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Turkey: good prospects for another year of growth

Turkey: good prospects for another year of growth
Even during the Ottoman Empire, Turkey has enjoyed the technological advancements from Europe and access to larger markets in Asia. But its integration with new technologies at the start of the millennium, proved to be a turning point that has created a massive growth cycle for the Eurasian region’s industrial development.

Written by Sushen Doshi

Turkey has always been a major trading destination because of its geographic proximity to Europe, Asia, the Balkans and to the energy producing regions in the Caspian and Central Asia. It is a large country with more than 80 million inhabitants and a free-market economy, mainly driven by industries and service sectors, although its traditional agriculture sector still accounts for 25 % of employment. The automotive, petrochemical and electronics industries have grown in importance and surpassed the traditional textiles and clothing sectors within Turkey’s export mix. With the onset of the new millennium, Turkey’s acceptance and integration with the new technologies has created a massive growth cycle for the Eurasian region’s industrial development.

Turkey’s economy

After Turkey experienced a severe financial crisis in 2001, Ankara adopted reforms as part of an IMF program. The reforms strengthened the country’s economic fundamentals and ushered in an era of strong growth averaging more than 6 % annually until 2008. Global economic conditions caused the GDP to contract in 2009, but Turkey’s well-regulated financial markets and banking system helped the country weather the global financial crisis, and GDP growth rebounded to around 9 % in 2010-11. Since 2014, productivity and growth has slightly slowed to reveal the underlying imbalances in the Turkish economy. In particular, Turkey’s low domestic savings and large current account deficit means it must rely on foreign investment inflows to finance its growth, leaving the economy vulnerable to destabilizing shifts in investor confidence.

Turkey has made great economic strides in the last 15 years and has shown strong growth with an average annual real GDP growth rate of more than 6 %. The GDP rose from $ 230 billion in 2002 to more than triple at $ 850 billion in 2016. It is among the 15 largest economies in the world in terms of purchasing power parity and among the top 6 economies in Europe. In 2016, Turkey had global trade volumes totalling to more than $ 340 billion. The European Union is Turkey’s number one import and export partner, while Turkey ranks 7th in EU’s top import and 5th in export destinations. Turkey mainly exports machinery, transport equipment and engineering goods to the EU. Rising levels of purchasing power amongst Turkey’s middle class and the high disposable income levels of its major trade partners – mostly the EU countries, provides a much necessary boost to the domestic consumption as well as exports.

In the third quarter of 2017, Turkish economy grew by 11 % year-on-year basis, accelerating sharply from a 5.4 % expansion in the previous quarter and beating market expectations of 10 %. It was the strongest pace of expansion recorded since 2011. The OECD forecasts the annual GDP growth to be around 4.5 % in 2018 and 5 % in 2019, driven mainly by household consumption, fixed investment, exports and government spending.

Rise of Turkish manufacturing

The manufacturing industry is one of the main drivers of the Turkish economy, accounting for roughly a quarter of the total GDP. According to Turkstat, Turkey’s manufacturing industry has been growing at a CAGR of 12 % since 2003. Its top 10 exports include Automobiles and auto components ($ 20 billion), Machinery ($  12 billion), Gold and other precious metal ($ 12 billion), Electrical machinery and equipment ($ 8 billion), Iron and steel ($ 6 billion). Machinery manufacturing continues to be one of the key growth drivers of the Turkish economy. This sector plays a crucial role in the development of Turkey’s greater manufacturing industry due to its capability to produce intermediate goods and to provide inputs to key sectors such as automobiles, construction, energy, textiles, agriculture, and mining. The machinery manufacturing sector in Turkey is relatively R&D intensive as compared to other emerging markets. Inflow of foreign direct investment (FDI) in machinery manufacturing represents a significant share of country’s overall FDI amount, making up around 20 % of total manufacturing FDI between 2005-2015. R&D expenditures on machinery manufacturing reached $ 600 million in 2014, accounting for almost 10 % of the total R&D expenditure of the country. Turkey’s competitiveness in the machinery sector is driven by favorable input costs and strong enablers. Input costs include competitive labor cost, an affordable and reliable energy supply, and logistical advantages based on the geo-strategic location of Turkey, while enablers include a skilled workforce, investment incentives, sound infrastructure and a strong base of domestic suppliers.

Turkey: good prospects for another year of growth

To establish itself as major manufacturing power, Turkey has set the year 2023 as its target. All the government initiatives and policies are focused with 2023 in sight. For the machinery and equipment manufacturing sector, the goal is to achieve $ 100 billion in export. Apart from creating higher export revenues, the country aims to shift from being a manufacturer of low cost products to high value-added products. To achieve this, Turkey with help from the EU, is focusing on increasing its R&D base by encouraging domestic and foreign investors to set up in Technology Development Zones (TDZ) in Turkey. TDZs are organized research and business centers where academic, economic and social structures become integrated and universities, research institutions, and industrial foundations work together for innovation, technology transfer; increasing productivity and reducing production costs; increasing product quality and standards; working on product development; supporting technological investments and entrepreneurship. To further promote the participation in TDZs, the government offers incentives and tax exemptions to entrepreneurs operating in this region until 2023 from the income made from R&D operations. Taxes on the wages of R&D personnel are exempt until 2023 as well. On an average, every year 4 new TDZs are launched in Turkey. As Turkey proceeds towards its goal for 2023, more and more TDZs are expected to emerge.

Turkey’s infrastructure boom

No other country with the exception of China and India, is undergoing a bigger infrastructure boom than Turkey. The Turkish Government is overseeing a $ 400 billion spending spree on infrastructure, with an aim to lay the ground work for rapid economic development. The impressive list of projects includes a $ 29 billion new international airport in Istanbul, which will replace the 93 year old Ataturk airport. With Istanbul’s advantageous geographical location in mind, this new airport is designed for a passenger capacity of 150 million per year, which will make it one of the busiest airports and cargo terminals in the world. Along with the new airport, Turkish government is planning to invest $ 45 billion to build a 10,000 km high speed rail network, another $ 6.5 billion on Istanbul-Izmir motorway project. The new motorway will reduce the average journey time and the traffic load on the existing route by more than 30 %. The motorway will offer easy and safe connectivity between the Marmara and the Aegean regions of Turkey that together account for 60 % of national GDP, 38 % of freight transport and 40 % of passenger transport in Turkey. Apart from investments in improving its air, rail and road infrastructure, Turkey is a focusing on developing its energy infrastructure with a $ 10 billion Trans-Anatolian gas pipeline that will connect Azerbaijan’s production facilities to cities in Europe passing through Turkey and a $ 5 billion refinery, which upon completion will be the largest in the country. Turkey is also beefing up its defense and aerospace industry cluster with investments more than $ 7 billion, so it can increase production and exports in the international market. All of these mega building projects come on the heels of completion of Eurasia Tunnel and Yavuz Sultan Selim Bridge in 2016. All the above projects are impressive, but Turkey’s Urban Renewal project is most massive of them all as it will cost more than $ 200 billion. Such mega infrastructure projects offer a big boost to the economy as they create a multiplier effect and increase the aggregate demand of various engineering goods and services.

Another year of growth, despite turbulence

In the immediate aftermath of the failed coup attempt in July 2016, the Turkish economy bled and saw steep declines in real production, domestic demand and investor confidence. But over the next few months, the government actions were instrumental in generating a fresh momentum and thus pulling the economy from the brink of crisis. Now, more than a year after the coup attempt, Turkish economy has posted impressive growth figures. This growth is relied heavily on the inflow of foreign short-term investments as well as on strong government levers at home, including the rise in bank lending, tax cuts and other incentives. Though not all is shiny as the growth numbers suggest, as current account deficit, unemployment and inflation have increased. The prevailing views among experts is that despite its spectacular growth in 2017, Turkey is entering 2018 with some serious challenges on its plate.

Author: Sushen Doshi is our International Correspondent for WORLD OF INDUSTRIES


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