The Chairman's Speech at the Assembly / 24 September 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 September meeting. Our guest this month is Mr. Ersin Özince, President of Türkiye İş Bankası and of the Association of Turkish Banks. We would like to welcome him and thank him for joining us today. Welcome Sir! It gives us great pleasure to have you among us, and we look forward to hearing to your views.

Esteemed members of the Assembly:

As you will remember, due to the recent changes in our professional groups, we held our August meeting earlier than usual on the 13th of the month. Therefore a month and a half has passed since we were last together. In that time some important developments have occurred in Turkey and in the world economy. The crisis that has been ongoing in the American financial system since the second half of 2007 has gradually deepened. There were reports from the U.S. of mortgage companies bailed out by the government and of investment banks sold far below their value. Finally, with the collapse of the 158-year-old Lehman Brothers, which had weathered the crash of 1929, the seriousness of the situation became apparent. The United States of America is mired in its worst financial crisis since 1929. So far no one can say whether the crisis has bottomed out, and it is uncertain whether the nightmare is over or whether there could be an even bigger collapse.

The Bush administration has submitted a 700-billion dollar bailout package to Congress to demonstrate that it stands by the financial system. This bailout has raised hopes, but questions and concerns for the future still remain. The American media is asking questions like, "What if the bailout passes Congress but doesn't do any good?" and "Is there a 'b' plan?"

That financial institutions that once acted with greed are now asking tax payers to pay for the risks they took is sparking debate, and the crisis is being viewed as the end of an era in the economy. Government takeovers of several institutions through bailouts in a country that could be termed the heart of the market economy is being seen as the end of the free market as we know it.

In a striking commentary, Nobel economist Joseph Stiglitz, who is known for his dissenting views, has compared the collapse of Wall Street to the collapse of the Berlin Wall.

The prevailing expectation for the post-crisis period is for a transition to a more regulated free market economy and new arrangements in the global financial system.

Leaving aside these debates, which we believe are going to occupy the international economic agenda in the period ahead - and we know that Mr. Özince is going to brief us further on issues relating to the financial system - I would like to turn to the question that is on all our minds, namely how all these things are going to affect our own country, Turkey. I believe, in the first phase, that our answer to this question is going to be in the form "the crisis in America, which is the engine of growth of the world economy, is definitely going to affect Turkey in one way or another." It is not easy, however, to envision the degree of those probable effects.

Taking it phase by phase, we must recognize that the period of low-interest high liquidity in the world has come to an end. It's not going to be as easy in the days ahead to find credit abroad, and costs are therefore going to rise. At the same time, growth is going to slow in the western economies. Our volume of trade with the U.S. is not large. Exports to the U.S. make up about 5% of our total exports. But the slowdown of growth in the European Union countries to whom we make close to 60% of our exports is going to affect us. A slowdown is envisaged in the European economies in general. And in Germany and Japan a recession is anticipated. This expectation of a recession in Germany, our biggest trading partner, is not good news at all.

Esteemed members of the Assembly:

A similar financial crisis occurred in Turkey in 2001 - and is still vividly preserved in our memory. In a sense we could say that we were ahead of the U.S. on this one! In the restructuring that followed 2001, our banking sector was put on a much more sound footing than it had been before. Little recourse was had to risky financial products. This is one of Turkey's major advantages today that make her glass half full. When we look at the empty half of the glass, what we see is our gaping current account deficit, which has continued to widen rapidly in 2008. By the latest figures, it was 32 billion dollars in July for the first seven months, and 47 billion for the year. Unfortunately as the current account deficit was widening, foreign currency inflows tapered off in the same period. There is also a 41% decline in net inflows of direct investment at the end of the first seven months and a 70% decline in inflows of portfolio investments. While official foreign currency reserves rose by 7.8 billion dollars in the first seven months of 2007, the increase was only 659 million dollars in the same period of 2008.

Under these conditions in the global financial markets, how much longer can Turkey continue to have such a high current account deficit? How can the current account deficit be financed in an unproblematic way? If interest rates rise in the western economies in the period ahead we may be forced to pay far higher rates of interest in order to attract funds to finance our current account deficit. As we see it, we must be extremely cautious when it comes to the current account deficit.

Another basic problem with the empty half of the glass is our high level of intermediate goods imports, a problem to which we draw attention at every opportunity. This issue is one of the key reasons for our high foreign trade and current account deficits. Turkey's total exports in the first seven months of 2008 were 81.4 billion dollars. Our intermediate goods imports in the same period were 95.8 billion, 29.4 billion of which were energy imports. Consequently, the picture ahead is this: The exports we make are not even sufficient to pay for the inputs we need in order to produce, let alone to create added value for our country. The figures show that imports of industrial inputs are steadily growing. While 64% of our imports were intermediate goods in 1998, in the first eight months of 2008 they were up to 76%. This structure is unsustainable! Turkey must rectify this situation and establish a balance in this area.

Continuing to look at the empty half of the glass, the real sector's high level of foreign currency debts emerges as another important risk factor. According to the latest figures, the private sector's foreign debts were 172 billion dollars at the end of the first quarter of 2008. And 112 billion dollars of this debt is due to non-financial institutions, in other words, to the real sector. One positive aspect of this is that 87 million dollars of the 112-billion-dollar debt, or close to 78%, consists of long-term debts. The fact that foreign debts are usually long-term may give our real sector a little breathing space.

A slowdown in growth is another risk for the Turkish economy! We are worried about this in any case. GDP rose by only 1.9% in the second half of 2008. With the exception of the first quarter of 2002, this is the lowest rise in the 26-month period of uninterrupted growth. Second quarter investment spending in the private sector was up by only 0.6% while spending on machinery and equipment fell by 2.7%. These figures are especially important as an indication that private sector investment has practically come to a halt.

In the same period, private consumer spending rose by only 2.8%, another indication of trouble in domestic demand. Unfortunately the preliminary figures for the second half of 2008 are not very encouraging either. Production in industry, the engine of growth, rose at the low rate of 3.4% in July.

Turning now to our exports, there was an average increase of 39% in the January-July period according to figures released by the Turkish Bureau of Statistics. The Association of Exporters of Turkey has announced export growth of 27.6% in August. Export growth in August is therefore below the average for the first seven months of the year. If we look at this in greater detail, the biggest factor seems to be a slowdown in automobile exports. We would like to hope that the slowdown in this sector, which drives Turkey's exports, will not be permanent.

As I have explained earlier on other occasions, our industrialists are utilizing all their resources to continue producing and stay in the export competition. The latest hikes on natural gas and electricity rates make that struggle even more difficult. Since January there has been a total increase of 60% in the price of the electricity used in industry. This price rise, which was postponed in relatively more favorable years and virtually swept under the rug, has accumulated now and caught our industrialists in a very critical period. This cannot be said to be proper pricing policy.

Esteemed members of the Assembly:

I have tried to share with you the picture before us to the degree that I am able to discern it. When we look back, it would clearly appear that the slowdown in growth and the point now reached in the global crisis cannot be viewed as an unexpected surprise development that caught us unawares. Growth had already begun to falter following the fluctuation in 2006. It was no secret that the abundance of liquidity was not going to last forever and that growth would slow down depending on inflows of foreign funds and the low exchange rates. It was clear that the crisis that erupted in the global markets last summer was going to continue in waves. And the government and the managers of the economy were of course aware of those risks. But unfortunately Turkey did not make sufficiently good use of the time. We spent 2007 bogged down in elections and political crises. The economy was not, and could not be, the number one item on the agenda.

At the beginning of 2008, under the impact of the threat of a global crisis, a little progress was made on some reforms that have been on the agenda for years. Then the economy was again virtually forgotten. Politics once again came to the forefront.

On July 30th when the Constitutional Court decided not to close down the ruling AK Party, we in the business community again had hopes and expectations that the economy would finally take precedence. Unfortunately our hopes once again were in vain! And here we are today!

We now face a serious threat. But we are not entirely defenseless against that threat. The glass is still half full. Like our banking sector, our budget is much better balanced than it was in the past. In the non-interest surplus, performance was above target in the area of interest spending. At his recent press conference on the economy, our distinguished Prime Minister insisted that fiscal discipline is going to continue. This is important, especially in the run-up to the local elections.

At the same meeting the Prime Minister brought up the issue of the black economy. We have heard similar statements concerning this issue before. We hope that in the struggle against the black economy we can finally move from the phase wanting to do something to actually demonstrating the will to do it.

Another important aspect of the full glass is our durable real sector. For many years Turkey's real sector has been struggling to compete. It has become virtually inured to crises. In the phase up to now at least, Turkey has done relatively well. What we need to do from here on out is to focus on how to turn the crisis into an opportunity and fill the empty half of the glass.

As for how that can be done...

Let us not forget that obligations that are postponed during periods of complacency, obligations, for example, such as the reforms needed to boost our competitiveness, can be implemented more rapidly under the threat of a crisis. Again let us not forget that both people and systems can become more creative in difficult times. Many inventions and discoveries are the product of such periods. And by straining our creativity under crisis conditions we can diversify our products and our export markets. In time these will be transformed into lasting gains.

At the same time the upheaval in the global financial system can create opportunities for developing countries. We must be able to keep a close eye on those opportunities.

The most important condition for succeeding in all these things is that attention be focused on the economy. That coordination and integration in the management of the economy be strengthened. The government and the managers of the economy have an historic responsibility in this sense.

Within this framework, we shall reiterate once again the appeal we have made at every opportunity for the last two years and say that the economy must be the number one item on the agenda.

Mr. Chairman, Esteemed members of the Assembly:

In closing I would like to thank you for your patience. I wish you all a happy and healthy holiday 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

The Chairman's Speech at the Assembly