The Chairman's Speech at the Assembly / 24 December 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 December meeting. Our guest at today's meeting is Mr. Durmu? Yılmaz, the Chairman of Turkey's Central Bank. We would like to thank him for accepting our invitation to join us today. It gives us great pleasure to have you with us at this, our last meeting of 2008, and to have an opportunity to assess developments in the economy with you. Welcome!

Esteemed members of the Assembly:

The global crisis is continuing to affect the whole world. And no one can say as yet how much longer the crisis will continue or how much deeper it will get. According to some experts, we are only at the beginning of a period of stagnation that could last for years. Most of the advanced economies, the U.S. and Germany in particular, have already entered a recession. Unfortunately the adverse effects of the crisis are gradually being felt more keenly in Turkey as well. Here however there was no financial crisis in which banks failed one after the other as there has been in the West. The restructuring of Turkey's banking sector following the 2001 crisis and the improvement in the budget balances have been key advantages, so far at least, in the face of the international financial meltdown. They kept problems from spreading into the financial sector.

We do see, however, that the adverse effects of the global crisis have had a devastating impact on our real sector. Reports in the news of industrial firms that have had to suspend production or close down altogether are unfortunately continuing at an increasing rate. Our people are losing their jobs. And unemployment, already a major problem in any case, is getting worse.

There is bad news in the economic indicators as well. First of all, industrial production is on a worrying course. Following contractions of 4.1% in August and 5.2% in September, industrial production unfortunately shrank in October as well, by 8.5%, in the biggest contraction of the post-2001 period. This is the first time in seven years that production has contracted for three straight months.

At the same time, capacity utilization in November was reported at 72.9%, again the lowest rate since February of 2003. Turkey's exports also declined significantly in November, falling by 3.1% in October according to statistics released by the Turkish Bureau of Statistics (TÜYK). And in November, exports were down by 22% according to the records of the Association of Exporters of Turkey.

In the circumstances, it is impossible to be very optimistic about November and December either when rates of contraction will no doubt be even higher. These contractions are going to pull average growth in industrial production, already only 1.4% in the first ten months, down even further for the year. And 2008 is going to end as the worst year for our industry since the 2001 crisis.

Growth in production declined from 5.8% to 1.4% between 2007 and 2008, an indication of just how much Turkish industry has hemorrhaged in a single year. In fact, the hemorrhaging started even earlier in Turkish industry, which was already in serious trouble before the global crisis erupted. Although this changed slightly in recent months with the rise in the exchange rates, the low exchange rate - overvalued YTL left its stamp on the last six years in the Turkish economy. This in turn damaged our competitiveness in both the domestic and the foreign markets. During this period, almost no progress was made on the micro and macro reforms that were expected to boost our competitiveness and compensate for the damage caused by the overvalued YTL.

Despite a lack of progress on both fronts, however, Turkish industry succeeded in increasing production and exports from 2002 to 2008. But how did it do this? As we have said so many times, by exploiting - juggling, if you will - all the opportunities available. During this period our industrialists had no choice but to turn to imported inputs, to use cheap credit from abroad at the cost of incurring exchange rate risk, to employ fewer workers in the name of lowering costs and boosting production, and to sacrifice their own profits for the sake of preserving their foreign markets, sometimes even going so far as to sell their goods at a loss.

And our industrialists, who were struggling to remain competitive under these conditions, began to show signs of getting bogged down already in 2005. While industrial production rose at the rate of 9.8% in 2004, in 2005 this growth rate declined by almost half to 5.4%. Growth in industrial production in 2006 and 2007 as well was up-and- down, following an unsteady course and again remaining around 5% for the year.

We found 5% to be inadequate, but, as I said a little while ago, we unfortunately would give our eye teeth for such a rate in 2008. For years we have been drawing attention to the weaknesses in our industry, and to the risks they entail and are going to entail in the future. While things seemed to be going well in the economy, we always tried to draw attention to these problems, even at the risk of being criticized as chronic whiners.

We drew attention, but unfortunately we got no results! Nobody listened to what we said because the mood in the global economy remained upbeat and in one way or another the wheels of the economy kept on turning. Steps to boost our competitiveness were not taken. And the global crisis - which actually came as no surprise because there had been talk of the bubble bursting for years in economic circles - weakened our competitiveness and resilience in the extreme and we were caught unprepared, with a struggling industry in which balances were hanging by a thread. We met the global crisis with an industrial structure that had no more tolerance for further sacrifice. When the problems caused by the crisis were added to the already existing situation, our industry became a sick man, and some sectors are already moribund today.

Domestic demand actually began to dry up following the fluctuation in May 2006. In the circumstances Turkish industry continued to increase production by putting more emphasis on exports despite all its problems, including a lack of profits. Now our export markets, the European Union in particular, are in a recession. Indeed, there is a good possibility that this recession in Turkey's foreign markets will further deepen in the period ahead. It would therefore appear extremely unlikely that we can increase production based on exports and foreign demand in the near future. At home meanwhile the crisis appears to have cut already sluggish demand with a knife.

What sort of way out can we create for our industry in a climate in which both domestic and foreign demand have dried up, in other words, when there are no customers? How can we continue to produce and export? How can we preserve jobs? How can we sustain growth? By the latest figures, the Turkish economy grew by only 0.5% in the third quarter, its lowest rate since the last quarter of 2001.

Value added in manufacturing was down by 1.1% in the third quarter in its first dip since the first quarter of 2002 and the first time that Turkish industry failed to make a positive contribution to growth. The fall in value added in manufacturing also impacted negatively on the trade sector, where value added fell by 1.8% in the third quarter.

But it's not only production; things are not going well in consumption either. Private consumer spending rose by only 0.3% in the third quarter, its lowest rise in 27 consecutive quarters. The picture in investment spending is grim as well. Following a drop of 12% in the first quarter of 2002, it fell by 10% in the third quarter of this year with spending on machinery and equipment down by 8.4%. Third quarter growth rates clearly show that the Turkish economy has gone into a slump.

Nevertheless, the June-July-August effects of the global crisis had still not been fully felt in the third quarter. Given the downward spiraling index of industrial production, it is clear that the impact of the global crisis on growth is going to be far more serious in the fourth quarter of the year. When we consider all these signs, the negative impact of the crisis on the economy emerges quite clearly. After a hiatus of seven years, the indicators are again at alarming levels. Indeed, we might even say that we have made an about-face and are coming back to the place we started from.

At one of our assembly meetings in 2002 we used the myth of Sisyphus as a metaphor to characterize our situation. Condemned by the gods, Sisypus struggles with all his might to reach the top of the hill, but every time he is just on the verge of making it to the top the rock slides back down and the whole process begins all over again. Our situation is a bit like that of Sisyphus. The rock we've been trying to push up the hill since 2002 is about to slide back again to the same place.

Mr. Chairman of Turkey's Central Bank:

We know that you are well aware of all these problems in the economy and that you follow developments closely at the Central Bank. Naturally I wanted to bring up developments on the industrial front in particular and to make clear our position and how we view the situation. As I said a little while ago, there are very serious problems regarding demand in both the domestic and the foreign markets. Our firms face grave problems such as cash flow. The shortage of cash on the market has reached the limit. Morale is low and expectations are down. Both the consumer confidence and producer confidence indexes have plummeted. All these things are having an extremely unfavorable effect on our industry. What's more, production and employment are in great jeopardy as well.

Given the existing situation, we see nothing in the domestic market to bolster consumer confidence or boost private consumer spending. The Central Bank's latest lowering of the interest rate is an encouraging start in that sense. However, there is a need for more comprehensive and radical measures to overcome the sluggishness in domestic demand. And you are already aware of the situation with regard to foreign demand.

Under the circumstances, it is clear that 2009 is going to be a tough year; in particular, that it is going to be extremely difficult from the standpoint of industrial production and exports. As one of the most important and respected members of our economic management team, the Central Bank is going to play a key role in solving these problems and putting our economy back on an even keel. In the recent period, the Central Bank adopted price stability as a fundamental objective. Is rigidity on this point going to continue when domestic demand has fallen to where it is today? What sort of monetary and exchange rate policy is going to be followed in 2009? How is the cash shortage going to be overcome?

We have tried to follow our Central Bank's approach to these issues in the press. As I pointed out at the outset, it gives us great pleasure to have you here in person today and to hear what you have to say. We are going to listen carefully to your explanations of all these issues.

Mr. Chairman: Before concluding my remarks, I would like to remind you of one fact. During the Republican period, between 1923 and 2007, the agricultural sector grew ten times and the services sector seventy times while the industrial sector grew exactly 192 times, becoming the major contributor to Turkey's reaching the point she is at today. Since 1982 industry has been the primary sector of the Turkish economy and its engine of growth. A nation of seventy million cannot solve its problems, cannot achieve the growth it needs and desires, without industry and production! As industrialists, we would like to believe that our economic management team is aware of this fact and is going to outline policies in harmony with it. We would like to be rid of the serious doubts we often have on this subject.

Mr Chairman, Esteemed members of the Assembly:

The year 2009 has the potential to be a far more difficult year than 2008, not just for Turkey but for the whole world. In order to get through that difficult year and come up with a new exit strategy for the economy, Turkey is compelled to implement more creative and sound policies than those tried up to now. We do believe however that, no matter how difficult it may be, our industry is going to try with all its might to maintain its efforts to stay afloat in 2009 as well. What we expect from our government and our economic management team is that those efforts be backed up.

I closing I salute you all once again on behalf of the board of directors and wish you a happy new year in the hope that, difficulties aside, 2009 will bring pleasant surprises and initiatives that will make it easier for our country and our industry to weather the storm.

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