The Chairman's Speech at the Assembly / 28 April 2010

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

On behalf of the Board of Directors I would like to welcome you to our April assembly meeting. We would like to thank our distinguished guest, Prof. Dr. Vedat Akgiray, the Chairman of the Capital Markets Board, for accepting our invitation and joining us today. Welcome! Our guest at our January assembly meeting was Mr. Hüseyin Erkan, the Chairman of the Istanbul Stock Exchange. Today it also gives us great pleasure to have with us Mr. Akgiray, the Chairman of the Capital Markets Board. We regard both meetings as important opportunities for our industry and our capital market to understand each other better and to develop communications and cooperation between them. We are also very pleased to have with us today the distinguished chairmen of the assembly and of the board, as well as members of the board, of the Kocaeli Chamber of Industry. We welcome all of you.

Esteemed members of the Assembly:

Following the 2001 crisis, the Turkish economy grew without interruption for 27 quarters, from the first quarter of 2002 through the third quarter of 2008, and during this period our average rate of growth was around 6.5%.

Unfortunately, this positive period was interrupted in the fourth quarter of 2008 under the impact of the global economic crisis. The ensuing contraction, which continued in the first three quarters of 2009, ended with the 6% growth that was achieved in the last quarter. With this last quarter growth, the rate of contraction in 2009 came in below expectations at 4.7%.

Looking at our sub-sectors we find contractions of:

7.2% in manufacturing,

16.3% in construction,

10.4% in trade, and

7.1% in transportation.

When things went badly for our industry, significant drops also occurred in the value added of our trade and construction sectors. As these sectors were contracting, the agricultural sector, in a remarkable development, grew in crisis year 2009 by 3.3% under the influence of favorable seasonal and climatic conditions. The banking and finance sector grew as well, by 8.5%, and therefore appears not to have been affected by the crisis.

The contraction in the economy, in the real sector especially, led to a rise in unemployment. The 2001 crisis had a similar effect, and the unemployment rate, which was around 6% before the crisis, stabilized at around 10% in the post-2001 period. In the recent crisis it rose as high as 14%.

Even more dire in 2009 was the 17.4% rate of unemployment outside agriculture and the 25% rate of unemployment among the youth population.

Another noteworthy development occurred in employment figures by region. The region with the sharpest drop in jobs in 2009 was Istanbul with 197,000 jobs lost, 82.2% of them job losses in industry. Unemployment, which leads to issues such as loss of income, psychological depression, ruptured social relationships and dissolution of the family, is a major problem with economic and social ramifications.

Joblessness and unemployment in Turkey constitute a complex issue with multiple dimensions, which has also taken on a structural aspect. For years now we have been trying to draw attention to the various dimensions of this problem. Above all else, Turkey's unemployment rate is high and sticky. Our rate of employment on the other hand is low and continually falling. Our rate of population growth is high. Close to half of employment is off the records. Our labor market is rigid and the cost of employment is high. Most importantly of all, there is a mismatch in professional qualifications between labor force supply and demand in Turkey.

We should point out here that unemployment is not merely a problem of the current period. The problem has been building up over the years, and the frequent crises have further exacerbated it. Such a cumulative and multi-dimensional problem naturally cannot be solved through temporary expedients. There is of course a need for short-term measures, but the main thing is to be able to develop medium and long-term solutions based on sound strategies. One thing we know, namely, that an employer can only create jobs if a suitable climate is developed. Nevertheless, the basic motivation of the business community is not to create jobs but to develop its own business. An employer who is able to grow his business will naturally also feel a need for additional employment.

According to figures published by the Turkish Bureau of Statistics (TÜYK), workplaces in branches of activity other than agriculture that employ from one to nineteen workers make up 98% of the total. It would therefore appear that close to all enterprises in Turkey are small-scale, with the result that they are also the crux of the problem. These enterprises, which are engaged in a struggle to preserve existing employment but which lack the capacity to hire even one more worker, much less to create new jobs, need support simply to preserve the jobs they already have.

This should not be construed to mean that we are closed to cooperation. Distance in solving the problem can only be covered through a joint effort by all parties involved. As the business community, we are of course engaged in efforts to fulfill whatever obligations devolve on us. But a pre-condition for our fulfilling that obligation in the best way possible is that our government should create conditions that foster investment, production and employment.

Esteemed members of the Assembly:

In the wake of 2009, which was a difficult year in terms of both production and employment, we are now about to leave behind the first four months of 2010. As of the first months of the year, we are on relatively firm ground as far as production is concerned. Judging by the figures that have been released, industrial production over the past three months was up by

25% in December,

12% in January and, finally,

18% in February

over the previous year's figures.

Although the base effect of the large contractions that took place in the same period of 2009 played a role in these increases, the rise in industrial output is positive and encouraging .

The rate of capacity utilization in manufacturing in April also rose by 4.3 points on the previous month and 11.9 points on the same month a year ago to 72.2%. This is the first time in seventeen months - since November of 2008 - that capacity utilization has topped 70%. This too is a promising development.

At the same time, the real sector confidence index was up in April by 33.7 points on the same month the previous year to the level of 118.8. These developments are positive and significant in terms of fostering the recovery trend in the economy and in production.

We should point out, however, that when we look closely at the figures for both industrial production and capacity utilization, it appears that the increases that have been achieved merely compensate last year's losses. Production of motor vehicles, for example, one of the leading sectors of Turkish industry, was up by record levels of 66.7% in January and 71% in February. But falls in production of up to 60% were recorded in this sector in January and February of last year.

Things are therefore just embarking on a normal trend, and there is as yet no additional production to cover the losses.

Forgetting the enormous losses of the same period last year and focusing only on this year's losses will keep us from seeing the whole picture. This year and last year absolutely must be assessed in tandem. From now on, the problem in front of us should be not only compensating the losses but ensuring additional production above and beyond them.

Mr Chairman,

Distinguished Guests,

Esteemed Members of the Assembly:

Turning again to the growth figures, let us have a look at investment and consumer spending. Private consumer spending contracted steadily for five quarters. It moved back into positive territory in the last quarter of 2009 with a growth of 4.7%.

This increase in private consumer spending is encouraging as a sign of life in the domestic market. As we see it, however, the darkest picture in the growth figures is that in investments. In 2009 the share of fixed capital investment spending in GDP, in current prices, was 16.8%. And this is the lowest level in the last fifty years.

On the other hand, a steady contraction in private sector investment spending has been under way for seven quarters.

Public sector investment spending, too, declined by 8.6% in the last quarter of 2009 and by 2.2% for the year as a whole. In periods of crisis public investments are, theoretically, expected to rise in order to stimulate the economy. In Turkey, however, public investment declined in 2009 due to concerns over the budget deficit.

Let us remind listeners once again that no lasting solution to our unemployment problem is possible without boosting investment. We hope - we would like to hope anyway - that investment spending will move into positive territory as soon as possible.

As we have so frequently tried to point out, a low level of domestic savings is one of the basic problems of our economy. In 2009, the share of domestic savings in GDP was 13.7%, the lowest level in the last fifty years. If we remind listeners that this rate is around 25-30% in the emerging economies, and somewhere between 50% and 60% in China, then Turkey's shortcomings in this area emerge more clearly.

As is evident in the table, the ratio of domestic savings to GDP has fallen steadily in the post-2001 period. The high growth rates achieved have not been sufficient to boost savings. The reasons for the low rate of domestic savings and how it can be improved are a matter for debate.

If we make a brief identification of the problem on the industrial front, the profitability ratios of our enterprises have been falling steadily according to our annual ISO 500 surveys of Turkey's top industrial firms. And as the producer's profitability has fallen, his difficulties in generating funds have increased proportionately.

If we leave aside the reasons for Turkey's low rate of domestic savings and look at the result, this is what we find: Securing financing and finding funds to make investments are a perennial problem in economies with a low rate of domestic savings. When we view the situation from a historical perspective, for example, and look at our table in ten-year periods, it appears that Turkey has had a savings/investment gap ever since the 1970's.

A balance was established in the 2001-2005 period but that balance was upset again starting in 2007. What's more, because of the low level of domestic savings, the ratio of total deposits to GDP in Turkey is also below 50%. In the European Union in contrast it is around 150%. Imagine an economic climate in which the producer's equity is extremely limited. At the same time, deposits are inadequate, and the financing opportunities offered by the banks are very expensive. Enterprises are constantly experiencing financing difficulties and seeking alternative resources. As a result, in the post-2001 period, for example, a period when the Turkish Lira was overvalued, entrepreneurs took the route of borrowing from abroad at the cost of incurring exchange rate risk.

Let us look now at another dimension of the problem. Yes, our rate of savings is inadequate. But are we able to make efficient use of the inadequate savings we have? Are we able to effectively utilize of our savings potential? It is at this point that the capital markets emerge as a window of hope, an opportunity for an important initiative. When we look at the situation in the country, however, it appears that we are not taking sufficient advantage of this opportunity. The development of our capital markets has fallen short of our economic potential. Despite some major successes, our stock market has not shown any significant development in the last twenty years.

During the 27-quarter period of growth when important developments occurred in the economy and we grew on average 6.5% a year, the number of firms listed on the Istanbul Stock Exchange remained more or less the same. Although there were fluctuations from year to year, close to 85% of our top 1000 industrial firms are still not traded on the stock market.

Our mutual fund and derivatives markets on the other hand are small. Until our capital markets develop, sufficient distance cannot be covered in the solution of our financing, investment and development problems.

Our capital markets need to be developed,

so that our capital base can be broadened,

so that our firms can secure cheap financing,

and so that employment and investment can grow.

There is a need for an increase

in the number of firms making public offerings,

in the further development of our stock market,

in the growth of our derivatives and mutual fund markets,

in the growth of our private sector bond market, and

in the creation of real estate markets.

In an encouraging development, an absolute consensus was recently achieved on this point; even more importantly, spearheaded by our Capital Markets Board and the Istanbul Stock Exchange, the will to do so has also been palpably demonstrated. The Union of Chambers and Stock Markets of Turkey is a part of the process as well. We are following these developments with pleasure, and they have already begun to bear fruit. A promising increase is evident in the number of firms making public offerings.

The financial markets and the real sector are the two complementary legs of the economy, each one unthinkable without the other. The development of one is also going to impact positively on the other. I would however like to underscore one thing here, namely that, as everyone knows, the financial sector was at the center of the global crisis that originated in the U.S. And the entire economy paid a price for the mistakes that were made. The fact that in Turkey our financial sector is shallow, not deep, with little product diversity, was indicated as one of the factors that protected us during the crisis.

What is needed now, in this period we when aim to deepen our financial sector and develop our capital markets is that the mistakes made in the the global markets be noted well and a lesson taken. Simple but effective oversight mechanisms should be put in place. At the same time, public offerings should be encouraged. Furthermore, the fight against the black economy must continue and at the same time the development of institutional management should be a goal. We are pleased to see that our Capital Markets Board and the Istanbul Stock Exchange are actively engaged in efforts in this area. We too are trying to give all the support we can during this process.

Mr. Chairman,

Distinguished Guests,

Esteemed members of the Assembly:

With the coming of spring, we have entered a period in which hopes have revived in the economy and expectations are more upbeat. We must keep in mind, however, that one can sometimes encounter unexpected cold waves in spring. Consequently, as we savor the pleasure of optimism, we should also not let go of our caution. The economy cannot be overshadowed a busy political agenda. It should not be forgotten that the usual political tensions can impact negatively on the economy. Solutions based on reconciliation should be sought for our problems.

As I conclude with hopes for a Turkey that has achieved global standards of competitiveness in industry, finance, politics and democracy, I salute all of you once again on behalf of the board of directors.

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