch lasted.

 

In other measures to counter the tightening in liquidity, the central bank increased transaction limits in the resumed foreign exchange depot market, lengthened the maturity of foreign exchange transactions in this market, and reduced the foreign exchange lending rate.

 

Additional measures announced by the bank to counter continued shrinking liquidity, include plans to buy government bonds in the secondary market and hold 91-day repo auctions.

 

The Turkish Central Bank may find itself in limbo if the lira currency continues to depreciate and the government is forced to continue its price increases, creating renewed inflationary pressures, amid tightening liquidity.

 

MANUFACTURING (REAL ECONOMY)

As the global financial crisis begins to take its toll on emerging market economies, Turkey's industrial activity slumped due to a slide in both domestic and foreign demand. The indicators of the worsening conditions became more obvious with increasing job cuts, factory closures, as well as production suspensions, particularly as 2008 drew to a close.

 

The two sectors long regarded as the locomotives of the Turkish economy, the textile and automobile industries, were the hardest hit by the global crisis.

 

One of the leading Turkish polyester yarn and fiber producers, Sonmez Filament, halted production and laid-off 1,800 workers. Many of Turkey’s smaller textile firms followed a similar move that led to more than 10,000 job cuts in the sector in 2008.

 

Analysts expect a gradual continuation of lay-offs in the sector throughout 2009, as the global affects of recession continue to strengthen.

 

Similar developments occurred in the country’s automotive sector, which faced a sharp decline in demand in the second half of the year, with vehicle production falling to 59,082 units in November, almost halving production figures from the previous year. In 2008, several companies, including Turkish subsidiaries of global automotive manufacturers, halted investments, suspended production and implemented job cuts.

 

Japanese Honda froze its plans to increase capacity in Turkey, while firms including the Ford Motor Co, Fiat, Hyundai, and the Mercedes-Benz’s truck plant, suspended production at their Turkish plants. The decisions of auto manufactures had a knock on effect in the supplier industry, as Pirelli Turkey, a subsidiary of the Italian based tire maker, slashed 80 jobs.

 

The huge debt burden of the Turkish private sector, which is estimated more than 100-billion-dollars, increases the country’s risk premium and remains as a problem that is sure to continue well into 2009.

 

TENDERS / AUCTIONS

Turkey continued the privatization and tender process in 2008 - to create new funds and to implement new investments. One of the most important tenders, in terms of the government’s policy of utilizing local energy sources, was for the country’s first nuclear power plant.

 

The tender received much criticism as a consortium, led by Russia’s state-run Atomstroyexport together with Inter RAO and Turkish Park Teknik, was the sole bidder. Although, many companies had requested changes to the tender law ahead of the process and sought a delay to make a sufficient evaluation, the government rejected the demands. The process for the consortium's proposal for four reactors with a capacity of 4,800 megawatts still continues.

 

Another drawn out tender was held for third generation communication (3G) service licenses. Turkey received 969 million euros from mobile operators for three 3G operating licenses. The country’s leading mobile phone operator, Turkcell acquired the first ever third-generation mobile phone systems license, while Vodafone and Avea acquired the second and third 3G licenses respectively.

 

The Privatization Administration also sold four grids serving central Anatolia, eastern Anatolia, Ankara, and northwest Turkey. Meanwhile the process for the privatization of the National Lottery Administration still continues and is expected to be completed by mid January 2009.