11

BUSINESS ENVIRONMENT

IN TURKEY

İbrahim H. ÇANAKCI
Undersecretary of Treasury

Knowledge Economy Forum IV

Istanbul
March 22, 2005
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CONTENT

¾ TURKEY’S POTENTIALS AND KEY CHALLENGES

¾ POLICY ACTIONS TO MEET THE CHALLENGES

¾ GAINING GROUND & PROSPECTS

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TURKEY’S POTENTIAL AND KEY CHALLENGES

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Turkey’s Potential

Demographic Profile Economic Profile

US $ GDP Per Capita 7,213
7.400
Japan
(PPP) 6,937
7.000

Europe EMU 6.600

6.200

Turkey 5.800

5.400
0% 20% 40% 60% 80% 100%
5.000
0-14 14-60 60+ 1999 2000 2001 2002 2003 2004E

Increasingly Open Economy

Capital Market Integration
180
160,4
160 Freedom
Freedom toto invest
invest in
in
140
stock and bonds
stock and bonds
116,6 RANKING
RANKING SCALE
SCALE 1-7
1-7
120
9 TURKEY 9 9 9 6.8
100 87,6
72,7 9 USA 9 17 9 6.7
80
9 ITALY 9 26 9 6.5
60
9 BRAZIL 9 39 9 6.3
40
9 POLAND 9 42 9 6.2
20
9 RUSSIA 9 71 9 5.1
0
2001 2002 2003 2004
Exports Imports Trade Volume
Turkey ’s Trade Potential
Turkey’s 55

RUSSIAN FEDERATION

GDP Population
EUROPE 433 billion USD 144 million

GDP Population
11,717 billion USD 576 million
CENTRAL ASIAN AND
CAUCASIAN COUNTRIES

GDP Population
44 billion USD 37 million

MIDDLE EAST AND NORTH AFRICA

GDP Population
690 billion USD 247 million
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Despite this huge potential, an underperforming

economy in 1990s ...
1990s...

During 1990s......
Turkish economy was characterized by:

¾ Boom and bust cycles in growth

¾ High and chronic inflation

¾ High public sector deficit

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Foreign Direct Investment in Turkey

Annual FDI Inflow (1980 – 2002)

(US$ million)

6.000

5.000

4.000

3.000

2.000

1.000

0
1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002
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Key Challenges

¾ Fully Utilize
Utilize Turkey’s Potential For Sustainable
Turkey’s Sustainable High
High Growth
Growth

¾ Enhance Competitiveness Of Turkish Economy In The Global

Global
Markets

¾ Increase Investment And Bring FDI Inflows T

And Too The Level
Level Of
Of Peer
Peer
Countries
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POLICY ACTIONS TO MEET THE CHALLENGES

 10
10

TURKEY’S PROGRAM FOR CREATING AN ENVIRONMENT MORE

CONDUCIVE TO BUSINESS

¾ RESTORING MACROECONOMIC STABILITY

¾ IMPLEMENTATION OF WIDE RANGE OF STRUCTURAL

REFORMS

¾ REMOVING ADMINISTRATIVE BARRIERS AND REDUCING RED

TAPE
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11

Macroeconomic Stability

Strong
Strong Growth
Growth Path
Path Single-Digit
Single-Digit Inflation
Inflation
(%)
(%) GNP
GNP Growth
Growth CPI (%)
8,4
80 70,4
10
8 5,9 60
5
6 40
4 2,8 18,4
20 9,3 8,0
2
0 0
1993-2002 2003 2004E 2005P 1993-2002 2003 2004 2005
Average Avr. Program

Strong
Strong Reserve
Reserve Position
Position Declining
Declining Debt
Debt
Net
Net Public
Public Debt
Debt Stock
Stock // GNP
GNP (%)
(%)
39,4
39,4100 91,0
38 Central Bank Gross Reserves 90
(bn $)
33 80 78,7
28 70,5
23
70 64*
18 60 57,5
13 50
J F M AM J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M 40
02 03 04 05
2000 2001 2002 2003 2004

(*) Estimate
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12
Structural Reforms So Far...
Public Sector Reform
9 Financial Management and Control Law 9 Rationalizing Public Sector Budget &
9 Public Procurement Law Investment
9 Rationalizing Public Sector Employment 9 Code of Ethical Conduct for Civil Servants
9 Law on Freedom of Information for Citizens

Financial Sector Reform

9 Banking Regulation and
Supervision in line with EU
Standards
9 Strengthening the Private Banks
• CAR-Capital Adequacy Ratio-
Improvement
• Vulnerabilities Reduced
• Consolidation Encouraged
9 State Bank Reform 9 Improving the Resolution of
ƒ Financial Non-Viable Banks
Restructuring ƒ Strengthened Institutional
ƒ Operational Capacity for Resolution
Restructuring ƒ Accelerated Resolution of
ƒ Preparation for Intervened Banks
Privatization ƒ Faster Recovery of Assets

Enhancing the Role of Private Sector

9 Opening the Key Markets to Competition and 9 Boost to Privatization
Regulation by Independent Agencies ƒ TUPRAS (Petroleum Company)
ƒ Energy Market ƒ Several Small Companies and Assets
ƒ Tobacco Market ƒ TEKEL (Monopoly of Alcoholic Beverages)
ƒ Telecommunication Market ƒ THY (Turkish Airlines)
ƒ Sugar Market 9 Reduced Administrative Barriers & Red Tape
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13
Key Features of Turkey’s Reform Program to Remove
Administrative Barriers and Red Tape

9 Strategy Based on Full Screening & Problem

Diagnosis
9 Strong Public and Private Sector Collaboration
9 Pursuing Pragmatic & Solution-oriented Policies
9 Relying on International Experience & Perspective
9 Strong Political Ownership to Coordinate These
Efforts under a Functioning Institutional Framework
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14

Institutional Framework For Investment Environment

Coordination Council for

Improvement of Investment IAC
IAC
Environment (YO İKK)
(YOİKK)

Technical Working Groups

Location of Customs and Taxes and Investment

Investment Licensing
Standards Incentives Promotion

Foreign Direct
Company Intellectual Property
Employment Investment SMEs
Establishment Rights
Legislation
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15

Major Achievements to Improve Investment Environment

New FDI Regime

9 No Approval Requirement

9 No Minimum Capital Requirement

9 National Treatment

9 Guarantee to Transfer Proceeds

9 Key Expatriate Personnel

9 Protection Against Expropriation

9 Access to Real Estate

9 International Dispute Settlement

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16

Major Achievements to Improve Investment Environment

New Procedures for Setting up
Business:
Simplified and Streamlined Achievement has been registered internationally
Notarize the Articles of Starting a Business Indicators
Association
Turkey OECD
Average
Pay the Registration Fee Before After
the the
Number of Reform
13 Reform
8 6
Fill the Company procedures
Establishment Form Time 38 9 25
and (days)
Register with Trade Source: World Bank, Doing Business in 2004
Registry AND 2005

START BUSINESS
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17

Major Achievements to Improve Investment Environment

Progress
Progress onon the
the recommendations
recommendations of
of IAC
IAC
¾Remove red tape and bureaucracy, with a focus on procedures at the
sectoral level...

9Progress in streamlining procedures for the mining and petroleum sector

9Time required to obtain Environmental Impact Assessment brought down
9Draft Law to create “one-stop-shop” at provincial level prepared
9 Inspections and permissions related agro-sector simplified
¾Improve implementation of laws and dispute resolution mechanisms…

9A new Commercial Code being drafted

9Priorities of Corporate Law, Intellectual Property Rights, Industry Property

Rights specified in National Program

9National Justice Network Project aiming at electronic connection of service

units
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18

Major Achievements to Improve Investment Environment

Other Initiatives...
Progress
Progress on
on the
the recommendations
recommendations of
of IAC
IAC
¾ Develop a corporate tax regime and incentive structure comparable to those
of competitor countries...

9Tax reform underway to fight informal economy and to bring a predictable

taxation system
9New provisions in the Corporate Tax Law reduce the tax burden
9Scope of Corporate tax exceptions expanded

¾ Increase efficiency of customs; particularly import procedures and licensing

9Technological infrastructure of Customs improved

9Comprehensive Amendment on the Customs Code drafted
9 Significant improvements in reducing cargo dwell times and transaction costs
9The automated BILGE system improved
9 Improvement in Risk Analyses System
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19

Major Achievements to Improve Investment Environment

Other Initiatives...
Progress
Progress on
on the
the recommendations
recommendations of
of IAC
IAC
¾ Create an investment promotion capacity

9Capacity improvement of General Directorate of Foreign Investment

¾ Improve infrastructure

9Priority infrastructure needs identified

¾ Invest in education and training

9Share of education expenses in the budget increased

¾ Secure the availability of land for investment

9Land allocation to the investment sites improved

9Legislation amended to increase the effectiveness of the Industry Zones

¾ Protect intellectual property rights more effectively

9Measures taken to protect the intellectual property rights

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20

Major Achievements to Improve Investment Environment

Other Initiatives...
Progress
Progress on
on the
the recommendations
recommendations of
of IAC
IAC
¾ Strengthen research and development base of country

9To encourage R&D, expenses to be deducted from the tax base

9 Incentives to operate in the Technology Development zones increased

¾ Harmonize standards and regulations with the European Union

9Standards prepared by State Institute of Standards harmonized with EU

¾ Strengthen the role of SMEs in the economy

9 SME access to finance improved

9KOSGEB (Small and Medium Industry Development Organization)
restructured

¾ Accelerate the privatization program

9 Tenders planned for the first half of 2004 realized

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21

GAINING GROUND AND PROSPECTS

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22

Robust Private Sector Activities

Sources of Growth Productivity in Private Sector Man. Industry

160
15
150
10 7,9 5,8 13,4
140
5 10,1

Index
4,5 130
0 120
-7,5
-5 110
-10 100

2001Q1

2001Q2

2001Q3

2001Q4

2002Q1

2002Q2

2002Q3

2002Q4

2003Q1

2003Q2

2003Q3

2003Q4

2004Q1

2004Q2

2004Q3

2004Q4
-15
2001 2002 2003 2004-Q1 2004-Q2 2004-Q3

Priv. Inv. Priv. Cons. Other GDP Growth Productivity Long-Term Trend

FDI Performance Number of Foriegn Participated Firms

FDI Inflows (Million $)

12000 cumulative
cumulative
3000
2.568 9.605
9000
2000 1.694 6.275
6000
1.046
1000
3000

0 0
1992-2002 2003 2004 2002 2004
Net
Net
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23

New Medium -Term Economic Program

Medium-Term

Key Features
9 Strong Ownership
9 Social Consensus
9 EU Convergence (EU Pre-accession Economic Program)
9 Basis for a New Stand-By Arrangement

Macroeconomic Objectives
9 Sustainable High Growth
9 Price Stability and Single Digit Inflation
9 Debt Reduction

Macroeconomic Policies
9 Continuation of Prudent Fiscal Policies
9 A Monetary Framework focused on Price Stability
9 Floating FX regime
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24

New Medium Term Macroeconomic Framework

2005 2006 2007

Inflation (CPI %) 8 5 4

Growth (%) 5 5 5

General Gov’t Deficit (% of GDP) 4.4 2.1 0.5

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25

Structural Reform Agenda

Creating
Creating aa Self
Self Sustaining
Sustaining Reforming
Reforming the
the Tax
Tax System
System
Social
Social Security
Security System
System

ƒƒ Unification
Unification of
of three
three social
social security
security ƒTax administration
ƒTax administration reform
reform toto combat
combat the
the
institutions
institutions informal
informal economy
economy and
and to
to improve
improve compliance
compliance
ƒEstablishment
ƒEstablishment of
of universal
universal health
health and
and efficiency
efficiency of
of tax
tax collection
collection
insurance
insurance with
with aa view
view to
to minimize
minimize cost
cost to
to ƒSimplification and
ƒSimplification and streamlining
streamlining of
of the
the tax
tax
government
government system
system
ƒTransfer of
ƒTransfer of social
social assistance
assistance functions
functions to
to ƒRationalization of
ƒRationalization of financial
financial transaction
transaction taxes
taxes
one
one institution
institution

Further
Further Developing
Developing the
the Infrastructure
Infrastructure For
For A
A
Strong
Strong Financial
Financial Sector:
Sector: Engine
Engine of
of Growth
Growth
Competitive
Competitive Market
Market Economy
Economy
ƒImproved
ƒImproved regulatory
regulatory and
and supervisory
supervisory ƒCompetitive Real
ƒCompetitive Real Sector
Sector
framework
framework
ƒCompetitive Financial
ƒCompetitive Financial Sector
Sector
ƒA new
ƒA new road-map
road-map forfor restructuring
restructuring and
and
privatization
privatization of
of state
state banks
banks ƒPrivatization of
ƒPrivatization of Major
Major Companies
Companies

ƒA strengthened
ƒA strengthened institutional
institutional capacity
capacity and
and aa ƒContinue to
ƒContinue to Enhance
Enhance the
the Business
Business
new
new strategy
strategy for
for asset
asset resolution
resolution Friendly
Friendly Environment
Environment

ƒTransfer of
ƒTransfer of non-bank
non-bank financial
financial institutions
institutions to
to
the
the BRSA
BRSA
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Ongoing Initiatives and Forthcoming Events

¾ E-transformation Turkey Project

¾ Investment Climate Assessment Survey

¾ Second Investment Advisory Council Meeting