Gas partnership Construction of a crucial pipeline will help ease Turkey’s energy concerns Page 2 Inside » Dash for growth needs backers New infrastructure projects require hefty investment Page 2 Neighbourhood matters Opportunity to bolster rights or build new order Page 3 Gold deposits to boost reserves Billions raised through precious metal account Page 3 EU hurdles Tortuous journey towards Turkey’s European transformation Page 4 FT SPECIAL REPORT Investing in Turkey Thursday November 22 2012 www.ft.com/reports | twitter.com/ftreports President Abdullah Gul, one of the heavyweights of Turkish politics, does not hold back on how far he considers the country has come since his party began its stint in office 10 long years ago. But, speaking to the Financial Times in an hour-long interview in the presidential palace last week, he does not gloss over what he says is needed to hold on to that record – structural economic reform, a consensual political approach and, above all, further effort in Turkey’s bid to join the EU. On topic after topic, Mr Gul’s remarks contrast with Recep Tayyip Erdogan, his old comrade- in-arms, who, as prime minister, is the centre of power in Turkey today. Mr Gul’s role is largely ceremonial, but he has the ability to veto legislation, approve appointments and set the agenda in formal addresses. But nothing is for ever. Mr Gul has already served as prime minister once – a decade ago, when he was keeping the seat warm for Mr Erdogan – and the job is set to become vacant in 2015, by which time Mr Erdogan says he will step down. In a move reminiscent of the Vladimir Putin-Dmitry Medvedev switch in Russia, the prime minister is widely thought to be aiming to succeed to Mr Gul’s post when direct presidential elections are held for the first time in Turkey’s history in 2014. Mr Erdogan is already pushing changes that would make the presidency more powerful ahead of that date, although it is far from sure he will The President is asked about one diplomat’s recent observation that, while a year ago Turkey was seen as a rising econ- omy with a growing world role, today it is perceived as a country that jails jour- nalists – at least 61 by the count of the Committee to Protect Journalists – and has problems with its neighbour Syria. Mr Gul does not contest this – he has expressed his concerns about freedom of expression in the past. He adds that the political instability caused by the fighting in Syria, and the unrest in the broader region have had other con- sequences as well. Those circumstances have led the Kurdistan Workers Party, or PKK, an organi- sation classified by Turkey, the EU and the US as ter- rorist, “to think that they have perhaps found a his- torical opportunity”. The fighting between the PKK and Turkish government forces has been bloodier this year than at any point for over a decade; and hun- dreds of Kurdish prisoners have only just ended a hunger strike. “This is one of the most important issues in Turkey,” says Mr Gul of the Kurdish question, add- ing the reforms introduced over the past 10 years leave no justification for violence. He also insists on a con- sensus-based approach to Turkish politics, particu- larly with respect to replacing the country’s military-era constitution. But he returns to the importance of the economy and the EU. He compares Turkey’s expectations of average annual growth of 5 per cent with the projected 1-2 per cent for other European econo- mies. He adds, nonetheless: “We still need to do some work on our economy; we still need structural changes to ensure this continued growth.” Mr Gul describes the country’s current account deficit as “one of our most important soft spots”, emphasising the impor- tance of reducing it by boosting both Turkish industrial production and the country’s anaemic savings rate. He praises the efforts of current economy ministers; Ali Babacan, Turkey’s deputy prime minister, is often seen as a protege. But his words sometimes sound like a prospectus for government at a time when Mr Erdogan’s plans to leave his post have increased political uncertainty. At the end of the inter- view, the president recalls his long history with Mr Erdogan, with whom he set up both the Islamist-rooted Justice and Development party, as well as the current govern- ment. But, asked if Turkey needs a stronger opposition in the face of such a powerful prime minister, he doesn’t hesitate for a moment in saying yes. Crucial need to retain the country’s dynamism Interview Abdullah Gul President Heavyweight strikes conciliatory tone, says Daniel Dombey ‘We still need to do some work on our economy; we still need structural changes’ Power play: Abdullah Gul, Turkey’s president Daniel Jones I n a factory on the outskirts of Istanbul, a Turkish executive is emphasising his readiness to sell golden washing machines. As yet, there have been no takers – although clients from the Gulf are a definite possibility – but a gold- painted mock-up has pride of place in a showroom crammed with some of the more than 1,000 different models that the factory already makes. The manufacturer, Arcelik, a sub- sidiary of Koc, Turkey’s largest com- pany, sells to more than 100 countries across the world and has made a par- ticular mark in the European market. Nazim Kadirzade, a plant manager, boasts that under its Beko brand, the group has, for example, become the leading supplier of washing machines and fridges to Britain. The company has come a long way from the days, half a century ago, when it sold only one basic model to a largely captive market in Turkey alone. Arcelik’s story, and the issues that the company confronts, mirror many of the changes that have taken place in Turkey’s economic and corpo- rate landscape. In recent years, the country has been relying on surging domestic demand, fuelled by an explosion in credit, as the motor of economic growth. That has changed now as the economy rebalances. This year, domestic demand will be a drag on growth; exports have taken its place as the propulsive force behind the country’s economic success. Even so, overall growth, which last year reached 8.5 per cent, has more than halved to about 3 per cent. The shift is largely the consequence of efforts by the Turkish author- ities to effect a soft landing and rein in Turkey’s current account deficit by pushing banks to limit lending. “[This is] the first successful example of doing this in Turkish history,” Erdem Basci, governor of the Turkish central bank, said in a recent inter- view. He added that he was commit- ted to bringing down inflation to foster the domestic capital markets that the country lacks. “Many compa- nies would be better off if they had the opportunity to borrow in domestic currency long-term; that is simply not available at the moment,” he said. Right now, Turkey is basking in the good reviews it has garnered for right- ing its course from the boom years of unsustainable growth. Fitch, the rat- ing agency, this month awarded the country investment-grade status for making the shift. Turkish officials do not disguise their hope that another rating agency will follow suit, so pav- ing the way for large-scale institu- tional investment. Yet, the true extent of rebalancing and the appropriate level of economic growth remain fierce topics of debate. Political risk is a factor at a time when Turkey has been rocked by the war next door in Syria and when Recep Tayyip Erdogan – the man who, as prime minister, has dominated the country’s political life for almost a decade – is preparing to move up to become executive president, a posi- tion that does not yet exist. Even the question of where Arcelik sells its washing machines reverber- ates at a higher level. Some countries are constrained by their geography. By contrast, Turkey’s place on the map, on the edge of southeast Europe, bordering the Middle East, opens up a world of possibilities. In terms of trade, the country has a new focus on the growing markets to its south and east, a push that dimin- ishes its dependence on the often stag- nant economies of the eurozone and bolsters its ties with neighbours on which it long turned its back. And yet the sheer volume of Arce- lik’s trade with the EU attests to the unique advantage that Turkey enjoys as a neighbour of the bloc, with which it has a 17-year-old customs union. Commerce with the countries of the Middle East, while booming, may be less stable than first meets the eye – not least because Turkey has Continued on Page 2 Taking its wares to the world The country has rebalanced its economy towards exports and away from domestic demand, writes Daniel Dombey Consumer society: inside Istanbul’s historic Grand Bazaar Getty Images get the executive style presidency he wants. Although Mr Gul says it is too early to discuss who will be the next prime minister, his comments, laden with English words such as “grassroots” and “checks and balances”, contain glimpses of what could be an alternative agenda to the country’s approach today. “If you look at the pic- ture of Turkey 10 years ago when I established a government as prime min- ister, and a picture of today, broadly speaking you would see the Turkey of 10 years ago as a nega- tive place . . . very spent, living in a very uncertain environment.” Today, Mr Gul main- tains, his country has conquered its once-chronic high inflation, produced rates of growth that are the envy of Europe, and is a dynamic player on the world stage. “Now what has brought about this change in the last 10 years?” Mr Gul asks. “The key for this has been political and economic reforms,” which have taken their inspira- tion and motivation from Turkey’s EU bid, he says. “A lot has been done, but there is a lot more to do.” Big problems remain.
Transcript
Gas partnershipConstruction of acrucial pipeline willhelp ease Turkey’senergy concernsPage 2
Inside »
Dash for growthneeds backersNew infrastructureprojects requirehefty investmentPage 2
NeighbourhoodmattersOpportunity tobolster rights orbuild new orderPage 3
EU hurdlesTortuous journeytowards Turkey’sEuropeantransformationPage 4
FT SPECIAL REPORT
Investing in TurkeyThursday November 22 2012 www.ft.com/reports | twitter.com/ftreports
President Abdullah Gul,one of the heavyweights ofTurkish politics, does nothold back on how far heconsiders the country hascome since his party beganits stint in office 10 longyears ago.
But, speaking to theFinancial Times in anhour-long interview in thepresidential palace lastweek, he does not glossover what he says isneeded to hold on to thatrecord – structuraleconomic reform, aconsensual politicalapproach and, above all,further effort in Turkey’sbid to join the EU.
On topic after topic,Mr Gul’s remarks contrastwith Recep TayyipErdogan, his old comrade-in-arms, who, as primeminister, is the centre ofpower in Turkey today. MrGul’s role is largelyceremonial, but he has theability to veto legislation,approve appointments andset the agenda in formaladdresses.
But nothing is for ever.Mr Gul has already servedas prime minister once – adecade ago, when he waskeeping the seat warm forMr Erdogan – and the jobis set to become vacantin 2015, by which timeMr Erdogan says he willstep down.
In a move reminiscent ofthe Vladimir Putin-DmitryMedvedev switch inRussia, the prime ministeris widely thought to beaiming to succeed toMr Gul’s post when directpresidential elections areheld for the first time inTurkey’s history in 2014.
Mr Erdogan is alreadypushing changes thatwould make the presidencymore powerful aheadof that date, although itis far from sure he will
The President is askedabout one diplomat’srecent observation that,while a year ago Turkeywas seen as a rising econ-omy with a growing worldrole, today it is perceivedas a country that jails jour-nalists – at least 61 by thecount of the Committee toProtect Journalists – andhas problems with itsneighbour Syria.
Mr Gul does not contestthis – he has expressed hisconcerns about freedom ofexpression in the past.
He adds that the political
instability caused by thefighting in Syria, and theunrest in the broaderregion have had other con-sequences as well. Thosecircumstances have ledthe Kurdistan WorkersParty, or PKK, an organi-sation classified by Turkey,the EU and the US as ter-rorist, “to think that theyhave perhaps found a his-torical opportunity”. Thefighting between the PKK
and Turkish governmentforces has been bloodierthis year than at any pointfor over a decade; and hun-dreds of Kurdish prisonershave only just ended ahunger strike.
“This is one of themost important issuesin Turkey,” says Mr Gul ofthe Kurdish question, add-ing the reforms introducedover the past 10 yearsleave no justification forviolence.
He also insists on a con-sensus-based approach toTurkish politics, particu-larly with respect toreplacing the country’smilitary-era constitution.
But he returns to theimportance of the economyand the EU. He comparesTurkey’s expectations ofaverage annual growthof 5 per cent with theprojected 1-2 per centfor other European econo-mies. He adds, nonetheless:“We still need to do somework on our economy; westill need structuralchanges to ensure thiscontinued growth.”
Mr Gul describes thecountry’s current accountdeficit as “one of our mostimportant soft spots”,emphasising the impor-tance of reducing it byboosting both Turkishindustrial productionand the country’s anaemicsavings rate. He praisesthe efforts of currenteconomy ministers; AliBabacan, Turkey’s deputyprime minister, is oftenseen as a protege.
But his words sometimessound like a prospectusfor government at a timewhen Mr Erdogan’splans to leave his posthave increased politicaluncertainty.
At the end of the inter-view, the president recallshis long history with MrErdogan, with whomhe set up both theIslamist-rooted Justice andDevelopment party, aswell as the current govern-ment.
But, asked if Turkeyneeds a stronger oppositionin the face of such apowerful prime minister,he doesn’t hesitate for amoment in saying yes.
Crucial need to retain thecountry’s dynamismInterviewAbdullah GulPresident
Heavyweight strikesconciliatory tone,says Daniel Dombey
‘We still need todo some workon our economy;we still needstructural changes’
Power play: Abdullah Gul, Turkey’s president Daniel Jones
In a factory on the outskirts ofIstanbul, a Turkish executive isemphasising his readiness to sellgolden washing machines. As yet,there have been no takers –
although clients from the Gulf are adefinite possibility – but a gold-painted mock-up has pride of place ina showroom crammed with some ofthe more than 1,000 different modelsthat the factory already makes.
The manufacturer, Arcelik, a sub-sidiary of Koc, Turkey’s largest com-pany, sells to more than 100 countriesacross the world and has made a par-ticular mark in the European market.Nazim Kadirzade, a plant manager,boasts that under its Beko brand, thegroup has, for example, become theleading supplier of washing machinesand fridges to Britain.
The company has come a long wayfrom the days, half a century ago,when it sold only one basic model to alargely captive market in Turkeyalone. Arcelik’s story, and the issuesthat the company confronts, mirrormany of the changes that have takenplace in Turkey’s economic and corpo-rate landscape.
In recent years, the country hasbeen relying on surging domesticdemand, fuelled by an explosion incredit, as the motor of economicgrowth. That has changed now as theeconomy rebalances. This year,domestic demand will be a drag ongrowth; exports have taken its placeas the propulsive force behind thecountry’s economic success.
Even so, overall growth, which lastyear reached 8.5 per cent, has morethan halved to about 3 per cent. Theshift is largely the consequence ofefforts by the Turkish author-ities to effect a soft landing and reinin Turkey’s current account deficit
by pushing banks to limit lending.“[This is] the first successful exampleof doing this in Turkish history,”Erdem Basci, governor of the Turkishcentral bank, said in a recent inter-view. He added that he was commit-ted to bringing down inflation to
foster the domestic capital marketsthat the country lacks. “Many compa-nies would be better off if they hadthe opportunity to borrow in domesticcurrency long-term; that is simply notavailable at the moment,” he said.
Right now, Turkey is basking in the
good reviews it has garnered for right-ing its course from the boom years ofunsustainable growth. Fitch, the rat-ing agency, this month awarded thecountry investment-grade status formaking the shift. Turkish officials donot disguise their hope that anotherrating agency will follow suit, so pav-ing the way for large-scale institu-tional investment.
Yet, the true extent of rebalancingand the appropriate level of economicgrowth remain fierce topics of debate.Political risk is a factor at a timewhen Turkey has been rocked by thewar next door in Syria and whenRecep Tayyip Erdogan – the man who,as prime minister, has dominated thecountry’s political life for almost adecade – is preparing to move up tobecome executive president, a posi-tion that does not yet exist.
Even the question of where Arceliksells its washing machines reverber-ates at a higher level. Some countriesare constrained by their geography.By contrast, Turkey’s place on themap, on the edge of southeast Europe,bordering the Middle East, opens up aworld of possibilities.
In terms of trade, the country has anew focus on the growing markets toits south and east, a push that dimin-ishes its dependence on the often stag-nant economies of the eurozone andbolsters its ties with neighbours onwhich it long turned its back.
And yet the sheer volume of Arce-lik’s trade with the EU attests to theunique advantage that Turkey enjoysas a neighbour of the bloc, with whichit has a 17-year-old customs union.
Commerce with the countries of theMiddle East, while booming, maybe less stable than first meets theeye – not least because Turkey has
Continued on Page 2
Taking its wares to the worldThe country has rebalanced its economy towards exports and away fromdomestic demand, writesDaniel Dombey
Although Mr Gul saysit is too early to discusswho will be the next primeminister, his comments,laden with English wordssuch as “grassroots” and“checks and balances”,contain glimpses of whatcould be an alternativeagenda to the country’sapproach today.
“If you look at the pic-ture of Turkey 10 yearsago when I established agovernment as prime min-ister, and a picture oftoday, broadly speakingyou would see the Turkeyof 10 years ago as a nega-tive place . . . very spent,living in a very uncertainenvironment.”
Today, Mr Gul main-tains, his country hasconquered its once-chronichigh inflation, producedrates of growth that arethe envy of Europe, andis a dynamic player onthe world stage.
“Now what has broughtabout this change in thelast 10 years?” Mr Gulasks. “The key for thishas been political andeconomic reforms,” whichhave taken their inspira-tion and motivation fromTurkey’s EU bid, he says.“A lot has been done, butthere is a lot more to do.”
Big problems remain.
2 ★ FINANCIAL TIMES THURSDAY NOVEMBER 22 2012
Drill down at all into theambition laid out by PrimeMinister Recep TayyipErdogan to turn Turkey’seconomy into one of the 10largest in the world by 2023and you quickly discoverjust how much the govern-ment is depending on trans-forming the country’s infra-structure to get there.
By 2023, the centenary ofthe fall of the OttomanEmpire and birth of theTurkish republic, the gov-ernment has set the goal ofhaving in place 10,000km ofhigh-speed rail track, one ofthe world’s top 10 ports andan electricity grid thatdraws a third of its powerfrom renewable sources.
It may, for now, have puta hold on plans to build acanal alongside the Bospho-rus to ferry goods to andfrom the Black Sea, butTurkey is not wasting timein rolling out other large-scale projects.
Work is under way on a$2.5bn third bridge acrossthe Bosphorus and a pair oftunnels where the straitflows into the Sea of Mar-mara. New motorways arebeing built across the coun-try and airports planned.The country’s power infra-structure is being priva-tised. All in the name ofTurkey achieving what MrErdogan this year dubbedits “bright future” as “oneof the greatest powers of itsregion and the world.”
There is certainly morethan a tinge of hubris to MrErdogan’s grandiose vision.In 2011, the prime ministerproclaimed as “crazy andmagnificent” his plans forCanal Istanbul, the 50km,150-metre wide man-madewaterway he wants to buildalongside the Bosphorus todraw tanker and otherfreight traffic away fromthe busy strait.
“We are building thecanal of the century, aproject of such immensesize that it can’t be com-pared to the Panama orSuez canals,” he declared.
There are, therefore,those who question the gov-ernment’s ambition, be itever so gently.
“What is more importantthan the sheer quantity of[infrastructure] investmentis the quality of that invest-ment,” says one westerndiplomat.
But there are signs thatforeign investors are buyinginto Mr Erdogan’s vision,something they haven’talways done before.
Private equity groupshave been paying more andmore attention to Turkeyand people in the industrysay they see a promisingfuture in the country’sinfrastructure plans.
Turkish projects now
form a significant portion ofthe €385m deployed byInfraMed, a Paris-basedinfrastructure fund backedby the European Invest-ment Bank, says MarianBocek, associate director.
And, as it looks to expand– it has a target of having€1bn under management –he expects many of its newinvestments to be Turkish.
Its economic growth andtransformation into anemerging market championare the main reasons. Thecountry, says Mr Bocek, “isjust China next to Europe”.
“Just looking at themacro fundamentals it isone of the most attractivemarkets we have,” he says.“We see a huge pipeline ofnew opportunities.”
Chief among those is thepower sector which the gov-ernment is aggressively pri-vatising in order to attractinvestment to keep up withsurging demand.
Turkey has already hadsome luck doing so. In 2005it attracted just $4m in for-eign direct investment inelectricity, gas, and watersupply projects, accordingto central bank data.
In the first nine monthsof 2011 electricity, gas andwater projects drew in$2.6bn in FDI, the bulk ofthe $3.7bn in investmentsthat went into the infra-structure sector during thatperiod.
But that still falls wellshort of what the govern-ment says it needs. Overthe next decade it estimatesit will require more than$100bn in investment in theenergy sector to keep upwith growing demand.
There are certainly practi-cal challenges facing MrErdogan’s ambitious vision.
Chief among them, in theshort term, may be a diffi-cult financing market forthe flood of new projectshitting it.
According to MartinSpicer, head of the Interna-tional Finance Corpora-tion’s southern europeinfrastructure practice,European banks have tradi-tionally dominated Tur-key’s project finance mar-ket and they are still reel-ing from the effects of theEurozone crisis.
That means Turkey maystruggle to raise the $10bn-15bn that it needs to keepup with its bold ambitionsfor the next three years.
“The financing markettoday is difficult and will bea constraint to meeting thisaspiration of building allthis infrastructure,” saysMr Spicer.
“All these projects takemoney from the samesource.”
Turkey may struggleto raise the billionsof dollars it needs,says Shawn Donnan
There are . . . thosewho question thegovernment’sambition, be itever so gently
In the world of natural gas, geogra-phy is everything. And for Tur-key, located between the rich gas-fields of the Caspian and northMiddle East and the gas hungry
markets of the EU, geography is aboutto become destiny with the construc-tion of the planned Trans-Anatoliangas pipeline (TANAP).
A joint venture between Turkey andAzerbaijan, its eastern neighbour,TANAP is expected to begin by carry-ing gas from the Azeri sector of theCaspian Sea with a possible laterexpansion to carry gas from Turkmen-istan and other Caspian states.
Planned to be commissioned in 2018,TANAP will initially supply 6bn cum/yr of gas from Azerbaijan’s ShahDeniz field to Turkey, with a further10bn cu m/yr crossing Turkey on itsway to Europe.
Good news for Turkey, where de-mand is expected to exceed its exist-ing import portfolio within two tothree years, but even better news forthe EU which has long been lookingto secure access to new supplies toreduce reliance on existing sources.Chief among those is Russia’s Gaz-prom, which meets about 25 per centof EU gas demand, and in Septemberbecame the subject of an antitrustcase by the EU.
Since the late 1990s, EU hopes havebeen set on the creation of the “South-ern Gas Corridor”, a bespoke pipelineto carry gas from the ample reservesof the Caspian and north Middle Eastthrough Turkey to markets in Europe.
Until a year ago, EU hopes werepinned on the Nabucco pipeline beingdeveloped by a consortium ofAustria’s OMV, Germany’s RWE,
Hungary’s MOL and the state gascompanies of Romania, Bulgaria andTurkey, to carry gas from EasternTurkey all the way to Europe’s maingas hub at Baumgarten in Austria.
But, with questions over whether itcould succeed in persuading the BP-led consortium developing the ShahDeniz field to favour the project overtwo rival pipeline projects, Azerbaijanand Turkey stepped in with TANAP.
TANAP’S first phase is expected tocost in the region of $8bn. It will bescalable to 30bn cu m/yr, with theextra capacity expected to be used tocarry gas from other gasfields cur-rently being prospected in the Azerisector of the Caspian.
Hakan Turker, BP’s head of exter-nal affairs and security for Turkey,says the Shafaq-Asiman block it isprospecting in partnership with Socar,the state-owned oil and natural gascorporation of Azerbaijan, could alonehold as much as 1tn cu m of gas.
However, such are the reservesavailable in the region that a secondparallel line is already being planned.
Gulmira Rzayeva, an analyst atAzerbaijan’s official strategy researchcentre, says: “There is the possibilityof adding a second parallel line todouble throughput to 60bn cu m/yr.”
That extra capacity could be used tocarry gas from Turkmenistan, Kaza-khstan or any other country in theCaspian region with gas reservesavailable for export westwards.
With the delivery of 10bn cu m/yr ofAzeri gas to Turkey’s western bordersnow all but guaranteed for 2018, andwith the promise of more to follow,two projects are competing to carrythe gas on to European markets
starting at Turkey’s western borders.A truncated Nabucco West project
aims to carry 31 billion cu m/yr of gasto Baumgarten, while the Trans-Adri-atic Pipeline, backed by the US groupEGL, Norway’s Statoil, and Ger-many’s Eon, is expected to carry up to20bn cu m/yr of gas through Greeceand Albania and across the Adriaticto markets in Italy.
A decision on which line will carrythe gas is expected from the consor-tium developing the Shah Deniz fieldby the middle of next year, with con-sortium members BP, Statoil andTotal considering an offer to take acombined 29 per cent stake inTANAP, alongside Socar (51 per cent)and Turkey’s state pipeline companyBotas (20 per cent).
As well as further enhancing Euro-pean energy security, TANAP offersthe same for Turkey, whose gas
demand is expected to exceed its cur-rent 51.8bn cu m/yr import portfoliowithin the next two years.
This is an important considerationgiven that Turkey has few energyreserves of its own beyond low gradelignite and some unexploited hydropotential and that power demand isexpected to continue rising at about 8per cent a year. Imported gas has longbeen earmarked to meet much of Tur-key’s baseload.
Already 21 new gas-fired plant total-ling 21.3GW have been issued withgenerating licenses despite no newgas being available to supply them.
Applications for a further 60 total-ling 29.2GW are on hold, with Turkishofficials warning private sector devel-opers will need to arrange their owngas imports if the plant are to beconstructed. An impasse that TANAPshould go some way to resolving.
Pipeline offerssecurity withdemand forenergy growingTANAP Joint venturewithAzerbaijanwillsecure supplies for EU,writesDavidO’Byrne
Supply lines:routine checksare carried outat a natural gascontrol centrewest of Ankara.A new gaspipeline isplanned for2018Getty Images
significant political prob-lems with two of its biggesttrading partners, Iran andIraq. The fighting in Syriahas also reduced access toother markets in the Gulf.
“It is important for Tur-key to diversify the marketsit is trading with, but I stillcan’t see any other marketby itself replacing Europe,”says Umit Boyner, the headof Tusiad, Turkey’s biggestbusiness confederation.Adding that the countryonly accounts for less than3 per cent of total EUimports, she argues there isstill space both to increaseTurkey’s market share andachieve higher value-added.
“People felt the MiddleEast region was a low hang-ing fruit; we are seeing thatthat is not the case,” sheadds. “In terms of politicalstability we see that theyare not such easy markets.”
Meanwhile, Ms Boynerurges Turkey to keep upwith economic reforms andinfrastructure investment,to boost its capacity togrow.
In the short term, thenews is likely to be good. It
Continued from Page 1is not just investment-gradestatus and the demograph-ics of the country’s youngpopulation that draw port-folio funds to Turkey; likeother emerging markets,the country attracts capitallet loose in the US and else-where by continued quanti-tative easing.
Public debt of about 38per cent of GDP shines incomparison with Europeanlevels of 80 per cent ormore. Nor do traditionalexports such as whitegoods, televisions and carsrepresent all of Turkey’sinternational economicdynamism – Turkish com-panies now take secondplace after their Chineseequivalents in the interna-tional construction sector.
But the longer-term chal-lenges remain. One underly-ing dilemma is that, after adecade in which Turkishper capita income tripled indollar terms, the country isfacing the same scenario asother upper-middle-incomestates: a lower, though stillsubstantial, rate of growth.
While growth of 4-5 percent is attractive to multi-nationals and investors of
many stripes, for politiciansit may not be enough.
Mr Erdogan, who hasbuilt his rule on the mutu-ally reinforcing accomplish-ments of political stabilityand economic growth, hasset out the much moreambitious goals of makingTurkey into one of the 10biggest economies in theworld by 2023 and of bring-ing per capita income up to$25,000 by that point.
A recent Organisation forEconomic Co-operation andDevelopment paper arguedthat the country’s growthover the past decade hadtwo causes: productivitygrowth in the export-oriented west – the greaterIstanbul region around theSea of Marmara accountsfor 45 per cent of GDP – andemployment growth in theAnatolian hinterland.
For Turkey to grow morein the coming decades – bycloser to 6 per cent a yearrather than 4 per cent – thepaper argues that the coun-try should loosen the labourrestrictions that inhibitem-ployment in the formalsector and push ahead witheducational reforms, includ-
ing vocational training. Itremarks that “Turkey stillhas the human capital char-acteristic of a developingcountry.”
Kemal Dervis, the archi-tect of many of theeconomic reforms thatpulled Turkey away fromcrisis a decade ago, high-lights the country’s low sav-ings rate – recently at about14 per cent of GDP or less –as a constraint on its abilityto achieve the growth goalsthat it wants.
Pointing out that thelower a country’s savingsrate, the higher its currentaccount deficit, the formerminister of economic affairsadds that Turkey’s deficitremains largely financed byrelatively fickle portfolioinvestment, and that it hasattracted markedly lessforeign direct investmentover the past two decadesthan countries such as Mex-ico and Brazil.
“There are no miracles ineconomics,” he says. “If thesavings rate does not go upto at least 17, 18, 19 percent, the Turkish growthrate will be mediocre, notspectacular.”
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FINANCIAL TIMES THURSDAY NOVEMBER 22 2012 ★ 3
Although much criticisedfor its use of “unconven-tional measures”, fewwould argue that the deci-sion last year by Turkey’sCentral Bank to allow thecountry’s banks to buy goldwas anything less than aroaring success.
Beginning in October2011, the CBT has allowedbanks to hold part of theirreserve requirements ingold, while at the same timeallowing them to collect thegold themselves.
The rationale is straight-forward. With many Turkshistorically preferring toinvest their wealth in physi-cal gold rather than moretraditional banking instru-ments, analysts estimatethere may be as much as5,000 tonnes of gold beingheld “under the pillow” inthe country.
These investments, whichare effectively held outsidethe economy, could be con-verted to bank depositswhile simultaneously allow-ing banks some leeway ontheir reserve requirements.
Initially set at 10 per centof reserve requirements, thelevel has been successivelyraised to its current 30 percent as the policy has suc-ceeded in attracting goldback into the economy withhigh street banks initiatingopen “gold days” – whenanyone holding gold cantrade it in for a replacementinvestment in a “golddeposit account”.
The effect has been dra-matic, with Turkey’s bank-ing regulator reporting anincrease in the banking sec-tor’s collective preciousmetal account rising fromTRY1.8bn in September 2010to TRY15bn by September2012 and individual banksreporting gold collectionsmeasured in tonnes.
But the initial rush of in-terest appears to be slow-ing, with Is Bank, Turkey’sbiggest high street bank,telling the Financial Timesthat it expects to collectonly $50m in gold depositsby the end of 2012.
Similarly, doubts havesurfaced over just howmuch gold is likely to beavailable for deposit.
Speaking earlier thismonth, Erdem Basci, gover-nor of the CBT, estimatedTurkey’s “under the pillow”reserves at being about
2,200 tonnes or about$12.2bn at current prices.
With the figure appar-ently based on recordedgold sales over the pastthree decades, analystspoint out that it fails toaccount for “heirloom gold”already in circulation andpassed down through fami-lies, suggesting the true fig-ure could be as much as5,000 tonnes.
Whatever the true figure,opinions differ as to howmuch of that gold might beavailable for deposit in thebanking system.
Can Demir, banking ana-lyst at Renaissance Capital,says much of the “underthe pillow gold” is jewellerywith cultural traditions mit-igating against it beingbanked to be melted downfor bullion. A better meas-ure of how much gold is
available for banking wouldbe the weight of Turkishgold coins in circulation, heexplains. “They are pro-duced only for saving, theyhave no other use,” he says.
But, with the state Dar-phane mint having alreadyproduced 39 tonnes of goldcoin in the first ninemonths of this year, thesame as it produced in thewhole of 2010, questionsremain over how much ofthis gold is likely to bebanked. And over whatbanks will do with thegold they collect, with utili-sation of the Central Bankfacility for swapping bullionfor lira reserves approach-ing capacity.
“Unless the cap is raisedit’s difficult to see what elsebanks can do with the addi-tional gold, because the cur-rent gold deposits can be
utilised at the CBT any-way,” says Mr Demir. Rais-ing that cap and attractingfurther gold into the bank-ing system would free up atranche of lira liquidity.
“It will open up a sizeablesavings pool which thebanks would be able toextend as credit,” says InanDemir (no relation), chiefeconomist at Turkey’s Fin-ansbank.
With loan growth in Tur-key static extra liquidity isnot an issue, but with ana-lysts predicting the Turkisheconomy growing faster in2013, many are anticipatingincreased demand forcredit, which could be metby increased gold deposits.
But the benefits for thebanking system of buyingup Turkey’s “under the pil-low” gold, are not confinedto reserve requirements andcredit pools. It also servesto increase the level of banksavings in Turkey which,according to World Bankfigures, fell from 23.5 percent of GDP in the mid ’90sto 12.7 per cent by 2010.
“The ratio of assets in thefinancial system to GDP isonly a quarter of that of theEU average,” says SuzanSabanci Dincer, chairmanof Akbank, adding thatwith 19m Turks withoutbank accounts, there is stillplenty of room for the sec-tor to grow.
But, with the easing ofBasel II capital adequacyratios and the scarcity ofcapital since 2009, banks aretrying to generate non-capital consuming businessopportunities through crossmarketing rather than berestricted to savingsaccounts, explains CanDemir, pointing out thatbuying gold is a way ofreaching out to Turks whohave never set foot inside abank.
“If you have a good golddeposit product, then onceyou initiate the relationshipwith the customer, youhave the opportunity to sellthem credit cards, mort-gages and other products.”
Gold deposits couldmeet credit demandBanking
The central bank’spolicy is also a way toboost savings, writesDavid O’Byrne
‘The ratio of assetsin the financialsystem to GDP is aquarter of that ofthe EU average’
Egemen Bagıs, the Turkishminister for Europe, is inthe habit of describingTurkey as the most easternpart of the west and the
most western part of the east. Inthat sense Turkey should be aninvaluable ally to an EU fumblingfor answers on its periphery – aMiddle East and north Africa inupheaval.
Instead, Turkey is fast losinginterest in a European club thatappears to spurn its onceenthusiastic drive for membership, atthe same time that its ambitiousplans to help reshape itsneighbourhood in light of the ArabSpring are in danger of beingunravelled by the bloody conflict inSyria, which has set alight itssouthern border.
Just as importantly, the paralysisin negotiations on accession to theEU, now in their seventh year, hasshut down what for Turkey had beena formidable engine of democraticrenewal, at a time when theauthoritarian tendencies of RecepTayyip Erdogan, the prime minister,are beginning to worry not just hisopponents but some of hissupporters.
Mr Erdogan, who triumphantlywon his third election last year on arising share of the popular vote, canlook back on a decade of China-styleeconomic growth, the sidelining ofthe army as the final arbiter ofTurkish politics, and the re-emergence of Turkey as an admired
and influential regional power.What matters now are his
intentions in drawing up a newconstitution to replace the army-dictated charter of 1982. The questionis whether he wants to use thisopportunity to strengthen individualrights – and craft a consensus givingTurkey’s large Kurdish minoritycultural and self-government gains –or to mould a new order in his ownimage, stepping up from thepremiership to an executivepresidency on the French model,thereby to claim a mantle to rivalthat of Mustafa Kemal Ataturk, thesecularist founder of modern Turkey.
Abdullah Gul, the currentpresident and Mr Erdogan’s onlyrival on the national stage, whomight take over the premiership in2014, has told the Financial Timesthat, for its own reasons, Turkey
needs to keep to the path of reformtraced by its bid for EU membership.“We should not stop here; it’s notsufficient”, he said.
Very much in contrast to MrErdogan’s belligerent attitudetowards his critics, Mr Gulacknowledges the need for a strongopposition to counterbalance thedominance of the neo-Islamist rulingJustice and Development party(AKP) he and the premier founded.
Turkey’s political drama is not thesecularists’ spectre of creepingtheocracy but that the opposition hasproved unelectable, trapped in thepast and hitherto reliant on generalsand judges to win back what itkeeps losing at the ballot box.
The paradox is that Mr Erdoganand the AKP, although now lords ofall they survey, behave as thoughthey were still in opposition.
The prime minister exemplifiesTurkey’s winner-takes-all politicalculture in which the AKP hasresorted to the same methods itsenemies used to try to deny it power.As Mustafa Akyol, a Muslim liberalwriter says, “it is not that the AKPis too Islamist, it’s that it’s tooTurkish”.
This sense of entitlement, as a newelite rooted in the dynamiccapitalism of the Anatolianbourgeoisie elbows aside thesecularist establishment of Kemalistand metropolitan Turkey, now comeswith more than a tinge of disdaintowards an EU mired in crisis.
Turkey, with the long conditioningof its NATO membership andvestiges of dirigisme, does not seeitself easily reflected in a Europeanlandscape peopled by what oneformer minister derides as
“market fundamentalists and defencepygmies”.
At this year’s AKP conference, MrErdogan managed to speak for morethan two hours without mentioningthe EU, to an audience that includedArab Islamist leaders such asPresident Mohamed Morsi of Egyptand Khaled Meshaal of Hamas butno front-rank European figures.
“It’s getting harder and harder todefend the EU in Turkey, let alonedefend Turkey inside the EU,” whereGermany and France have keptraising the barriers to Turkishaccession, one official says.
Yet, there are ties that bind.The economic integration of
Turkey and the EU, to the benefit ofboth, proceeds apace. There are nowmore than 14,000 Europeancompanies in Turkey, giving them anextra competitive edge as well asaccess to Turkish engineering skills.EU officials say there are nearly60,000 Turkish students currentlystudying in Europe with EU funding.The European Investment Bank hasbecome an important source ofinfrastructure funding. Turkey’slarge army plays a full part ininternational peacekeeping, fromAfghanistan to Lebanon.
If President Gul, who drove EUpolicy in his previous role as foreignminister, gets his way, Turkey mayjust swivel back westwards –especially since its ambitions in theneighbourhood have been hit badlyby the intractable and bloody realityof the Syrian civil war on itsdoorstep. Some Turkish officialsbelieve the EU’s apparent movetowards a multi-tier Europe – withthe eurozone at its core and aBritish and Scandinavian outer ring– may make it easier for Turkeyeventually to slot in.
“If we’re in the same room as, say,the UK or Sweden, that is somethingI can explain to Turkish publicopinion”, one says.
Stock pile: Grand Bazaar’s gold souk in Istanbul Getty Images
Investing in Turkey
David Gardner
‘It’s getting harder andharder to defend the EU inTurkey, let alone defendTurkey inside the EU’
4 ★ FINANCIAL TIMES THURSDAY NOVEMBER 22 2012
It is a matter, President AbdullahGul tells the Financial Times, ofcompleting the country’s transfor-mation – and yet Turkey’s bid tojoin the EU could hardly be more
tortuous, or its outcome more uncer-tain.
Recep Tayyip Erdogan, prime minis-ter, once put membership at the heartof his project of government, but asEU states’ reservations about Turkishmembership have hardened into for-mal blocks on talks, so Ankara’sardour has cooled into indifference.
On a recent trip to Berlin MrErdogan said the bloc would have toadmit Ankara by 2023 or “lose Tur-key” and has floated the idea ofreintroducing the death penalty,which would sound the death-knellfor his country’s bid.
And yet Turkey’s EU talks, troubledthough they are, are still vital for thecountry’s orientation. Three-quartersof foreign direct investment comesfrom the EU, even though sales to thebloc are now little more than a thirdof total Turkish exports.
The loss of EU influence, as talkshave stalled, has coincided with
increased complaints within Turkeyabout such issues as media freedomand the rule of law.
“There should be no doubt withrespect to the determination of Tur-key to successfully complete negotia-tions,” says Mr Gul, who talks aboutTurkey’s EU aspirations in a mark-edly different way from Mr Erdogan.“This is what is going to complete thetransformation of Turkey.”
Mr Gul concedes Turkey mayfinally decide not to proceed withmembership and that a country suchas France or Austria could veto itsaccession at the last gasp. But heargues that the mere fact that it willhave completed the talks will havebrought Ankara up to EU standards.
He also insinuates that Turkishentry, as potentially the biggest mem-ber state, may be less threatening toother Europeans at a time of flux inthe EU, when the bloc may be reshap-ing along the lines of a eurozone innercore and an outer periphery.
“We are very closely following thedifficulties that the EU is facing at themoment – the ongoing political andeconomic restructuring,” he says.
“There may be new mechanismsthat emerge in the EU, and Turkeyshould take its rightful place withinthis overall picture.”
In a likely reference to Turkey’sambitions as a rising power on theworld and regional stage, he adds:“The EU countries should also appre-ciate the fact that there is no substi-tute for Turkey; they have to recog-nise the contribution that Turkey canadd to the EU.”
But while Mr Gul speaks of a virtu-ous cycle in which the possibility ofEU entry serves to speed Turkeyalong the path of reform, today avicious cycle applies: the EU censuresAnkara for its failings, yet those veryfailings make it more difficult torevive the negotiations.
The EU’s most recent report on Tur-key, issued last month, was its mostcritical yet, raising serious concernsover the country’s jailing of journal-ists, the legitimacy of high-profilecourt cases and internet censorship.
“The progress report was basicallyraising one question: ‘Where is thiscountry going?’” says Jean-MauriceRipert, EU Ambassador to Ankara.
He adds that the dynamic couldyet be changed with the opening ofnew negotiating chapters, somethingthat can be achieved if, as Europeandiplomats hope and expect, Francelifts reservations put in place duringthe presidency of Nicolas Sarkozy.
“The EU has to give signs that westill care, this is really important,”Mr Ripert says.
But even that hope depends on thegovernment of Francois Hollandedetaching Turkey’s EU aspirationsfrom the vexed issue of whethermassacres of Armenians in Anatoliaalmost a century ago constitutedgenocide, a controversy that has putAnkara at loggerheads with Paris.
Marc Pierini, Mr Ripert’s predeces-sor, is worried Mr Erdogan’s govern-ment may have decided for religiousand ideological reasons that it doesnot want to be too close to Europe.
And yet he, too, thinks greater EUattention could still change thecountry’s course, for economic rea-sons among others. “Look at Gulfinvestment in Turkey; it is shoppingmalls,” he says. “The future of Tur-key as a Bric is with Europe.”
Erdogan andGul differ oncountry’s EUaspirations
EuropeThe president hopes that joiningwillcomplete the country’s transformation buthurdles abound, writes Daniel Dombey
‘They have torecognise thecontributionthat Turkeycan add tothe EU’
PresidentAbdullah Gul
Investing in Turkey
Tucked into a busy Istanbulside street, beside the city’sSpice Bazaar, is one ofthe masterpieces of theclassical Ottoman age. TheRustem Pasha Mosque, withpanel after panel of decora-tive Iznik tiles, is a happymarriage of aesthetics andfaith, as well as a mid-16thcentury expression of bling.
“It displays great wealthwith great confidence,” saysLucien Thys-Senocak, anarchitectural historian atIstanbul’s Koc University.The mosque is a peacefulsanctuary above the shops –which gave it an income – aliteral attempt to move reli-gion into the marketplace.
The current generation’snostalgia for the Ottomanperiod, reflected in the Dis-neyland-style office blocksor Ottoman-themed housingestates, appears sympto-matic of a longing to showoff Turkey’s new-won pros-perity with a time-provenyardstick of good taste.
After years of running tocatch up to Europe, theTurkish haut monde nowfeel they may be evenahead in the race. Therivalry is now less with theoutside world than betweenhome-grown rival elites.
A new, more conservativehaute bourgeoisie is on anaccelerated learning curve.“They may be even over-confident, but they feel thatTurkey has a status. Thenewly affluent look at aEurope in crisis and thinkto themselves: ‘We’re not afailure after all’,” says Alan
Duben, an anthropologist atBilgi University in Istanbul.
In the comfortable seasideneighbourhood of Florya isthe famed meat restaurant,Beyti. Its owner, BeytiGuler, began with a simpleroadside grilled meat res-taurant, which has evolvedinto a palatial, gilded empo-rium, with its Ottoman tilesand stained-glass windows.
Among the photos ofcelebrity diners is one ofTurgut Ozal, former primeminister, who battled Tur-key’s way into the globaleconomy. But it was Beytiwho tutored Turkey’s post-war citizens in the pleas-ures of Sunday lunch. Verymuch an institution, it is asmuch a clubroom as a res-taurant, with a bar anddrawing rooms to lingerbefore and after a meal.
That disappearing world –in particular its polite envyfor the instant coffee, Marl-boro cigarettes and depart-ment stores of western con-sumerism – is captured inthe display cabinets ofIstanbul’s new Museum ofInnocence, a shrine by thewriter Orhan Pamuk to hisnovel of the same name.
The novel’s centrepiece isan engagement party inthe Hilton Hotel, a placewhere “so many Westerninnovations made theirfirst appearance . . . that theleading newspapers evenposted reporters there.”
The novel begins in the1970s, but the Hilton wasfinished in 1955 in the nickof time to cosset the dele-gates to that year’s IMFmeeting. Its week-longopening warranted its owncommemorative stamp.
The writer is the author of‘Turkey: What EveryoneNeeds to Know’, publishedby Oxford University Press
High societydoes lunchin IstanbulLifestyle
Confidence aplentyin a changing city,says Andrew Finkel
Abdullah Gul,president (right)and Recep TayyipErdogan, primeminister Getty Images
