Turkey Finds It Place As A Bridge to MENA
By Max Bleyleben, Contributing Editor
Ankara, April 2015 – As international investors search out pockets of stability with the potential for growth, Turkey remains in prime position. And although the economic relationship between Turkey and the Middle East has grown significantly in recent years, a great deal of opportunity remains untapped.
To understand the potential better, Introducing Leaders for Middle East Business Magazine sat down with Turkish Minister of Finance Mehmet Şimşek in a wide-ranging discussion of economic developments and the untapped potential of increased business relations with its Mediterranean and Gulf neighbours.
Şimşek has been a parliamentarian for the Justice and Development Party (APK) since 2007, followed by a stint as Minister of Economy and – since 2009 – Minister of Finance. A prolific tweeter under the handle @memetsimsek, he cuts an approachable, experienced, professional figure within the government. And he is clearly a critical popular asset to the APK, with his 1.2m Twitter followers.
Şimşek is credited with implementing fiscal policy reforms that helped Turkey avoid the worst effects of the financial crisis, and with spearheading a slew of reforms to keep Turkey on a path of economic modernisation. Şimşek knows what it takes – before entering politics he spent years working with bulge-bracket investment banks in London and New York as an economist and strategist.
Outpacing the BRICs
Thanks in large measure to Şimşek’s steady hand, Turkey continued to enjoy BRICS-levels of growth while much of the world was recovering from crisis, but in the past year the lack of economic momentum in Europe has caught up with Turkey: “Following several years of 4-5% growth, 2014 was more modest, with GDP growth of 2.9%, and somewhat lower than our target of 3.3%. This was mainly due to weak global demand and – in particular – economic stagnation in the EU, which is still our largest trading partner.”
But Turkey’s situation should be seen in a context where once shining stars like Brazil are now struggling to meet investor expectations. Şimşek added, “Despite that, Turkey’s 2014 growth is higher than Latin America (1.3%), emerging Europe (2.5%), and emerging markets excluding China and India (2.7%).”
Şimşek made clear that Turkey’s ties to Europe represent a critical opportunity for the country to act as a bridge for the Middle East, as the continent emerges from recession. But he also pointed out the need for Turkey to continue diversifying its economy: “What is important in the long run is a country’s fundamentals.” In particular, Şimşek wants to reduce the impact of short-term capital flows into the country, while extending trade agreements to more countries, especially in the MENA region.
“Turkey’s global agenda takes into account the further improvement and expansion of international cooperation, in particular with countries of the MENA region, our natural allies and trade partners. The share of exports to MENA has risen to 26% in 2014 whereas it was only 12% in 2002 – but there is still a significant potential to tap for all sides. Turkey’s total exports to MENA are currently $41.5 billion, 4.2% of MENA imports.”
Standing at about 7% of GDP –, reflecting an economy growing mostly through consumption of both consumer and industrial imports, the sliver lining in the current macro-economic climate is the continuing low oil price, which has dampened internal inflation and is helping shrink the deficit through lower import costs.
The key, he believes to the investment community’s perception of Turkey has been its fiscal conservatism – bolstering the fundamentals Şimşek likes to highlight.
In 2013 the country paid off its remaining debts to the IMF, and since then it has maintained one of the smallest fiscal deficits of any country in broader Europe. “The Turkish account deficit is narrowing and the country maintains a strong fiscal position. We expect for our fiscal deficit (as a share of GDP) in 2014 to be of 0.8 per cent. For emerging markets the average was over 2.3 percent and for OECD countries it was close to 4 percent.”
Reform Plan Remains On Track
Şimşek recognises that the key to sustaining Turkey’s economic resurgence and avoiding the so-called ‘middle income trap’ is continued structural reform. In response the government has launched a series of programmes to improve infrastructure, invest in long-term education and to increase savings. “The structural reform targets productivity, savings, energy efficiency – driving our push towards high income status.”
The ambitious plan includes 25 ‘prioritised transformation programmes’, including the development of health tourism, increasing domestic savings, further developing Istanbul as a global financial centre, and legalising more of the informal economy while improving conditions for foreign investors.
Şimşek confirms that the reform agenda has strong political ownership and is being implemented within the existing conservative fiscal budgeting approach. “We have a solid fiscal position allowing room to counteract external shocks. We estimate that the government deficit as a share of GDP will be 0.7% in 2014 down from 10.8% in 2002. Turkey’s 2014 deficit ratio is less than a quarter of the OECD average and a third of the Maastricht Criterion. We aim a general government surplus of 0.1% by 2017.”
This conservative spending approach has not dampened Turkey’s investment in long-term fundamentals, particular in healthcare and education – the country has hired half a million new teachers in the past decade, doubled the number of universities, and created a new focus on technical schools.
Insatiable Demand for Energy Requires More Investment
Perhaps the largest-scale investment opportunity lies in the energy sector, with estimates that Turkey will need to support an increase in primary energy demand of 90% during 2011-2023.
The electricity sector is one of the fastest-growing in the world, and Turkey has one of the most private-sector-friendly policies in emerging markets today. Şimşek points out that “Power distribution is now completely in private hands, whilse the privatisation of power generation assets is set to be completed within the next few years.”
Meanwhile, this government is also leading among its peers in supporting the development of renewable energy sources.
The International Finance Corporation (IFC) has supported Turkey with more than $3bn in support of private-sector efforts at energy generation. In fact, the largest syndication in IFC history is the $700m Enerjisa project to develop thermal and hydropower plants.
The Banking Sector Expands
Şimşek points out with some pride that Turkey has escaped the global financial crisis relatively unscathed: “The banking sector’s capital adequacy ratio, even if you use [the criteria of] Basel III, is two times more capitalized than what global requirements would be and, based on some definitions – it is three times more.”
Keen to develop a homegrown Islamic banking industry to differentiate its position as a financial services hub, last year, the government invited state-owned banks to establish Islamic banking units alongside the private banks that have already done so – Albaraka Turk, Bank Asya, Kuveyt Turk and Turkiye Finans.
One of those coming to market this year is Ziraat Bank, which will launch its “participation bank” – Ziraat Katılım Bankası – with a $300m of capital provided by the Treasury, on May 29th, the anniversary of the Ottoman Empire’s conquest of Istanbul. It plans to open 20 branches in Turkey this year, with representation in Montenegro and Azerbaijan, highlighting the role that moderate Islamic states can play as a bridge to eastern Europe and the CIS.
As of last year, it is estimated that Turkey’s Islamic banking sector holds assets of $36.9bn, a small but growing component of the global Islamic banking sector, with assets of $1.8tn as of 2013. Islamic lenders accounted for an estimated 5% of Turkish bank assets last year, three times the level in 2004.