The Chairman's Speech at the Assembly / 28 December 2011
Mr. Chairman, Distinguished guests, 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 December meeting. We would also like to thank our guest, Central Bank Chairman Erdem Başçı, Ph.D., for accepting our invitation to join us today. Welcome, Sir! This is our first time to welcome you as Chairman of the Central Bank. I would like especially to say what a great pleasure it is to have you with us and to have an opportunity to assess developments with you at this final assembly meeting of 2011. Once again, welcome!
Esteemed Members of the Assembly:
Since the distinguished Chairman of the institution with the best command of the economic data is with us today, rather than assessing the indicators and developments in the economy, I would essentially like to focus on the situation in our industry and to convey to Mr. Başçı our expectations regarding monetary policy. That is what I shall try to do.
Mr. Başçı,
Esteemed Members of the Assembly:
High inflation has been one of the fundamental problems of the Turkish economy since the mid-1970?s. In the first decade of the 2000?s Turkey, albeit much later than the rest of the world, finally made serious progress in her battle with inflation and succeeded in bringing down annual inflation, which was 68.5% in 2001, to 8.4% in 2007 and to 6.5% at the end of 2009. This is a significant accomplishment indeed and there is no doubt that the resolute policies of the Central Bank played a major role in it.
Here at the Istanbul Chamber of Industry, we have supported that battle from the start, saying that it was not possible for us to do business on firm ground until we were extricated from the morass of inflation. Indeed, our industry has also adapted successfully to the new, low-inflation environment. Our expectation from here on out is that the Turkish economy will continue along the path of low inflation.
We ended 2010 with averages of 6.40% on the CPI and 8.87% on the WPI. But in 2011 we are seeing a trend towards rising inflation, in the month of October in particular. We hope that this is a passing phenomenon and that inflation is not going to return again to double-digit figures. We know that our Central Bank is extremely sensitive on this issue as its distinguished Chairman emphasized at the press conference yesterday.
Mr. Chairman,
Mr. Başçı,
Esteemed Members of the Assembly:
Parallel with high inflation, financial costs in Turkey have always been high as well. A lack of long-term financing on convenient terms has been one of the basic problems of industry and of the climate for investment and manufacturing in our country. This problem was however alleviated to some extent with the fall in inflation. Interest on commercial credit in Turkish liras, which was 48.97% on average in 2002, fell to 13.92% in 2009 and 8.90% in 2010.
This drop in interest rates had a very positive effect on our industry, which was also very clearly reflected in the results of our ISO 500 survey of Turkey?s top 500 industrial firms. The year 2009 was a crisis year, in which production-based sales in the ISO 500 fell on the previous year by around 14% in both current and constant prices while total profit and loss nevertheless rose by around 24%.
To understand the reasons for this surprising situation, we examined the income tables of the ISO 500 firms. What we realized at the end of our examination was that the biggest factor in the rise in profits was that the fall in interest rates had significantly reduced financing costs compared with the previous year.
The improvement in financing costs continued in 2010 as well, as profitability in the ISO 500 traced a positive curve. In these years when profitability and the overall indicators in the ISO 500 are going well, we also took a look at the indicators for indebtedness, and when we made an international comparison a very negative picture emerged with regard to industrial firms in our country.
For example, while total debt to equity capital ratios are around 50% in the U.S. and 70 to 80% in the European Union, in the private firms among Turkey?s Top 500 and Second 500 industrial enterprises this ratio was around 120% in 2010. As you see, our industrial firms are forced to borrow at high rates since they are unable to generate adequate funds, and this in turn creates fragility both for the enterprises themselves and for our economy.
Whenever we are asked what is the biggest problem our industrial firms face, the answer is always, and I underline this, a low capacity to generate funds. The main factor at play here is that inputs, particularly those produced by state-run firms, are much more expensive in Turkey than they are in our competitor countries. Here at the Istanbul Chamber of Industry we strive to keep the need to bring those costs down to levels equal to those of our competitors on the agenda at every opportunity in our contacts with the government.
Among input costs, financing costs occupy an important place. As I said a little while ago, the results of the ISO 500 survey of Turkey?s top 500 industrial firms shows clearly how positively a relative fall in financing costs affects profitability. Increasing profitability in our industry means boosting its capacity for new investments and additional jobs. The improvement in financing costs definitely can and must continue. While that is what we want, however, as of the second half of 2011 we see that the cost of commercial borrowing is once again tending to rise.
Naturally we might assume that we are in an unusual period at the moment due to uncertainty in the global economy and think that is driving the rise. Despite everything, however, it is our expectation that the improvement in financing costs should continue and that our industry should finally get the long-term credit financing opportunities on convenient terms it has craved for years.
At this point I would especially like to point out that improving financing conditions and pulling down the cost of state-sourced inputs is very important for boosting the capacity of firms to generate funds. We are going to continue to insist on this, but at the same time we are well aware that a responsibility also falls upon us as the private sector. Our industrial firms are therefore seeking to boost their productivity in every area as well as developing their capacity for innovation and for research and development.
Mr. Chairman,
Mrs Başçı,
Esteemed Members of the Assembly:
Another crucial issue on the agenda of our economy and our country is, without a doubt, the foreign exchange rates. We have said since the beginning of the 2000?s that the exchange rates are not the only determinant of competitiveness but that what is crucial, as I said a little while ago, is that input costs be brought down to levels equal to those of our competitors. And for that, structural reforms need to be effected as soon as possible.
In past years there were long periods when the Turkish lira was greatly overvalued. Unfortunately the dearth of structural reforms to compensate the adverse effects of that overvalued TL on our competitiveness has not been entirely eliminated, and this in turn has had a negative impact on the competitiveness of our industry. Our domestic input producers have had a hard time competing in the face of ever cheaper imported goods. Cheap foreign currency has further driven the quest for convenient borrowing from abroad by our enterprises, and many firms have turned to foreign loans at the cost of incurring exchange rate risk. Meanwhile our gaping foreign trade deficit and equally gargantuan current account deficit have become a virtual fixture of the Turkish economy.
Now, since the second half of 2011, there has been some upward movement in the foreign exchanges. Although a rise in the exchange rates may at first create an advantage in terms of exports, within a short time it may also trigger a chain reaction of disadvantages starting with rising input costs, rising inflation and rising borrowing costs.
At the same time, rising exchange rates have also driven up the Turkish lira equivalent debts of industrial firms that have borrowed in foreign currency. A little while ago I spoke of our firms? low capacity to generate funds. The rise in the exchange rates appears to have further exacerbated this difficulty, insofar as the difference in the exchange rates between the beginning of 2011 and the end is going to mean a significant decline in profits for firms with foreign currency debt.
Turkey today is an economy that is largely integrated with the global economy, and we are all aware of the problems the global economy is having at the moment. Although it may be unrealistic to expect the exchange rates to remain steady in such an environment, as a general rule I would like to say that what we want to see with regard to the exchange rates is, rather than wild fluctuations, a policy that is as stable, predictable and realistic as possible.
Mr. Başçı,
The interest and exchange rate policy implemented by the Central Bank is a matter of discussion from time to time and subject to criticism from various quarters. Here at the Istanbul Chamber of Industry we have tried to stay out of those debates as far as possible, because although low exchange rates may at times reach very worrying proportions, taken as a whole, the Central Bank has, in our opinion, pursued correct and successful policies during this period.
For a long time the Central Bank?s fundamental target was price stability. Later, from the end of 2010, and parallel with the rise in the current account deficit in particular, we saw that, in addition to price stability, financial stability became one of the Bank?s priorities as well. This too we regarded as an appropriate policy, indeed one that was a little late in coming.
Starting from the second half of 2011, the alarm bells have again begun to sound in the global economy and we have entered a difficult period. Our Central Bank, too, has been compelled to target two goals, i.e., keeping the rise in the current account deficit under control at home while staving off the threat of a recession in the global economy and the risks of a probable fluctuation in the flow of capital.
To deal with the difficult agenda ahead, the Central Bank has brought some instruments into play that it had not previously used and has started implementing some policies that could be termed ?alternative?. These policies have had their critics as well as their proponents. At the same time, we also hear reports to the effect that other countries? central banks around the world are also turning to our central bank?s implementations. I believe that we are going to see, and be better able to assess, the results of those policies in time.
The world economy is indeed passing through a difficult period. It is plain that being a central banker in such a time is not easy. We hope that all of us together will be able to weather this critical period with a minimum of damage.
Mr. Başçı,
As I come to the end of my talk, if I were to clarify and sum up what I have said, we, as the industrialists of this country, are asking for price stability. We place a lot of importance on financial stability and a stable exchange rate policy.
At the same time, what we ask of our Central Bank is that, as it develops policies aimed at these targets, it also keeps more clearly in mind the effect those policies are going to have on the other vital aspects of the economy like growth, investment, production, exports, employment and competitiveness.
The economy is an area of work that is difficult to control, an area in which everything affects everything else. And the global economy can give the impression from to time of having a structure that is completely out of control, in which everything is independent of everything else.
We are therefore aware of the difficulty of reconciling all these targets that we have enumerated, but we believe that when it comes to priorities the real sector needs to be at the top of the list. At the same time, we believe that Central Bank policies are very necessary but not sufficient in themselves for solving problems like the gaping current account deficit.
Targets like structural change in our production and exports, boosting our competitiveness and increasing our domestic savings may be achieved within the framework of a strategy through a concerted effort by the government and the economic management and, indeed, the private sector. We for our part are ready to cooperate by lending all the support it is in our power to give.
The most important condition for this is that we understand each other well and establish a good environment for communication in which we can express our problems and expectations clearly and openly.
From that point of view, we take great pleasure in having you with us today. We can in principle always come together with our central bank. We have a healthy dialogue which we hope to develop even further in the period ahead.
Esteemed Members of the Assembly:
As our distinguished Central Bank Chairman also underscored in the press conference yesterday, 2012 already looks like being a year with a high level of uncertainty. There are risks and difficulties, yes, but we know that risks and difficulties at the same time are the driving force that open the door to opportunities and fresh initiatives. We believe that, with her industry and her economic management, Turkey in 2012, as in previous difficult years, is going to succeed in turning trouble to opportunity and creating initiatives that will ensure we overcome our problems in 2012. Despite the risks and uncertainties, we enter 2012 with hope and positive feelings.
In the belief that everything is going to be better in the new year, I would like to conclude my remarks with the hope that 2012 will bring health, happiness and success to everyone here today and to their families, and peace and prosperity to our country and the world.
In closing 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