The Chairman's Speech at the Assembly / 28 May 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 May assembly meeting. We have with us today a very distinguished guest. Former Undersecretary of the Treasury, academic, and one of the leading names in the economic media in Turkey, Mr Mahfi E?ilmez. We would like to thank him for accepting our invitation and welcome him to our meeting. We always follow your comments and views with interest, and we are going to listen to what you have to say today with interest and pleasure.

Esteemed members of the Assembly:

It would, I believe, not be incorrect to say that the favorable period in the Turkish economy that began in the first quarter or 2002 ended in the second half of 2007. The economy was relegated to the back burner in 2007, when two important political elections were held. And when the unease in the global markets was added to this situation at home the economy ended the year with a picture that did not compare favorably with that of previous years. Unfortunately those troubles are continuing, even worsening, in 2008. The unease and uncertainty in the global markets has not abated. We don't know yet whether the threat of recession in the U.S. economy has been averted, because the debate is ongoing. Prices of food, commodities and, especially, oil are skyrocketing. Naturally these adverse trends both at home and abroad are further exposing the fragilities in our own economy. It is becoming more and more difficult to combat inflation, which is creeping back towards double-digit figures. In principle this already happened on the Producer Price Index when the annualized rate for the last year came to 14.6%. Meanwhile on the Consumer Price Index, which is regarded as the true indicator of inflation, the figure is still below double digits at 9.66%.

On the other hand our current account deficit, despite a slowdown, is continuing to widen, from 9.2 billion dollars in the first quarter of last year to 12 billion in the first quarter of this. As the current account deficit grows, inflows of foreign funds are declining. There is a fall in inflows of both portfolio investments and direct investments in the first quarter of 2008. While 9.4 billion dollars of direct investment entered Turkey in the first quarter of 2007, in the same period of 2008 this fell to 4.4 billion.

Unemployment is another fundamental problem in the Turkish economy, looking even more bleak in the first quarter of 2008 than it did in the first quarter of 2007. By the latest figures, unemployment in Turkey stands at 11.6%. However, when underemployment, seasonal workers and those who are prepared to work but not actually seeking jobs are added to this, Turkey's unemployment rate rises to around 24%. This deterioration in the indicators also paves the way to a deterioration in perceptions of the Turkish economy.

The Real Sector Confidence Index fell in May to its lowest level in the last year. It is noteworthy as well that the index number for fixed capital investment spending, one of the sub-items on the index, fell for the first time below the borderline level of 100 into negative territory.

Meanwhile the Consumer Confidence Index at 76.2 in April exhibited its lowest level since its inception in April 2003.

In short, to sum up, in the first half of 2008 the Turkish economy exhibited a picture in which inflation and the current account deficit both rose,
unemployment was on the rise,
growth slowed,
the inflow of funds declined,
and expectations were steadily dashed.

If these unfavorable trends continue, clearly very difficult days lie ahead!

In the circumstances, the 19th Stand-by agreement signed with the IMF in 2005 and covering the 2005-2008 period ended on 10 May. While the European Union, an important external anchor from the point of view of the economy, has almost completely disappeared from the agenda, another external anchor, the IMF, is now on hold. Whether a new stand-by is on the horizon is anybody's guess.

Since Turkey has already used more than a hundred percent of her credit quota, post-program monitoring automatically goes into effect. In post-program monitoring however the IMF assesses how things are going not by intervention in the economy but only through its reports. Since the close monitoring agreement of mid-1998, the Turkish economy has passed IMF inspection for almost the last ten years. There is no question that significant gains were made in the economy during that period.

However, when we assess it officially as a whole what emerges is a picture of a Turkey that still, after ten years of stabilization programs, has not achieved complete economic stability and remains openly exposed to the adverse impact of external shocks. We have supported the stability programs from the start, because we regarded the fight against inflation, fiscal discipline, and the implementation of structural reforms as fundamental needs of the economy.

The investment and production dimension was lacking in the programs, but we nurtured the hope that these oversights would be made up along the way. We have to admit that the stability program had some success in the beginning. But this success was short-lived, and a formula of high interest rates, low exchange rates and an overvalued YTL soon began to cause losses and fragilities in the economy. Unfortunately however our government has remained a spectator to these losses and fragilities and failed to take preventive measures in time. The oversights that we had hoped would be eliminated along the way were not, and serious erosion occurred in the competitiveness of our producing sectors. When we look at the world, we see that no other country on a par with Turkey is still continuing with the IMF. Countries in the same category with us that embarked on stability programs with the IMF at around the same time we did have long since cut their ties. Yes, the IMF program has its shortcomings, and it entailed certain costs, but can we in Turkey cut our ties with the IMF? Can we say, let's not sign a new stand-by agreement?

Are we sure that a Turkey without the IMF is going to continue to pursue fiscal discipline, that it is not going to slide once again into populist policies?

Indeed questions of this nature already began to crop up prior to the local elections. But what is really important is, if we don't continue with the IMF, do we have an alternative program to replace the IMF program?

During the period we have left behind, we always expressed the view that "we must develop our own medium and long term programs without jeopardizing macro economic gains." We drew attention to the fact that only in this way could the shortcomings in the IMF program be compensated and an answer provided to the needs and expectations in the production dimension of the economy. Unfortunately, however, such programs were not forthcoming!

At the beginning of this month, Minister of State Mehmet ?im?ek and Finance Minister Kemal Unakytan revealed the medium term financial framework for the 2008-2012 period. This program which, as the name indicates, is essentially a fiscal and monetary program with no production or investment dimension, certainly cannot be regarded as an alternative economic program. The most salient aspect of the medium term financial framework is that it appears to lower the target for the non-interest surplus.

Turkey in the recent past has adopted high non-interest surplus ratios at levels rarely seen in other countries in the world and, in a sense, has also succeeded in realizing those high rates.

Based on national income figures prior to the recent revision, Turkey chalked up a non-interest surplus that came to 6.6% of its national income in 2003, 7% in 2004, 6.4% in 2005 and 6.5% in 2006. Based on the revised national income figures for 2007, the non-interest surplus in that year came to 3.5% of national product. In the medium term financial framework this has been targeted at 3.5% in 2008 as well. What impact will lowering the non-interest surplus have on the economy? If the funds thus obtained are used efficiently and allocated to investment spending, the economy will certainly be favorably affected. However, any preferences made in the direction of populist or election spending can bring nothing but further deterioration in the economic balances.

At this juncture, Brazil constitutes an interesting and significant example. At the beginning of the decade, Brazil was mired in a crisis as severe as ours and Turkey was ahead in economic comparisons between the two countries. Nevertheless the situation has now changed completely. Not only has Brazil outstripped Turkey, she has significantly widened the gap.

While international credit rating institutions have downgraded Turkey's status, they have raised Brazil's. When we look at what lies behind Brazil's success, we see that one of the basic factors has to do with the non-interest surplus. Engaging in tough bargaining with the IMF in 2004, the Brazilian government lowered the ratio of its non-interest surplus and allocated the funds it thereby gained to investment spending, primarily infrastructure investment. Nor did it merely allocate funds, at the same time it also implemented measures to encourage investment and improve the investment climate. Through these implementations Brazil succeeded in speeding up growth, revitalizing its economy and boosting employment. Nor did it compromise its macro economic gains in doing so. Turkey too should put the funds it has gained by lowering the non-interest surplus to productive use as in the Brazilian model.

Yesterday our Prime Minister announced his GAP (Southeast Anatolia Project) action plan. GAP is an important project for Turkey in both its economic and its social dimension. He announced a fairly comprehensive plan. Let us leave aside questions as to how soon funds allocated to GAP will yield a return or when they will contribute to growth or lowering inflation.

Generating excitement by announcing a plan is of course very important. But what is really important is implementing, or translating into reality, plans that have been announced. After the elections, our government first announced a three-month emergency action plan and, following that, a 2008 action plan. Both action plans are now behind schedule!

We are expecting the targets envisaged in the GAP action plan to be implemented on time and in full, and the shortcomings in the other plans to be made up as soon as possible and those plans fully implemented as well.

Esteemed members of the assembly:

While there was deterioration in most of the economic indicators in the first quarter of 2008, industrial production and, especially, exports both exhibited a favorable curve. According to the latest figures of the Turkish Bureau of Statistics, Turkey's exports were up by 61.9% in January, by 44.4% in February and by 27.6% in March. The quarterly rise is 42.9%, one of the highest in recent years. Imports rose on average by 39.5% in the same period. Exports rose faster than imports in the first quarter of the year, but the speed at which our foreign trade deficit is growing has not been slowed.

According to figures released by the Union of Exporters of Turkey, growth in exports continued as well in April when the Union reported an increase of 39.1% in the fourth month and an average growth of 36.9% for the quarter. Annual growth of 12.5% in exports was envisaged in the economic program for 2008. We are confronted with a growth rate well in excess of this in the first four months.

Turning now to industrial production, as you will remember, this was up by 11.4% in January and 7.5% in February. Following these two rather successful months, we observe a conspicuous slowdown in the rate of growth in industrial production in March at 2.4%. Results for the first quarter underscore the high probability that the erratic structure we have seen in industrial production over the last three years is going to continue in 2008 as well.

Indeed, adding December of 2007 into the picture, when we look at the last four months we can say the ups and downs have become even more pronounced with sharp zigzags appearing at ever shorter intervals.

As I said at the outset, the Consumer Confidence Index indicates that no revival in the domestic market can be expected in the days ahead. In the circumstances, continuation of growth in industrial production in the coming months would appear to depend largely on developments in the foreign markets. And the continuing threat of a global recession is unnerving in that sense.

Esteemed members of the Assembly:

Turkey is facing a difficult and troubled agenda in the economy for reasons of both internal and external origin. The rise in food and oil prices is a serious threat. Let us not forget that the oil crisis of the 1970's was the primary reason for the start of the chronic inflation that plagued the Turkish economy for decades. Today we are faced with a similar risk! I should made clear at this point that we do not even want to think about scenarios in which the price of a barrel of crude could come to $200.

Our relevant minister of state said recently that every dollar hike in the price of oil means an additional 530 million-dollar burden a year on Turkey. By another calculation, a dollar hike in oil prices adds another 400 million dollars to our current account deficit.

How are we going to cope with a widening deficit and rising inflation? One alternative is to try to attract more foreign funds by paying a lot higher interest rates. In the circumstances, as interest rates soar, growth is going to slow and the vicious cycle of cheap foreign currency, abundant imports, high unemployment and low competitiveness is going to accelerate, thrusting sectors and enterprises that are already in trouble into even deeper difficulties.

A look at industrial production figures by sector shows that production in some sectors has been declining steadily. Although the sectors with advanced technology and oriented to the foreign market are in a relatively better position to cope, enterprises working mainly for the domestic market in particular are in big trouble.

While we use the world's most expensive gasoline, another approximately 20% hike in electricity and natural gas following the hike at the new year is going to further exacerbate the problems of our enterprises. According to Turkish Bureau of Statistics figures, the number of workplaces closing in April 2008 was up by 209% over the previous year. Let us not forget that behind this lie the stories, indeed the tragedies, of thousands of people, unemployed and victimized together with their families.

Mr. Chairman,

Esteemed members of the Assembly:

As I said a moment ago, Turkey is facing a difficult agenda and some complex and difficult choices in the economy. We believe that the government and the managers of the economy are aware of all this. Yet we can see no development, no unified whole, when it comes to what measures are to be taken and what is to be done.

What are we going to do? Are we going to weather this difficult period by sitting on our hands and hoping that the global credit crisis is straightened out and that oil and commodities prices come down? What is apparent is that we have come to the end of the road as far as using the methods and recipes we have used up to now. There is an urgent need for investment and focused new initiatives in the economy. Monetary policy and financial policies are of course important instruments, of course, but let us not forget that the real recipe for solving our problems and coping with the inflation and current account tsunamis that are probably going to come our way in the days ahead is production! Boosting production! We are compelled not only to produce more but to produce goods that are higher in value added. We must rapidly orient ourselves to technology, innovation and productivity in all our sectors. We must rapidly implement policies that will turn the structure of our industry and our production around in this direction and transform the threats that lie before us into opportunities. We must pursue the reform process without interruption. This is what we have to do.

I would like to underscore once again that danger is standing at the door in the economy. Indeed, it has one foot in the door already.

If the potential risks materialize, all sectors are going to be hit. Turkey must put an end to all the problems that are dividing her energies and rapidly focus her attention on the economy. Instead of passively awaiting the fate that is going to befall us, we must engage without delay in a quest and effort to shape that fate. Examples from around the world, most notably Brazil, show us that this is possible. And Turkey is a country with the potential to succeed!

In closing I would like to 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