The Chairman's Speech at the Assembly / 21 October 2009

Mr. Chairman,Distinguished 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 October meeting.

Esteemed members of the assembly:

We have now entered the last quarter of 2009, a year ton which we embarked knowing it would be a difficult one. And indeed the ten months we have left behind have been extremely problematic in both the world and the Turkish economy. With the release of the latest growth figures, we are now in a position to make a more accurate assessment of the first six months of the year.

As you will remember, the first quarter was extremely negative. Industrial output contracted at record levels by 22%, manufacturing output by 24.5%. Nevertheless, following that extremely negative first quarter, there was a relative letup in the second, which boosted hopes that a recovery was under way and created a relatively more positive climate in the economy.

Let us come now to the third quarter, which we entered with such hope. Not all the figures have been released yet but, judging by those that have, the recovery trend appears to have slowed down in the third quarter. In July, the first month of the quarter, industrial output contracted by 9% on the previous year. In August the rate of contraction was down to 6.3%. A development of this sort may at first glance appear positive. But we should not forget that the contraction in industrial output that has continued for thirteen straight months began in August of last year. In other words, coming as it did in the wake of last year's -3.6% contraction, this year's August contraction remained at a relatively reasonable level. (Graph 1)

Graph 1 - Industrial Production (%)

Compared with a year ago, industrial output in the coming months as well is going to be at relatively reasonable levels by comparison with last year's enormous contractions. What we need to monitor more closely from now on are the rates of change on the same month the previous year.

Such is the case in August, for example, and we need to take a look at it. Since March we have seen a positive development in industrial output with steady growth on the same months the previous year. This trend, which has been under way for five consecutive months now from March to July, was unfortunately interrupted in August when industrial output again contracted by 5.7% on July. (Graph 2)

Graph 2 - Industrial Production on the Same Months the Previous Year (%)

There was also a relative decline in the capacity utilization rate in the third quarter. Capacity utilization in manufacturing, which rose to 72.7% in June, dropped to 72.3% in July and 69.7% in August. (Graph 3) Most recently in September it was 70.1%. This means an improvement of 0.4 point in capacity utilization from August to September.

Graph 3 - Capacity Utilization in the Manufacturing Industry (%)

In addition to these figures, the Turkish Bureau of Statistics also publishes indexes of turnover and new orders in industry. According to these indexes, turnover in August was down by 3.9% and new orders by 6.9% on the previous month. Turkey's exports on the other hand are still continuing to fall at rather high rates like 28-29%. (Graph 4)

Graph 4- Exports According to Turkish Statistical Institute (TurkStat) (%)

These indicators all tell us that we cannot be too optimistic about industrial output in September.

Such is the state of production. Let us look now at jobs. As you are all well aware, unemployment has been fundamental problem in Turkey for a long time. Around 6% in 2000, unemployment climbed to over 10% following the 2001 crisis. (Graph 5) And it never came back down. Despite growth in the economy, unemployment always remained in the neighborhood of 10%. Most recently, the annual unemployment was 10.3% in 2008. In the latest crisis, it broke a record at 16.1%. How fortunate then that it began to inch down from this terrifying peak in the ensuing months, falling to 14.9% in April, 13% in June and finally to 12.8% in July.

Graph 5- Unemployment Rates (%)

The seasonal effect of the services sector, primarily in tourism and agriculture, was responsible for the July improvement in jobs.

While there are still losses of 10% on the previous year in industrial jobs, farm jobs in contrast are on the rise. Apparently workers left jobless in industry are turning to agriculture. Despite this trend however unemployment at the end of 2009 is going to be 14.8% according to the medium-term economic plan. (Table 1) And the forecast is 14.6% for 2010 and 14.2% for 2011. The 2001 crisis drove unemployment up to levels of 10% and higher. In the current crisis we are facing levels of 14%. As you can see, Turkey is paying the price of the economic crises in the loss of jobs and output.

Table 1- Unemployment Rates According to The Medium-Term Economic Plan (%)

This most recent crisis has had a devastating effect on Turkish industry with Istanbul industrialists being particularly hard hit. At the same time however a city like Denizli, which has been cited as a model of Anatolian industrialization, is appearing on the agenda today with heavy losses in jobs and output. In addition to these distressing developments, Istanbul industrialists, already severely impacted by the crisis, have now been struck by flash flooding as well. Here at the Istanbul Chamber of Industry we have striven from the outset to bind up the wounds of our injured industrialists. Most recently, on Saturday, 10 October, we held a four-hour meeting at AKOM, the Disaster Coordination Center in Istanbul, with our Deputy Prime Minister Cemil Çiçek, the Governor of Istanbul Province, the Mayor of the Istanbul Metropolitan Municipality and other relevant bureaucrats.

We were pleased to observe at the meeting that the damage assessment study our chamber conducted regarding the machinery park has become a reference for our government. The support recommendations compiled by our chamber for the flood-damaged firms made up the agenda of the meeting point by point. Among our recommendations, two were passed: tax obligations have been deferred for a month and social security premium payments and other premium payments accruing in the next three months for a year. Another of our recommendations was that flood-damaged firms be enabled to take advantage of short-time work payments.

Our Ministry of Labor and Social Security has allocated 12 million liras' worth of funds to cover short-time work payments to workers employed by firms damaged in the floods. The Turkish Labor Organization for Istanbul Province has informed us that 23 workplaces have applied for these benefits.

In the report we submitted to Deputy Prime Minister Cemil Çiçek, we also recommended that the government banks offer flood-damaged companies more flexible terms with regard both to credit analysis and guarantees. This recommendation too has been accepted. In the same report we recommended further that the value-added tax cuts firms were unable to collect, due either to investments or high inventories, and that have therefore been carried over, be made available to them now, either as refunds or by being offset against their tax obligations.

Following the meeting, we had an opportunity to talk with Mr. Çiçek again in Malatya. On that occasion he told us that the question of the offsets would be duly studied. Meanwhile we shall continue to follow up on our recommendations regarding relief for flood-damaged enterprises.

I should point out at this juncture out that our Deputy Prime Minister, Mr. Cemil Çiçek, has approached the situation with extreme sensitivity and been at least as zealous as we ourselves during the process. We would like to thank our entire government in the person of Mr. Çiçek for the understanding they have shown.

Esteemed members of the Assembly:

Let us put the flood aside for now and turn our attention back to the economy. A little while ago I drew your attention to some of the economic indicators. The situation in industrial output in particular points to a slowdown in the recovery trend in the economy. It seems that bottoming out and returning to normal is going to take longer than anticipated. Just how the recovery will go has been, and remains, a topic of much debate. At this stage, we can say that, for the Turkish economy, a 'V' shaped recovery with a sharp upward spike does not appear likely, at least not in output.

In principle, however, hopes were high for the second half of the year as the expectation prevailed that the recovery would gather momentum with the help of the effect I mentioned earlier. Following a few encouraging months, however, unfortunately we now appear to have reached a stage in which recovery in the economy has slowed to a snail's pace.

This however is a luxury Turkey cannot afford. Our economy needs to recover far more rapidly, especially in the areas of output and jobs. At this point we should remind you of the fact that economies cannot recover by themselves. For rapid recovery from a crisis, governments need to pursue active and well-planned policies. When the crisis hit, Turkey was late in taking measures! Then, in the next stage, she appeared unable to sustain the measures she had taken. The start of a recovery in the world economy is naturally going to impact positively on us. But this should not be construed to mean that we are expecting a solution from abroad. We must get beyond our problems by taking our own measures!

At the current juncture when exports are no panacea, our best bet for protecting jobs and production is to rejuvenate domestic trade. Stimulating domestic demand is the first measure that can be taken in the short term against rising unemployment and a contraction in the economy. Indeed, this is the path Turkey has followed by lowering VAT and SCT in March. And the economic indicators have shown that these measures worked. The relative improvement in the second quarter was the result of these tax cuts. And yet this implementation was discontinued.

In a climate where exports are continuing to fall and not a single measure is being taken to revive the domestic market, how hopeful can we be about output and jobs in the last quarter of the year? The VAT and SCT cuts must absolutely be brought back on the agenda and continued in order to stimulate domestic demand.

Fiscal discipline is important, and Turkey must be cautious in this area. But reviving the economy would appear to have priority over fiscal discipline at this stage. And indeed at the IMF-World Bank meetings held recently in Istanbul, attention was drawn to the fact that recovery in the world economy was going to take a long time, and a signal was given to persevere with relaxed fiscal policies.

As I personally said to Mr. Babacan on our return from our New York visit, without production and consumption, there is no trade, and if there is no trade there will be no tax revenues!

While GDP is envisaged to grow by 8.7% in current prices in the medium-term program, tax revenues are envisaged to grow by 18.2%. All things considered, how can it be that tax revenues are going to outstrip GDP? That is the question.

Esteemed members of the Assembly:

Political issues dominated the agenda in 2009 when the economy was literally fighting for its life. Nor can we take issue with this since Turkey has no alternativeredounded but to come up with solutions for all her social and political problems.

In doing so, however, especially during the crisis of the century, the economy should not be allowed to fall off the agenda altogether! We should make clear that there is also a need for an "economic overture". A need for an "overture" in production and jobs! Indeed such initiatives will be a complement to the recent political initiatives (to the Kurds and the Armenians). For a sound, healthy economy is the best guarantee of social tranquility. In the recent period foreign policy has occupied a prominent place on the national agenda. Turkey has assumed an active role in international relations, especially in developments in our region. We naturally find the new 'zero-problem' approach to our neighbors and the steps being taken towards solving long-standing problems important, and we support those efforts. We believe that in time those developments are going to redound to the benefit of Turkey's economic potential and foreign trade.

But we should point out once again that a sound economy is the most important complement to a strong foreign policy. Turkey, which has made progress in solving her economic problems, is also treading now with more confident steps in foreign policy. The economy should stay on the agenda, and measures to bolster production and jobs and accelerate recovery from the crisis should continue to be taken without interruption.

Furthermore, as we have always said, as important as it is to take measures, taking them in a timely fashion is also important. Finally, after eight months, the credit guarantee fund that has been on the table since March to give our SME's some much-needed breathing space has finally been signed. We hope that this fund will provide a modicum of assistance to our SME's that are still on their feet.

Credit bottlenecks persist despite a historic drop in interest rates. In this period when we are struggling to stay afloat and continue producing, the word 'investment' has unfortunately been all but forgotten. Investment spending in the private sector fell by around thirty-plus percent in the last two quarters. And in the medium term we have not come across any encouraging forecasts for investment in the coming three years either.

Let us not forget that the price of curtailing investment is going to return to haunt us in the years ahead in the form of lowered growth, rising unemployment and falling production.

These days when we are stepping up our efforts to remain afloat, we unfortunately have been forced to put investments, like competitiveness, on the back burner. Under the circumstances, the fact that the exchange rates have started to fall is going to make it all the more difficult for our industry to stay competitive. This in turn is going to encourage imports and further exacerbate our problems with employment and production. We've seen this film before! Are we going to allow it to run again?

Mr. Chairman,

Esteemed members of the Assembly:

Yes, we are going through a difficult period. Yes, we have problems, But, as we always say, we also have hope and confidence.

Our past successes should light the way to our future. Let us not forget that in 86 years we managed to transform a country that was importing even safety pins into a country that exports industrial goods all over the world. We have succeeded in creating a strong, dynamic private sector out of nothing. Despite the odds, our private sector has chalked up important successes in both the global competition and the international organizations. The election of Mr. Ryfat Hisarcıklıoğlu, President of the Stock Markets and Chambers of Turkey (TOBB), as first vice-president of Eurochambers is a prime example of this in the recent period. We would like to take the occasion of his election, which is a source of pride for Turkish industry and the Turkish private sector, to congratulate Mr. Hisarcıklıoğlu and wish him success in his new post.

In closing I would like to wish you a happy Republic Day on 29 October in the conviction that we will keep our Republic alive forever with a secular, democratic structure and in indivisible union and integrity. I salute you all once again on both of the Board of Directors.

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