The Chairman's Speech at the Assembly / 13 August 2008

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 August assembly meeting.

As our distinguished chairman has said, under the bylaws governing the grouping of professions in chambers we are holding today our August assembly meeting, which would normally have been held on the 27th of the month, to examine objections regarding changes in our members' professional groups and coming to a decision on that. We have therefore allocated the major part of our meeting to a discussion of those changes.

First however I would like to make a brief assessment of developments in the economy with regard to the main item on our agenda, .

Esteemed members of the assembly:

As you know, our chamber has been making regular surveys of the state of the economy every six months since 1998 and sharing the results with the public. The purpose of these surveys is to identify our members' economic activities and to determine how their expectations for the next six months have changed. At a press conference yesterday we announced the results of our survey for the first half of 2008. Since we are holding our assembly meeting immediately following that press conference, I would like to present to you, the esteemed members of our assembly, the results of that survey. In our surveys, we examine five basic indicators: production, domestic sales, foreign sales, new orders and jobs.

Let us look first at production. According to our survey, the percentage of Turkish businesses reporting a decline in production in the first half of 2008 is higher than in the first half of 2007. While 24.4% of enterprises reported lowered production in the first half of 2007, in the first half of 2008 this rose to 34.7%. If we look at change in production by sector, we see that the percentage of enterprises reporting a production increase in the first half of 2008 was highest in the food, beverage and tobacco sector at 55.2% and the percentage of enterprises reporting a decline in production highest in the leather and footwear sector at 61.9%.

Turning now to domestic sales, we see that as in production the first half of 2008 was less successful than the first half of 2007. The percentage of businesses posting a drop in domestic sales rose from 28% in the first half of 2007 to 37.5% in the first half of 2008. On a sector basis, the sector experiencing the highest growth in domestic sales is forestry products and furniture at 66.7%, whereas that reporting the sharpest decline in domestic sales is again leather and footwear at 60%.

Let us take a look now at foreign sales. The percentage of enterprises reporting a decline in foreign sales, which was 28.5% in the first half of 2007, rose in the first half of 2008 to 36.2%. The number of enterprises reporting an increase in this item fell while the number reporting a decline rose. The sector reporting the biggest growth in foreign sales in the first half of 2008 was food, beverages and tobacco with 66.7%. The leather and footwear sector on the other hand again reported the sharpest decline at 64.7%.

We turn now to developments in new orders, which is one of the key indicators for the period ahead. At 29.7% in the first half of 2007, the number of businesses reporting a decline in new orders rose in the first half of 2008 to 33.4%. While the decline in production, domestic sales and foreign sales affected all enterprises regardless of scale, we see that the small and medium scale enterprises were harder hit in this area than the large-scale ones. The sector with the biggest growth in new orders was forestry products and furniture with 50% while the sector experiencing the biggest loss was again leather and footwear.

The last indicator measured in our survey is jobs. The percentage of businesses reporting a decline in jobs in the first half of 2008 was 26.2%, down slightly from 26.9% in the first half of 2007. As the figures indicate, jobs are the one indicator in which there is a slight improvement. Looking at the results in terms of scale, however, we see that this improvement is due largely to the large-scale enterprises. There is no improvement in jobs among the small and medium-scale enterprises.

Looking at the phenomenon on a sector basis we see that forestry products and furniture at 50% was again the sector reporting the largest growth in jobs, while leather and footwear once again reported the biggest losses at 40%. When we look at this basic indicator in terms of enterprises reporting losses overall, we see that one out of every three experienced a decline in production, domestic sales, foreign sales and new orders in the first half of 2008.

Expectations for the coming sixth months constitute a major aspect of our survey. According to the most recent survey, expectations for the second half of this year are more positive than actual results in the first half. Only 23.7% of enterprises expect a fall in production in the second half of 2008. You will recall that this decline was 34.7% in the first half of the year. Current expectations are considerably more optimistic.

Looking now at expectations regarding other basic indicators in the second half of 2008, the following picture emerges:

Domestic sales: 26.8% of enterprises expect a decline in this indicator.

Foreign sales: 23.2% of enterprises anticipate a decline in this indicator.

New orders: 25.2% of enterprises expect a decline in this indicator.

And, finally, jobs: 20% of enterprises expect a decline in jobs in the second half of 2008.

In other words, Turkey's industrialists as always continue to view the future with optimism and hope. However, when we examine the results of our economic surveys in retrospect, we see that those optimistic expectations have never been borne out.

As in previous periods, the method of estimation we developed in our survey indicates that developments in the second half of 2008 are going to fall below expectations.

Making use of the five basic indicators we use to compare different periods in our survey, we compiled an "ISO state of the industry index". In the index, values below 100 indicate negative development and values above 100 positive development. Our industrial development index hit its highest level in the first half of 2004 at 130.5 and its lowest in the first half of 2001 at 60.9. The index number in the first half of 2007 was 103, only slightly above the threshold of 100, rising in the second half to 112.4, only to fall again by 9.4 points in the first half of this year. However, when we look at expectations for the second half of the year, we see an index figure of 118.5, a rather high expectation. Our estimates indicate however that the index is more likely to fall in the second half of 2008 to 98.6.

In our survey, average capacity utilization in the first half of 2008 was 63.3%, down from 66.2% in the second half of 2007 and representing a slight decline during the half year.

In our survey we also examine change in the percentage of enterprises that export. This fell slightly from 75.5% in the second half of 2007 to 75.4% in the first half of 2008.

Turning now to the share of exports in total volume of sales, this rose from 36% in the second half of 2007 to 38.4% in the first half of 2008. The rise appears across the whole gamut of enterprises from small to large scale. The highest ratio of exports to total volume of sales in the first half of 2008 was in wearing apparel at 69.1% and the lowest in paper, paper goods and printing at 18.1%.

Let us look now at developments in profitability. The percentage of businesses reporting higher profitability in the first half of 2008 than in the same period the previous year was 27.5%, down sharply from 32.4% in the second half of 2007. The percentage of businesses posting losses meanwhile rose from 9.8% to 10.4%., making the first half of 2008 therefore a less favorable period than the second half of 2007 in this respect

In our state of the economy survey we also look at the rate at which sales targets are being met. The findings of our survey show that this too has fallen steadily in the recent period. While 70.5% of sales targets were met in the second half of 2007, in the first half of 2008 this was down to 65.2%.

The ratio of businesses faced with bad checks and disputed bills rose from 64.3% in the first half of 2007 to 72.7% in the second. Then, in the first half of 2008 it fell again to 60.6%, a drop in which the relative slowdown in domestic sales could be said to have played a role.

Data regarding disputed bills published by the Central Bank corroborates the findings of our survey. While a significant increase is observed in the number and amount of disputed bills in the second half of 2007 compared with the first half, this trend was reversed in the first half of 2008 when the number and amount of disputed bills declined. As the table shows, in the second half of 2007 the number of disputed bills was up by 12.2% and the amount of disputed bills up by 21.8% on the first half, whereas in the first half of 2008 both these items fell, by 5.7% and 5.5% respectively.

Another leading indicator in our survey is the percentage of enterprises in financial straits. In the crisis year 2001, 73% of enterprises responding to the survey reported being in financial difficulties. Then, with the favorable development in the economy in the post-crisis period, this percentage declined to around 50%. The percentage of businesses in financial straits, which was 55% in the second half of 2007, had risen to 60.2% in the first half of 2008, the highest ratio of the post-2001 period.

Looking at the businesses experiencing financial difficulties in terms of scale, we find that it is the small and middle-scale enterprises that bear the brunt of the problem. In the first half of 2008, 68.8% of the small-scale enterprises, 59.6% of the middle-scale enterprises and 37.6% of the large-scale enterprises reported having financing problems.

Turning now to the question of priority in enterprises experiencing financial difficulties, high credit costs rank first, in the first half of 2008 as in the second half of 2007. The high cost of domestic credit has, as you know, driven enterprises to borrow abroad.

Among the enterprises responding to our survey, 27.2% of those using credit reported that upwards of 80% of this took the form foreign currency or foreign exchange indexed loans. This finding shows the share of foreign currency and foreign exchange indexed credits used by almost one-third of the enterprises participating in the survey to be 80% and higher. Forty-five percent of the enterprises reported a 50% or higher share of such credits. Such high ratios underscore these enterprises' high potential for being significantly hurt by major fluctuations that might occur in the exchange rates.

According to data released by the Undersecretariat of the Treasury, the volume of debt of the real sector was 100.5 billion dollars out of Turkey's total 247.1 billion dollars' worth of foreign debt at the end of 2007. At the end of the first quarter of 2008, Turkey's foreign debt stock has risen to 262.9 billion dollars, of which the real sector is responsible for a 111.9 billion-dollar share.

Participants in our survey are also asked about the investments they make in their enterprise. Based on the data we collected, the percentage of enterprises not making such investments, which was 43.6% in the second half of 2007, rose to 49.8% in the first half of 2008. Meanwhile the percentage of enterprises making modernization investments declined from 34.8% in the second half of 2007 to 28.7% in the first half of 2008.

Continuing with investments, the percentage of enterprises planning to make investments in Turkey is 38.2% in the second half of 2008. In the first half of 2008 it was 45.5%. On the other hand, the percentage of enterprises planning to invest abroad in the second half of 2008 is 9.5%, down from 12.5% in the first half. Despite the drop, however, the number of enterprises with plans to invest outside the country remains relatively high.

When we look by sector at the the data published by the Central Bank on direct investment abroad by investors domiciled in Turkey, there appears to be a noteworthy increase in manufacturing industry investments. Such investments, which came to 282 million dollars in the first six months of 2007, rose to almost 1.3 billion dollars in the same period of 2008.

We look now at direct investment in Turkey by investors domiciled abroad. Based on the latest figures, direct investment inflows, which came to 10.9 billion dollars in the first six months of 2007, fell by 44.3% to 6.1 billion dollars in the first six months of 2008.

Expectations regarding the macro economic indicators constitute another section of our survey.

Enterprises participating in the survey estimated 5.2% growth in 2008, an average rise of 10.8% in the PPI, and of 11% in the CPI. They estimate that the dollar/YTL exchange rate will be 1.37 YTL to the dollar at the end of 2008, and the Euro/YTL exchange rate 2.05 YTL to the euro.

We also ask participants in our survey about areas of improvement and development in their enterprises. In the first half of 2008, a sizable percentage of 47.5% reported that they had improved the quality of their product. This improvement is seen across the board in all enterprises regardless of scale and is therefore extremely encouraging in terms of Turkey's competitiveness.

Some 44.1% of enterprises reported that they had lowered their costs, 32.1% that they had increased workforce productivity, 26.2% that they had developed new products and 21.9% that they had renewed and developed their technology. It is also worth nothing that 11.6% of enterprises have undertaken research and development projects.

Esteemed members of the assembly:

Together we have examined the results of our survey of the state of the economy at the end of the first half of 2008, which finds it to have been somewhat less positive than the second half of 2007. To recall briefly: There is a very small scale improvement in jobs. The percentage of enterprises not making investments and as well as the percentage in financial straits have both risen in the first half of 2008 on the second half of 2007. The percentage of enterprises reporting an increase in profitability has declined as has the percentage of enterprises meeting their sales targets.

Member firms of our chamber participating in the survey have cited the following areas as trouble spots:
High input costs
Shortage of raw materials,
Steady rise in the cost of the energy used in industry,
Low exchange rate,
Low margin of cost,
High level of off-the-record economic activity,
Absence of investment incentives,
Shortage of qualified personnel,
Pressure created by cheap, low-quality imports,
Lack of long-term financing on favorable terms,
Stagnation in domestic demand, and,
finally, high social security premiums and severance pay.

Furthermore, while chamber members taking part in the survey have characterized the employment package and the 5-point reduction in premiums that went into effect on 1 October as important first steps, they have demanded that measures in both areas also be taken further, and that a more effective struggle be waged against unfair competition and off-the-record economic activity.

As I said a little while ago, expectations for the period ahead are again optimistic as usual. When we look back at overall economic developments in 2008, the 38.7% growth in exports in the first six months of the year seems to be a development that would back up that optimism. It is however overshadowed by rising inflation and the negative trend in the foreign trade and current account deficits. At the same time, industrial production was up by only 0.8% in June, its lowest rise in 2008. Not only that but production in the manufacturing industry actually fell by 0.4% during the same month. The 0.8% increase in June stemmed from a 20.3% production increase in the mining sector. The point to which the exchange rate has fallen is abundantly clear and the rate increases on electricity and natural gas are giving our industrialists a hard time. In the circumstances it is unclear how industrial production and exports are going to perform in the second half of the year. Despite everything however the economy in 2008 is probably going to end the year pretty much as it did in 2007.

Nevertheless, as you will remember, 2007 was an average year, largely characterized as a loss, in which the lowest growth rates in many indicators were the lowest since the 2001 crisis.

As we always say, to solve the economic and social problems starting with unemployment, and to bring down to reasonable levels the gap between Turkey and the European Union in which she aspires to full membership, it is essential to achieve much heftier increases in industrial production and much higher rates of growth.

Every year that we end with average figures saying, 'well, it could have been worse', means a new addition to the lost years column for Turkey. We would like to hope that 2008 will be different.

To be able to add the period ahead to the gains column, Turkey needs to focus rapidly on the economy and, together with reforms that bolster investment, production and competitiveness, to speedily put in place economic policies that will contribute to bringing the current account and foreign trade deficits down to acceptable levelsI thank you for your patience and 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