Investment climate in Turkey

When it came to power in 2002, the present Turkish government continued with the ambitious program of reforms which was launched in 2000. That same year, an agreement was signed with the IMF. In question, ten billion dollars of aid. But there were numerous obligations: a tight budget, the reform of the social security system, consolidation of the banking sector and acceleration in the program of privatizations. The biggest challenge for the authorities: succeed the transition from a protected economy to a market economy, transition engaged in 1981, with an important milestone in 1995, the Customs Union signed with EU. Among the objectives, a reduction in inflation, the return of growth and the modernization of the institutions. After a certain number of slip-ups which set off two crises, the economy started to flourish in 2002. The liberalization of the State banks has been rather slow to take off.

The alliances that Turkey has made with numerous countries will enable it to undertake its missions successfully. It already has a customs alliance with the EU, and in December 1999 in Helsinki the Council of Europe confirmed its status as candidate to the European Union. The country is also a member of the WTO, NATO, the OECD and the World Bank

Foreign direct investment (FDI) is limited, bringing around one billion US dollars per annum. Despite these results, foreign businesses occupy an important place: 125 businesses with foreign participation among the 500 largest industrial companies quoted on the Stock Exchange. So as to increase the flow of FDI, a new law was passed by the Parliament in July 2003. The aim was especially to reaffirm the freedom of foreign investment, to simplify the administrative procedures, to reduce the time periods and to facilitate the hiring of foreign labor. Industry provides 25% of GDP and employs around 18% of the working population. Textiles, automobiles, steel and petrochemicals are the main exports. The largest clients are Germany, Great Britain and France. On the other hand, the leading trio of importers comprises Germany, United States and France. Agriculture, which represents 15% of GDP but employs almost half of the workforce, satisfies the whole of the national demand. The domain is still under-exploited. Finally, the service sector represents 60% of GDP. Tourism is the leading source of foreign exchange.

Strong points

The private sector is diversified and dynamic. It has experienced rapid growth, even if the government continues to play a major role in the domains of industry, banking, transport and communications.

As regards natural resources, various ores are in bountiful supply: boron, coal, iron, zinc, chrome, copper, silver, even if their production remains low.

Textiles, electronic equipment & domestic appliances and automotive & automotive components, almost entirely in the hands of private operators, are the heavyweights of the industrial sector. These sectors represent the leading centers of exports (70%), and employ nearly four million people.

The Turkish tourist and archaeological sites are important assets.

The volume of foreign direct investment (FDI) in Turkey has reached an annual average of around one billion US dollars.

Turkey offers an attractive framework for foreign investment. The law n° 4875 of 2003 and its associated together form a legislative framework. Foreign investors are treated in a non-discriminatory way by the legislation in place, without overall restrictions of access to particular sectors, nor a limit in the participation in the capital of corporations.

The fair treatment of foreign investors is also based on incentives offered by the legislation, such as tax reductions on company profits, VAT exemption on machines and equipment purchased locally or imported for the investment needs, subsidized loans for research and development, etc.

With the exception of the tax reductions on company profits which are applied automatically, to be able to profit from all these aids, investors must obtain a « certificate of investment » from the Treasury. The length and size of the exemptions and aids vary and are determined on geographical and sectoral bases as well as on the value of the investment. The decree of 10th June 2002 and the associated, provide the legal framework on the subject. The very liberal financial legislation facilitates portfolio investments, as the Istanbul Stock Exchange is one of the main Stock Exchanges among emerging countries.

Turkey, which forms a large market of nearly 70 million consumers, is engaged in negotiations for membership to the European Union. Since 1st January 1996 it has been party to a customs union with the latter which covers industrial products and transformed agricultural products (but not agricultural products per se). It applies, in parallel, the common customs tariffs of the EU third party countries, with the exception of certain products that it considers « sensitive ». On average, the customs tariffs which are applied to imports from third party countries (non-members of the EU) are 5%. The customs duties are paid on the basis of CIF prices. VAT is an average of 18% on industrial products and is added to customs duty. Capital equipment, however, benefits from a total exemption from both VAT and customs duty.

Beyond the negotiations with the EU, Turkey is also a signatory to the Black Sea Economic Co-operation Pact (BSEC) as well as free trade agreements with member countries of EFTA (Switzerland, Norway, Iceland, Liechtenstein). Turkey is also a member of the World Trade Organization.

To be able to export their products and services, businesses based in Turkey should be members of one of the country’s thirteen associations of exporters. A certain number of incentives and support for exports exist, such as loans from the Eximbank or aid for export promotion.

The banking sector is characterised by its relatively modest size compared with the weight of the national economy, with total assets representing only 65% of GNP in 2002 (that is a quarter of the European average. Source DREE), by a strong presence of public establishments (33% of assets), and by the very low share of foreign companies (3% of assets). 55 banks were counted in 2002 in the country. The first of them is the public agriculture bank, the Ziraat Bankasi (22 billion dollars assets, ahead of three private banks.)

Alongside SDIF, the Turkish banking sector is placed under the control of an independent regulation authority called the Agency for Bank Regulation and Supervision (BBDK in Turkish). It is in principle this agency which should supervise the program of privatisations of the large public banks. To support these operations, the Turkish authorities may call upon a modern financial centre. The Istanbul Stock Exchange is in fact one of the largest Stock Exchanges among emerging countries and would like to receive a few standard bearers of the country’s banking sector.

The privatisation program constitutes an occasion for investors to take a place a in the dynamic market of more than 70 million consumers. Among the public assets announced as due to be privatised in 2002, was Tekel, the conglomerate specialising in the manufacturing of cigarettes as well as participation in the oil refiner Tupras, in the petrochemical group Petkim and in the sugar refiner Turk Seker. But in total, the public sector still remains largely dominant. Several operations are yet to come which will liberalise more widely the telecommunications, energy and even finance sectors. Providing more medium term opportunities for foreign investors.

Tourism, already highly developed, especially on the Mediterranean coast, in Istanbul and in the centre of the country (Cappadoce) still has a strong potential, given the natural and historic wealth of the country. A wealth deriving not only from an exceptional coastline, but also numerous archaeological and cultural sites, Turkey has the immense advantage of being able to count on two complementary categories of foreign visitor: mass tourism interested in the coastal resorts as well as cultural tourism with visits to the sites.

But Turkey cannot simply be summed up by its formidable tourist resources and its programme of privatisations. Used to playing a prominent role because of its geo-strategic position, between Europe and Asia, the country has developed an undeniable know how in the whole logistics chain, hence the presence of a number of shipping and transit companies. This competence represents a lever for the development of heavy industry which takes advantage of the underground riches. In this field, the exploitation of resources has not yet reached its full yield, which leaves the field open to new players, especially in the steel domain. More generally, given the surface area of the territory, the large public work sites, involving transport projects as well as the large energy and water networks are likely to be a permanent feature of the Turkish landscape. As many occasions for the large international operators, as well as service providers of a more modest size to access calls for tender from the Public Works sector.

One of the strengths of the Turkish economy, moreover, is in the dynamism of the small private activities, in particular in the agricultural and textile sectors. Confronted with world trade and the challenge of membership of the European Union, these two sectors have an increasing need of equipment to enable them to improve their yield and their profitability. Furthermore, the evolution of the country involves new investments downstream of the primary activities, as in the agro-food industry as far as agriculture is concerned.

The demographic weight of the country is an important asset for the consumer goods producing businesses. Automobile manufacturing can find here both qualified labor on the production side and, on the consumer side, a large number of customers. In the same way, the large and small operators in the distribution sector find in Turkey a favorable and less risky terrain than other emerging countries. The number of inhabitants also enables operators from the health (pharmaceutical products, hospital services) and insurance sector to envisage this market with serious perspectives.

Finally, investing in Turkey, cannot be envisaged without considering the unique position of the country on a geographical level, in the region between East and West. Entry into the Turkish market gives hope of openings onto other emerging markets: from the Caucasian republics to the Middle East passing through Central Europe. To penetrate these new destinations, Istanbul is assisted by its economic, technological and financial weight and its opening to external trade.

Source : ANIMA

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