The Chairman's Speech at the Assembly / 27 May 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 May meeting. This meeting has special significance for us insofar as our chamber was founded in 1952 upon the written request of 750 industrialists and embarked on its activities at its first assembly meeting on May 30th of that year.

As we enter our 58th year, we have over 14,500 members, who account for approximately 40% of industrial production and value added in Turkey, who generate 9.3% of GDP, who make 35% of the country's exports, and who create 17% of the total industrial jobs in Turkey.

We are celebrating the anniversary of our 58th year with the hope of many happy returns, both for our country and for our industry.

There are two points I would like to share with you. As you will recall, following our previous meeting, our umbrella organization, the Union of Chambers and Stock Exchanges of Turkey (TOBB), held its general meeting on 1-2 May.

As a result of that meeting, I have assumed the position of Deputy Chairman of TOBB's Board of Directors representing the Istanbul Chamber of Industry. I am aware that this new office means a further increase in my responsibilities. From now on, I shall try also to represent our industry in the best way possible on the Board of Directors of TOBB. vSecondly, the assembly of Istanbul Chamber of Industry paid a visit to the provinces of Mardin and ?anlyurfa on 22-24 May. It was a useful visit in terms of enabling us to assess the latest situation in those provinces together with businessmen and industrialists in the region. We realized once again that there is an enormous potential all over our country and many things that can be done. I would like to thank those members who made this visit with us. I hope that they came away pleased as the questionnaires they completed seemed to indicate.

Esteemed members of the assembly: A very discouraging picture emerged in Turkey's production and employment in the first quarter of 2009 when industrial production contracted by 22% on the same period the previous year. Turkey's exports too declined by 26% in the first quarter of the year. This contraction in production and exports led to a sharp spike in unemployment.

In the February 2009 period, which represents the average for Jan-Feb-Mar, unemployment rose to the previously unseen rate of 16.1%. In the same period of 2008 it was 11.9%. An increase of four points, from 11.9% to 16.1%, in unemployment within one year makes it clear that the global crisis has had its most devastating effect in Turkey on production and jobs.

According to the latest figures, the biggest job loss on a sectoral basis is again in industry. Industrial jobs declined by 354,000, in other words eight percent, in a single year. As of February, open unemployment in Turkey had reached almost 4 million. The exact figure is 3,802,000.

If we add to that figure seasonal workers and those who are able to work but have stopped looking for a job, then the number of jobless rises to 6.5 million and the unemployment rate to 25% by the internationally recognized broad definition of the term. This means that one in every four persons is out of work.

When we look at world unemployment figures published by The Economist magazine, we see that South Africa has the highest rate of unemployment with 23.5%, followed by Spain in second place with 17.4% and Turkey in third. At the same time, youth unemployment in Turkey has reached 28.6%, which is a major problem in its own right.

According to a recent report in the press, young convicts between the ages of 18 and 35 make up a large majority of prison inmates in Turkey. In the circumstances, it would not be wrong, I think, to say that unemployment is Turkey's leading economic and social problem.

For a long time the Istanbul Chamber of Industry has been seeking to draw attention to this important problem and to contribute to generating solutions. Within this framework, one of our basic proposals has been to reduce the heavy burdens that virtually penalize employers in Turkey. Most recently, our esteemed member, Mr. Süleyman Orakçyo?lu, presented an interesting study on this subject last month. The Istanbul Chamber of Industry made a similar study in 2006 and submitted it to our distinguished Prime Minister. In the study, we determined that a reduction of at least 5.5% in the initial phase needs to be made in the share of the social security premiums paid by employers to be followed by subsequent reductions in increments. Furthermore, we also examined how a 5.5% reduction would affect labor costs and the competitiveness of the various sectors of the manufacturing industry.

Approximately two and a half years after our report was submitted, the 5-point reduction in question finally began to be implemented on 1 October 2008. I would like to remind them at this point that we are extremely grateful to our former minister of industry and trade and to the current minister, Mr. Zafer Çağlayan, for their efforts. However, in a stroke of extreme bad luck, the biggest crisis in a century happened to hit before this five-point reduction that we had awaited for years had a chance to make its impact felt. As is clear from the indicators, the crisis had a devastating effect on production and employment, and an urgent need arose for some additional measures.

During this process, however, we have observed that whatever could be done through a five-point reduction has been done in any case. Yes, it's true, a five-point reduction for the first time in our recent history!

The fact remains however that despite the reduction our premiums are still very high. As we have said from the beginning, reductions definitely need to be continued incrementally according to a plan. When asking for a reduction, we are aware of budgetary restrictions. We know that a one-point reduction means a cost to the state of around one billion Turkish liras. However, we also know that, due to the crisis, state revenues are being reduced as workers lose their jobs. Under the existing conditions, a reasonable road to take would appear to be to reduce the burden on employers on the condition of preserving jobs.

As we brought to the agenda earlier, a reduction of a certain percent could at least be considered for a certain period for enterprises that pay their premiums regularly. It is an indisputable fact on which almost everyone is agreed at this point that Turkey needs to take very urgent and comprehensive measures regarding unemployment, and we at the Istanbul Chamber of Industry are continuing our efforts on the subject.

As we develop our proposals, we are trying to find a way for enterprises to remain afloat and existing jobs to be preserved, indeed boosted, and workers not unjustly treated, all while putting the least possible burden on the budget; we are striving to be able to establish such a balance.

We are going to submit our proposals on the subject to the government once again during our contacts in Ankara.

Esteemed members of the assembly:

Any slowdown at all in the hemorrhaging of jobs in the period ahead depends on the course production takes. Turning now to developments in that area, after contractions of 21.3% in January and 23.8% in February, industrial production shrank by 20.9% in March. For the first time in seven months, therefore, we have a contraction in March that is smaller than the one the previous month. Under normal conditions, a contraction rate of 20.9% would be very high. But, at a time when we have literally fallen headfirst down a precipice, such a contraction is the lesser of two evils. We have begun to think that the negative trend may be coming to an end and that the fall in production has bottomed out. The fact that production in March is up by 13.4% on February also strengthens those hopes.

In another encouraging development, capacity utilization is also up, albeit only slightly. At 66.8% in April, the rate of capacity utilization in manufacturing is higher than in the previous three months. Furthermore, capacity utilization in April rose by 2.1 points on the previous month. This slight upward movement in the rate of capacity utilization in manufacturing can be regarded as an indicator that the measures the government has taken against the crisis are paying off in part. A look at the sectors covered by the economic stimulus package reveals this development even more clearly. Capacity utilization in the automotive industry, which was 47.5% in February, rose to 54% in March and 58.4% in April. The increase is even more striking in the furniture sector, where capacity utilization was 59.2% in February, 60.3% in March and 66.6% in April. These figures show without any need for words the importance of the measures we have always insisted on. Similar measures embracing all the sectors should definitely continue!

There are other signs as well that the downturn is beginning to level off. In May the real sector confidence index rose by 11.8 points on the previous month to 96.9. The consumer confidence index, meanwhile, which was 74.8 in March, was 80.8 in April. Both indexes are still below the positive threshold of 100, but at least there is a trend in the right direction. Our ISO professional committees industrial development index indicates a similar rise. The optimism in expectations for May especially is conspicuous.

All these relatively positive developments point to the fact that a groundwork conducive to reversing the downward trend is about to emerge. We expect these developments to be a trigger for reminding us of what needs to be done and spurring efforts to boost production. Only if that is the case can we hope for a recovery to get under way.

At almost every opportunity in the last three months we have expressed the view that the credit guarantee fund heads the list of measures that need to be taken. Finally, yesterday, some progress was achieved, and a draft law ensuring Treasury support for the credit guarantee fund was passed in the budget planning commission of parliament. We are expecting the remaining phases of this urgent legislation to be completed as soon as possible.

Following the Central Bank's recent lowering of interest rates, the lending rate has fallen to its lowest level at 9.25%. Let's face it, however, these reductions have not been reflected in the credit costs of the real sector due to the high risk premium. We are still talking about interests rates of around 20-25% on credit. Hemorrhaging in the real sector is never going to stop until some solution to this problem is found.

Turning now to our banks, according the figures of the Banking Regulatory and Supervisory Board (BDDK), the banks' profits in the first quarter of 2009 rose by 33% on the same period last year. I would like to draw attention to one fact here: on the profitability front, the industrial sector lags way behind the banking sector. The situation is quite different however when it comes to contributions to the economy. In 2008 the industrial sector's share in GDP was 19.6% in current prices, while that of the financial intermediaries was 3.5%. These data demonstrate the dominance of the industrial sector in terms of value added.

Our esteemed assembly member Mr. Nevzat Demir compared the banks with the industrial firms in the ISO Top 500 at our March meeting. We in turn put this comparison on a numerical footing and compared the turnover of the firms in the ISO top and second 500's with the revenues of the 23 banks which are members of the Banking Association of Turkey. Those 23 banks' revenues in 2007 were equivalent to 27.2% of the total turnover of the top 1,000 industrial firms for the year. It is noteworthy that, numerically speaking, the banks, whose numbers are only 2.3% of those of the industrial firms (23 as compared with 1000), claim such a high share of revenues. Mr. Demir asked whether or not a comparable situation exists in the economies of any of the developed countries. Since there is no survey similar to the ISO Top 500 Industrial Firms in those countries we are unable to make a one-on-one comparison for now. But we have done a preliminary study based on the data in the Fortune Global 500 for 2008. Twenty firms from England and 24 from Germany made it onto the Fortune Global 500 list in 2008, and seven of the firms from England and six of those from Germany operate in the banking sector. We see that while the share of those six banks in the total profits of the firms from Germany is 7.4%, in England the rate is higher at 43.4%.

Another issue that has been raised in our assembly meetings is that of value added. We would like to thank our esteemed assembly member Mr. Ali Eren who has literally made it his mission to keep this issue on the agenda.

Earlier we brought this subject to the agenda frequently as a basic problem by making reference to the structure of our imports. Turkey's exports climbed from 31 billion to 132 billion dollars in the post-2001 period. We were proud of this growth, but the other side of the coin was that Turkey's imports in the same period rose even more steeply, from 41 billion to 202 billion dollars. And imports of intermediate goods used for production made up 105 billion dollars' worth of our total 202 billion dollars' worth of imports in 2008. When we add to this our energy imports, total imports of intermediate goods come to 151.7 billion dollars. In other words, we were forced to import 152 billion dollars' worth of intermediate goods in 2008 in order to make 132 billion dollars' worth of exports. This picture shows, one, what straits our domestic producers of inputs are in, and, two, that from the standpoint of the economy in general there is a serious problem regarding value added.

It seems to be virtually a structural characteristic of the Turkish economy that our imported inputs outstrip exports in years of export growth. This situation is unsustainable, and Turkey has no choice but to change this structure of production.

The alternative of growth based on domestic demand has come to the agenda in the recent period when foreign demand has declined under the conditions of the crisis. Together with this alternative, however, the concern has also arisen that imports are again going to rise as the domestic market revives and that this in turn is going to put a strain on Turkey from the standpoint of financing. Turkey has no choice but to break out of this vicious cycle.

Domestic producers of industrial inputs in particular, which are also the sectors with a high potential for value added, must definitely be shored up. To contribute to the development of industrial policies conducive to this, our department of research has undertaken a study, using input-output data published by the Turkish Bureau of Statistics, aimed at identifying those sectors that have the most value added, that use the most domestic inputs and that have a high share in total production. When our study is ready, it will be shared with you, our esteemed assembly members, and with all our industrialists.

An important development in recent days is that our government has reached the stage of finalizing work on the new incentives law. The incentive system as stated in law no. 5084 did not bring about the expected growth in investments and jobs that is needed for the development of the backward provinces, but rather, quite the contrary, resulted in some new problems. The incentive system definitely needs to be designed in such a way as to eliminate imbalances among the regions. However, in today's crisis, even industrialists in Istanbul are in a very difficult situation and therefore need incentives. In developing a new incentive system, we hope that not only will attention be paid to encouraging sectors high in the use of domestic inputs and with a high potential for value added but that industrialists in the developed regions will be given encouragement as well.

Mr. Chairman, Esteemed Members of the Assembly: We have brought to your attention our views on the latest developments in Turkey's economy and industry and our efforts aimed at the issues that were brought to the agenda in our assembly. Furthermore, our report on the problems of Turkey's industry and the solution proposals we have developed was distributed together with our assembly agenda.

Today we would like to listen to the views and recommendations of you, our valued assembly members. Your sharing of your views with us is going to give us strength and help us to represent the problems and expectations of our industrialists more broadly and more realistically in our contacts with the government.

I thank you in advance for your contributions and salute you all once again on behalf of the board of directors.

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