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Turkey: opportunities

Turkey: opportunities despite turbulence NEWS AND MARKETS For Turkey, 2017 began on a hurtful note with the attacks in Istanbul; the entire world expresses their condolences and support to Turkey and its people. But in my regards the best way to beat the narrative of the disruptive forces is by not letting them derail the cycle of growth and development in the region. Turkey is a key ally to both, Europe and the United States. A longstanding member of NATO and a candidate for membership in the European Union, it has strong ties to the West and has long served as a bridge to the East in a volatile, yet extremely strategic region. The collaboration between Turkey and Germany or Europe, in the context of technology and industry has been progressive ever since the Ottoman Empire. Since then, a large number of technology based corporations like Siemens and Schneider Electric have been the first to introduce many innovative technologies in Turkey, for example, establishing the telegraph system in mid-1800s, supplying heavy industry products to the Ottoman Navy, laying the electricity network in 1914 even during the first world war or bringing the fiber optic cable on the Bosphorus bridge in 1986. 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 and role of industry In the broad frame of economics, Turkey has definitely been a success story in this century so far. In the last 15 years, Turkey has shown robust macroeconomic growth with an average annual real GDP growth rate of 4.7 %. The GDP rose from $ 230 billion in 2002 to more than triple at $ 720 billion in 2015. The country has undergone profound transformation over the last decade to solidify its economic foundation. It is the 16th largest economy in the world in terms of purchasing power parity and the 6th largest economy in Europe. In 2015, Turkey had global trade volumes totalling to more than $ 315 billion, of which approximately 40 % was with the EU 28 countries, followed by China, Russia, USA, South Korea and Iran. The EU is Turkey’s number one import and export partner while Turkey ranks 7 th in the EU’s top import and 5th in export markets. Turkey’s exports to the EU are mostly machinery, transport equipment and engineering goods. (Statistics: European Commission, Directorate General for Trade) The Economist Intelligence Unit (EIU) expects an annual average growth rate in real GDP to be around 5 % in 2017-18. The OECD forecasts the GDP growth to pick up to around 3.25 % in 2017 and 3.75 % in 2018, driven mainly by recovering household consumption and gradual increases in exports. Monetary policy played a Author: Sushen Doshi, International Correspondent for World of Industries WORLD OF INDUSTRIES – INDUSTRIAL AUTOMATION 1/2017

vital role in controlling and bringing down the inflation over recent years. The rate of inflation in Turkey has stayed under 10 % since 2004 and year-end inflation was capped as 6.2 % in 2012. EIU forecasts that the average inflation rate will further ease to 4 % by 2018. 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, exceeding the growth levels of the GDP and reached TL 220 billion in 2012. Turkey’s increasing level of disposable income and the high disposable income levels of its export partners – mostly EU countries, provide a much necessary boost to the domestic consumption as well as exports. Turkey 2023 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, securing a roughly 2.5 % share of the global machinery market. The sector aims to account for more than 18 % of Turkey’s total exports. The machinery sector is further categorized into various subsectors with quantitative export targets for 2023, for example the power transmission and controls sector totalling $ 30 billion, the industrial machinery equipment and parts accounting to $ 35 billion, automotive industry $ 75 billion and electronics $ 45 billion. Apart from creating more economic value, the country’s industry aims to create custom-designed, high-quality, affordable and environmentally friendly products, accelerating Turkey’s transition from low value-added products to high value-added products and creating joint R&D centres while increasing R&D spending. Turkey has signed agreements with the EU ensuring an increase in R&D expenditure up to 3 % of its total GDP until 2023. Two thirds of this will be funded by the private sector as is stated in its agreement with the EU. These incentives that are backed by law will secure Turkey’s position as a R&D base by encouraging foreign investors to set up Technology Development Zones (TDZ) in Turkey. TDZs are organized research and business centres 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 and software. 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. Demographic advantage Turkey’s workforce is one of the youngest and largest in Europe with the necessary education, skills and knowledge. More than 60 % of the population is aged between 24 and 54, and 25 % population in the age group of 0-14, which is a huge demographic and economic advantage for Turkey. Moreover, Turkey has one of the lowest minimum wage rates in Europe with approximately $ 600 per month in 2016. The above numbers show that in the coming decades Turkey is all set to enjoy rich demographic dividends. There are four mechanisms through which the demographic benefits are delivered: n The first is the increased labour supply. However, the magnitude of this benefit appears to be dependent on the ability of the economy to absorb and employ the extra workers. n The second mechanism is the increase in savings. As the number of dependents decreases individuals can save more. This increase in national savings rates increases the stock of capital in developing countries already facing shortages of capital and leads to higher productivity as the accumulated capital is invested. n The third mechanism is human capital. Decreases in fertility rates result in healthier women and fewer economic pressures at home. This also allows parents to invest more resources per child, leading to better health and educational outcomes. n The fourth mechanism for growth is the increasing domestic demand brought about by the increasing GDP per capita and the decreasing dependency ratio. Free trade and customs agreement with EU According to the Ministry of Economy, Turkey has free trade agreements (FTA) with 19 countries and has started negotiations with another 13 countries. In 1995-96 the Ankara agreement established a customs union between Turkey and the European Union. Under the customs union agreement, goods may travel between the two entities without any customs restrictions. The customs union does not cover essential economic sectors such as agriculture (to which bilateral trade concessions apply). Turkey’s main exports to EU and imports from EU are dominantly industrial. Since 1996, Turkey’s GDP has increased 4-fold, making it one of the fastest growing economies in the world. At the same time, however, the foreign trade deficit of Turkey (between EU) has increased 2 fold. The customs union is a large factor in both of these developments. In addition to providing for a common external tariff for the products covered, the customs union foresees that Turkey is in compliance with the EU industrial standards. Some commentators have pointed to a vicious circle that the profits generated from imports are being used to buy raw materials and assembly parts again from Europe. This actually highlights Turkey and Europe’s inter-dependence for raw materials, components and finished goods. Apart from FTAs, there are also 19 free trade zones within Turkey which enable corporate, income and customs tax, VAT and other exemptions. The Turkish investment incentive program provides varying tax reductions between 15-65 % depending on investment region, scale and social security support. Growth despite turbulence The Turkish economy continues to face geopolitical headwinds and unsettled political conditions, after having weathered a coup attempt in July 2016 and engaged in military operations in Syria. Following the coup attempt in mid-July, market sentiment worsened only temporarily. More recently, in the context of high geopolitical uncertainty and an extension of the state of emergency, a rating downgrade triggered a weakness in overall business sentiment. Turkey’s main export markets in Europe and in the region remain subdued. A trade embargo imposed by Russia in 2016, which is in the process of being waived, added to the volatility of export markets. Nonetheless, exporters are highly entrepreneurial and taking opportunity of the exchange rate depreciation, Turkish firms have increased their share in several alternative markets in 2016, including in some EU countries. With the expected normalisation of external trade conditions, real exports of goods and services are projected to recover gradually in 2017. Photographs: Lead photo Fotolia WORLD OF INDUSTRIES – INDUSTRIAL AUTOMATION 1/2017