16 Nisan 2011 Cumartesi

Successive crises pose challenge for investments in Turkey

This file photo shows a man in the southern city of Antalya watching exchange rate movements after the 2001 crisis erupted. AA photo

This file photo shows a man in the southern city of Antalya watching exchange rate movements after the 2001 crisis erupted. AA photo
The late Prime Minister Turgut Özal had been instrumental in liberalizing and privatizing the Turkish economy, yet Turkey continued to attract low levels of foreign direct investment, or FDI, until the start of the new millennium.

After ruling the country for six years, Özal left his Motherland Party, or ANAP, to become Turkey’s new president in 1989. Turkey, which had been opening up to the world economically in the 1980s, began experiencing some of the negative aspects of globalization at the same time with foreign-induced economic shocks coming one after another.

During the 1990s, no single party was able to win a clear majority at the polls, and Parliament witnessed many ruling coalitions. Özal chose to leave the ANAP leadership to Yıldırım Akbulut in 1990, but Mesut Yılmaz, who had served as tourism minister in Özal’s government, challenged Akbulut’s leadership, becoming the party’s new chief and eventually the country’s new prime minister.

Özal’s economic vision continued to be the de rigeur guide for the party, but as ANAP began losing popularity, the reform process began losing steam.

Instead, a rival politician, Tansu Çiller of the center-right True Path Party, or DYP, was gaining support.
Gravely needed FDI was low. “Despite its advantages, Turkey could only attract $1 billion in foreign investment on average per year between 1990 and 2000,” according to a study by the Turkish Industry and Business Association, or TÜSİAD.

Çiller, a staunch defender of a liberal economy, became Turkey’s first female prime minister in 1993 and served until 1996. During her rule, the train of the domestic economy went downhill with a sharp devaluation of the Turkish Lira in 1994. The government laid the foundations of large public sector borrowings that were nearly at 17 percent of gross domestic product. The instability did not allow for a meaningful rise in FDI, which was less than $330 million in 1994.

Meanwhile, annual inflation hit 73 percent by the first half of 1993. The rising real exchange rate paved the way for higher imports and a rising trade deficit, which was around $14 billion in 1993. Moreover, the current account deficit rose to $6.3 billion, nearly 5.3 percent of GDP. By January 1994, rating agencies had downgraded Turkey's debt to below investment grade. To add to the chaos, a second Central Bank governor resigned, while the ratings cut and a budget deficit of 14 percent of GDP triggered a large-scale capital flight.

Asian crisis tests the economy 

The Asian crisis then emerged in May 1997 after Japan hinted at raising interest rates to defend the yen.
This step “shifted the perceptions of global investors who began to sell Southeast Asian currencies, setting off a tumble both in currencies and local stock markets,” according to U.S. economist Dick K. Nanto.

Asian currencies fell dramatically one by one and the International Monetary Fund, or IMF, had to announce a $17.2 billion support package for Thailand. Despite this support, Asian stock markets plunged in August. Only by February 1998 did the Asia crisis begin to ebb.

Turkey was also hit hard as FDI remained low. “The level of foreign investment in Turkey was less than $1 billion in 1999,” said Abdurrahman Arıman, the secretary-general of the Foreign Investors’ Association, or YASED.

“In spite of the Asian crisis, the level of foreign investment in the world had increased by 40 percent by 1998. But Turkey could not manage to increase its share of foreign investment,” he said.

Then came the Feb. 21, 2001, domestic turmoil. When then-President Ahmet Necdet Sezer allegedly “threw” the Constitution book at the late Prime Minister Bülent Ecevit on Feb. 19, 2001 – implying that the latter was acting outside his constitutional mandate – he had no idea he was also opening Pandora’s Box and unleashing forces that had built up thanks to decades of economic mismanagement.

The crisis radically altered the political landscape as well, as the “traditional” political parties, namely those in the coalition government composed of the Democratic Left Party, or DSP, the Nationalist Movement Party, or MHP, and ANAP imploded only months later.

While the crisis swept those parties to the sidelines, the chaos gave birth to a new political formulation, the Justice and Development Party, or AKP, which took power soon after the crisis.

Net foreign direct investment increased markedly after the crisis. After a spectacular jump in 2001, which was largely linked to the privatization that occurred in the telecommunications sector the previous year, FDI went on an upward trend and even surpassed 2001 levels in 2005. After the crisis, some of the financial assets recuperated by the Savings Deposit Insurance Fund, or SDIF, were sold to foreign investors, notably Demirbank, a large private lender that was acquired by HSBC in 2001.

“Turkey’s public debt reached unbearable levels in 2001,” said Mehmet Şimşek, the current finance minister, reflecting on the crisis. He said the country had asked for more financial support from IMF as it could not pay the interest on its debt before the crisis.

A series of steps taken by the government after the crisis paved the way for an increasing amount of FDI to flow into Turkey. Privatization and the political stability under the rule of AKP boosted inflows, which were already encouraged by global developments.

The AKP introduced major incentives for international investors starting in 2003. Corporate income tax was reduced from 30 percent to 20 percent. The government also introduced various tax benefits and incentives in development zones, which included total or partial exemption from corporate income tax.

The rapidly changing business environment accelerated FDI inflows. In 1994, the total FDI amount was $1.2 billion. The figure had risen to $2.9 billion by 2004, then to $10 billion by 2005. In 2006, the amount hit $20.2 billion. But the real success came just a year before the global crisis in 2007, as FDI hit a record of $22 billion.

A total $8.6 billion in FDI flowed into the country in 2010, according to Central Bank data.
The number of foreign firms registered in Turkey increased from 8,912 by the end of 2004 to 25,491 by the end of 2010. Nearly 13,060 of those are based in Istanbul.

“Turkey has been going through significant developments,” said Cefi J. Kamhi, chairman of the Turkish-Indian Business Council. “Foreigners have always eyed the opportunities in this country as in many senses they know us better than we know ourselves.”

The current account deficit and hot money 

Despite the positive outlook of the Turkish economy, economists and businesspeople have often highlighted major problems such as a low savings rate, a rising current account deficit, or CAD, and potentially destabilizing hot money.

The proportion of domestic savings to GDP was at nearly 12.6 percent by the end of last year. “In order to cover its current account deficit, Turkey needs external funding,” Johan de Wit, the deputy general manager of ING Bank in Turkey, told the Daily News in January.

The unrest in North Africa has also increased risks, as Turkey’s energy supply relies on oil imports. Speaking to a TV channel this month, Economy Minister Ali Babacan said every $10 rise in the price of a barrel of crude oil would have a half-percentage point impact on Turkey’s inflation rate.

“The same price rise will also have a nearly $4 billion impact on our current account deficit,” he said.
According to official figures, the deficit for the whole of 2010 was $48.6 billion, or about 7 percent of estimated GDP. The figures are the worst since the Central Bank started making the data public in 1984.
As such, Turkey has to increasingly rely on “hot money” inflows to finance its deficit.

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