The Chairman's Speech at the Assembly / 27 January 2010

Mr. Chairman, Esteemed Members of the Assembly and of the Press:

On behalf of the Board of Directors, I would like to welcome all of you to our January meeting. I would also like to thank our distinguished guest, Mr. Hüseyin Erkan, President of the Istanbul Stock Exchange, for accepting our invitation to join us today. Welcome!

Esteemed members of the assembly:

The global economic crisis first manifested itself in the summer of 2007 and then deepened in the last quarter of 2008. Two thousand nine was a year in which the negative effects of the crisis further intensified. The first half of the year especially was extremely difficult. Although the downturn slowed, relatively speaking, in the second half, this was not sufficient to save the year, and two thousand nine ended as the most difficult in recent history both for Turkey and for many other economies.

Based on Eurostat figures, 2009 was a year in which the Euro zone contracted by 4.1%, the world's export giant Germany by 5%, the world's largest economy, the U.S., by 2.5%, and Japan by 5.9%. The latest estimate for Turkey is a contraction of 5.8%!

As we now enter a third year overshadowed by this global financial crisis, countries' rising debt ratios are being viewed as a new threat to the world economy. England, Greece, Spain and Japan stand out as having high levels of public debt. Indeed our neighbor Greece has become the new 'sick man of Europe'.

A look at the U.S., where the crisis erupted, shows that the banks that managed to stay on their feet through the crisis, thanks to a bailout by the U.S. Treasury and the Federal Reserve, made big profits in 2009. These big profits, and the banks' decision to distribute them to executives in the form of bonuses, have now sparked tension between the banks and President Obama, and the American administration is currently engaged in an effort to bring the banks under control.

When we look at Asia, we see that the region's rising stars, China and India, sustained their growth in 2009 despite the crisis, China growing by 8.3% and India by 6.5%.

True, the situation is far from brilliant in either Turkey or our major export market, the U.S.A. However, as we always say, hope is of the essence for the industrialist. Without hope, production cannot be sustained. Following a difficult year like 2009, we would like despite everything to have hope for 2010. Indeed, not content with merely being hopeful, we are once again, as we always do, airing our views about what needs to be done to make 2010 a better year.

The World Bank's 'Global Economic Expectations 2010' report states that the global crisis is largely over, but that the incipient recovery could peter out if the extraordinary measures taken by governments are abandoned too soon.

The situation in Turkey reflects that view perfectly, I believe. As we said at the start of the crisis, "Urgent measures need to be taken, so that this crisis, which began abroad in the financial sector, does not become our crisis and spill over into the real sector." Unfortunately, not only did it spill over into the real sector, it did so with devastating impact. During the periods when the crisis was at its peak in Turkish industry, we therefore insisted that "Extraordinary times call for extraordinary measures."

Six months after the crisis deepened, extraordinary measures such as VAT and SCT cuts finally did appear on the agenda. However, these cuts, which appeared to work, were unfortunately short-lived, ending in September 2009. Our industry was, if you will, once again abandoned to its fate under crisis conditions, with the result that the encouraging recovery trend that had got under way in the economy in the second and third quarters began to lose momentum in the fourth.

As you will remember, industrial output was up by 6.4% in October in a surprise jump that pleased all of us. Then, in November, it fell again by 2.2% on the previous year and 8.6% on the previous month. Although we never had high expectations for November, we were nonetheless not expecting a drop of this magnitude. Coming on top of a fall of 13.3% in November 2008, this fall of only 2.2% in November 2009 was not enough to save the day.

A higher than expected fall in industrial output in September, a higher than expected jump in October, and then another drop, again beyond expectations in November - that's what we experienced. This picture clearly shows that the recovery in output has not yet stabilized.

In an innovation this year, the industrial production index, both with and without adjustment for calendar and seasonal effects, was released on the same day in November. Although the figures are different, the zigzag course followed by the index is such as to corroborate the unstable recovery in production.

At the same time, the TEPAV retail confidence index, compiled by the Economic Policy Research Foundation of Turkey (TEPAV) and showing the development in domestic consumption, fell to its lowest level in December 2008. Beginning to rise in January 2009, this index peaked in September 2009, only to start plunging rapidly again towards the end of the year.

Similarly, the ISO index of industrial growth also began to fall starting from October. When we assess these data in tandem, it emerges that a recovery in industrial output and in the economy is going to take time and be a slow process with a lot of ups and downs. Relatively positive results in output could nevertheless be forthcoming in the coming months. It would be wrong however to immediately succumb to optimism and assume that everything is hunky-dory again based on a few relatively positive results.

In an encouraging development, the positive trend in exports did fortunately continue even in December, and according to figures released by the Turkish Exporters Association, Turkey's exports were up 32.3% for the month. Despite growth in recent months, however, over the year as a whole exports took a loss of 24% on the previous year. At this juncture, we have to say once again that the exchange rates need to remain at levels that will shore up exports in order for any hope in this area to be sustained.

Capacity utilization in manufacturing on the other hand has not improved as fast as we were expecting, with firms citing inadequate demand, domestic demand in particular, as the main reason for the low rates.

The first recipe that comes to mind during an economic slump is to take measures to revive the domestic market. If the VAT and SCT cuts that were implemented for six months had been allowed to continue, output and capacity utilization would probably not have followed such a zigzag course.

I must underscore once again that the recovery in output and in the economy should not be abandoned to its fate, to its own dynamics, but should be supported by a comprehensive plan. In the absence of such a plan, our industrialists are struggling hard to sustain and even boost their production. Their voices should be heeded at last and the struggle they are waging backed by urgent measures. We are calling for this at every opportunity!

Anyone can see however that while we are expecting support we are in fact confronted with just the opposite, literally more obstacles. The Finance Ministry's new code system, for example, has seriously disadvantaged many firms. Our esteemed Finance Minister has announced that the code system is going to be abandoned in favor of a group system. We should point out that, as a general principle, combatting the grey economy is a paramount concern for us. But law-abiding tax-payers should not be made to suffer in the process. We hope that the system that is going to replace the code system will not lead to even more problems.

Just when there was a relatively positive development regarding the code system, we were suddenly confronted with another unexpected new move. The social security administration started seizing the bank accounts of firms that owe outstanding premiums. This is a violation of commercial rights and individual freedoms and will not only disrupt firms' payment plans but also damage their commercial relations and jeopardize their future production and jobs. It is unacceptable that, rather than making it easier for firms to pay their premiums, such a repressive measure should be imposed from above.

In yet another worrying development, jobs in the textile and ready-to-wear sector, the biggest job creator in Turkish industry, have now been classified as 'heavy and dangerous work'. Industry has been the only primary sector with falling employment over the past year. Under the circumstances it is very difficult to understand how such implementations, which jeopardize already existing jobs in industry, can even be seriously considered.

Still another problem is the minimum fee that has been introduced for services rendered by customs brokers. I should point out here that our opposition to this measure has no connection with the income customs brokers earn from their services. Our only concern here is our industrialists' rising costs and eroded competitiveness. Fortunately the government has backed down on this measure in its new memorandum. The reduction in fees, however, is inadequate. The best way of dealing with fees is, as before, to let them be determined by free market forces.

Mr. Erkan,

Mr. Chairman,

Esteemed members of the Assembly:

Heading the list of our industry's most pressing problems is a lack of funds and firms' difficulties in finding financing. This problem is putting our small and medium-sized enterprises at a particular disadvantage. One of the basic structural problems of the Turkish economy is the low level of domestic savings.

When the state, due to its high borrowing requirement, seized those savings, which were scant in any case, throughout the decade of the nineties, this put pressure on the private sector.

The situation eased relatively in the post-2001 period, but our SME's this time had difficulty coping with the high cost and conditions of credit. At the same time, for many years, numerous companies in Turkey have been forced to continue operating with exposure to interest, term and exchange rate risk. A look at the balance sheets of companies in Turkey reveals that their equity capital is inadequate and they are therefore financed by short-term bank and commercial loans. Surveys, starting with our ISO 500 survey of Turkey's top 500 industrial firms, show that profitability ratios in our industry have been falling. And when the financial crisis was added to those falling ratios, our firms' capacity for generating equity capital was severely eroded.

We know that it is extremely important as far competitiveness is concerned that our firms expand and capture economies of scale. But how can firms expand in an environment of inadequate financing? How can they gain competitive advantage? It is precisely at this point that it becomes even more essential that our industrial firms be able to take advantage of alternative financing mechanisms such as making public offerings to procure funds.

Another of our industry's leading problems is inadequate institutionalization. Abandoning the traditional family structure and taking advantage of the possibility of making public offerings is a very important opportunity for our industry in terms of institutionalization, thanks to which companies will be able acquire a more solid and healthier financial structure by achieving transparency through independent auditors.

Close to 99% of Turkey's industry is made up of small and medium-scale enterprises, and if public offerings are not available to these firms, then our industry cannot take sufficient advantage of this option. According to the the ISO surveys of Turkey's top 500 and second 500 industrial enterprises, among the country's top 1000 industrial firms in 2008 only 113 - 90 in the top 500 and 23 in the second 500 - were listed on the Istanbul Stock Exchange. This is clearly not enough! We need to increase the number of our industrial firms, particularly our SME's, making public offerings. We have been working on this for a long time.

Finally, we know that a unit called the 'Growing Enterprises Market' has been set up within the Istanbul Stock Exchange. And we have followed with pleasure our chairman's announcements regarding the final phase of putting this market into operation. Today we will have an opportunity to hear about this in detail from him personally. We are eager, Mr. Chairman, to hear what you have to say and we will listen closely.

Encouraging our industrial firms to make public offerings is of great importance for our economic growth and competitiveness. Facilitating public offerings is also important in terms of giving accumulated funds and wealth in Anatolia a chance to contribute to the economy by including them in the financial system. The signing of a cooperation protocol on this subject between institutions such as the Union of Chambers and Commodity Exchanges of Turkey (TOBB), the Capital Markets Board and the Capital Market of Turkey is therefore a significant step. Here at ISO, we too are lending our full support to this process. We therefore regard your presence here today as very important.

Mr. Chairman,

Esteemed Members of the Assembly:

Today, during the worst economic crisis since the 1929 crash, we face very pressing problems in our economy, most urgently unemployment. Nevertheless, politics, not the economy, continues to dominate the national agenda as if Turkey somehow stands outside the global trend. Hardly a day passes but that we are confronted with some new scenario / plot! In order to forge a healthier democracy, Turkey of course needs to come to terms with the dark periods in her past. But this coming to terms should not be done in such a way as to erode our state and our institutions or to destroy our confidence in each other. This ongoing strife and polarization is clearly going to damage all our institutions, our entire society and every one of us.

Most recently, the name of Mr. Ryfat Hisarcıklıoğlu, former Chairman of the Union of Chambers and Commodity Exchanges of Turkey (TOBB), was brought up in connection with one of those alleged plots. Besides his many positive traits, Mr. Hisarcıklıoğlu is a man who supported free market principles during his term of office and consistently pushed for a return to a first-order democracy as the primary target for our country.

It is therefore a terrible misfortune that Mr. Hisarcıklıoğlu's name is now being associated with such anti-democratic and illegitimate intentions and intrigues. More than a misfortune, it is a disgrace for the perpetrators of such notions.

I am voicing these opinions once again here from the podium of our assembly, and I would like to take this opportunity to say that we regard it as very wrong that an attempt is being made to draw the business community into such vendettas.

From the outset we have taken pains to stay out of daily politics, and have strived instead to draw attention to the problems in our economy and our proposals for solution as befits our raison d'être as the chamber of industry. I would like to emphasize that we are determined to maintain that approach from here on out. As I conclude my remarks here at this first assembly meeting of the new year with the hope that 2010 will bring our country peace, tranquility and prosperity, I salute you all once again with affection and respect on behalf of the Board of Directors.

C. Tanıl KÜÇÜK
Istanbul Chamber of Industry
Chairman of the Board of Directors