Country Risk & Emerging Markets Course: Professor Michel H. Bouchet A Risk Analysis of Turkey Daniel Smith Peter Blahnik Alberto Lopez April 2002
Turkey Source: Central Intelligence Agency
Historical Overview • 1923 Turkey founded from the Turkish remnants of the Ottoman Empire. • The country instituted secular laws to replace traditional religious fiats. • 1945 Turkey joined the UN. • 1952 it became a member of NATO. • 1974 Turkey occupied the northern portion of Cyprus to prevent a Greek takeover of the island; relations between the two countries remain strained. • Periodic military offensives against Kurdish separatists have dislocated part of the population in southeast Turkey and have drawn international condemnation.
Government & Political System • Government type: republican parliamentary democracy. • Legal system:derived from various European continental legal systems; accepts compulsory ICJ jurisdiction, with reservations. • Chief of state: President Ahmed Necdet SEZER (since 16 May 2000). • Government head: Prime Minister Bulent ECEVIT (since 11 January 1999). • Economic minister: Kemal Dervis • Head of army:General Cevic Bir Source: Financial Times
Ethnical Features, Culture & Religion • Ethnic groups • 80% Turkish • 20% Kurdish • Religion • 99.8% Muslim • Languages • Turkish • Kurdish • Armenian • Greek
Social Indicators • Population: 66, 493, 970 (est. 2001) Source: World Bank
Geographical Features Natural resources:antimony, coal,chromium, mercury, copper, borate, sulfur,iron ore, arable land, hydropower. Land Use: Source: Central Intelligence Agency
Geographical Features • Natural hazards:very severe earthquakes,especially in northern Turkey, along an arc extending from the Sea of Marmara to Lake Van. Source: British Broadcast Corporation • Environment issues: water pollution; air pollution; deforestation; risk of oil spills.
Underground Economy 1. Underground economy creates unreliable officialmacroeconomics aggregates. Economy policy decisions are likely to be Ineffective. Example: Crisis in Turkey 1999. 2. Underground economy creates unfair competition conditions for firms. In Turkey usury is more than 20% of total volume of banking sector.
Volume of underground economy • Underground economy makes up $100 billions (half of Turkey national income). Source: The Fraser Institute
Measuring the underground economy • Different methods yield to different figures.The lack of necessary statistical data in many fieldin Turkey limits the reliability of the results. Source: Central Bank of Turkey
Measuring the underground economy Source: The Fraser Institute
Beware Turks bearing phones! • Filed law suit to reclaim $3 billion owed by Telsim (2nd largest mobile network). • Telsim controlled by the Uzan family. • Involves four counts of “criminal activity” under the Racketeer Influenced and Corrupt Organizations Act (RICO). • Diverted loans to other family owned companies “through an elaborate scheme of deceit and intimidation”. • Loans were supposed to finance the acquisition of base stations to bolster the Telsim network. • May 2001, Uzan family failed to pay $728m repayment to Motorola – excuse devaluation of Turkish lira. • Uzan’s are known as serial fraudsters. They have been in dispute with Turkey’s capital market regulators over financial shuffling for some time. • Turkey’s credibility could suffer and international investors shy away. • Nokia and Motorola should have done their research.
II. TURKISH FINANCIAL CRISIS 1994 & 2001
Turkey Crisis 1994 • Overvaluation of TL between 1989 – 1993. Increased Trade deficit Capital flight Decrease of reserves
Macroeconomic Scenario Before Nov 2000. OVERVIEW 1. Underlying economics weaknesses - Current account deficit - Severe problems in the banking sector - Inflation 2. Political instability. (Failure of the December 1999 structural reform agreed to with the International Monetary Fund (IMF)
Macroeconomic Scenario Before Nov 2000. INFLATION. Turkey had suffered from high and persistent inflation for more than two decades. • Roots: • Fiscal deficit due to: • 1. Inefficient tax system ---- unregistered economy • 2. High agricultural subsidies • 3. deficit in the public enterprises • Government policy: finance its deficit through domestic and foreign borrowing, which lead to increase in the money supply. • Consequences of the increases of the money supply: • 1. Rise in the price level • 2. Depreciation of the Turkey’s lira
Current Account Deficit Nov 2000 GOVERNMENT POLICY EXPORTS&IMPORTS MORE EXPENSIVE DEFICIT CURRENT ACCOUNT WEAKEN COMPETITIVENESS OF TURKEY PRODUCTS DEVALUATION INCOMPRESSIBLE IMPORTS INCREASE IN PRICE OF FINAL GOODS INFLATION
SPARK OF THE CRISIS. (Nov. 2000) 1. Authorities initially boosted liquidity • 2. Severe liquidity shortages in the banking system • Massive rise in interest rate • Stock exchange fell down sharply • Sudden capital outflow and international reserves fell heavily 3. The IMF intervened quickly. Credit increased by US$7.6bn
Spark of the Crisis (Nov 2000) Source: Australia & New Zealand Banking Group Limited
Spark of the Second Crisis (Feb 2001) • President Sedar accused the government of not • doing enough to tackle corruption. (political instability) 1. Immediately the international reserves fell down (capital outflow) 2. Overnight interest soaring 3. The government allow the lira to float.
Spark of the Second Crisis (Feb 2001) Source: Australia & New Zealand Banking Group Limited
Capital Flight from Turkey All sectors Capital outflow of US$ 10.6 billion Banking sector Source: BIS financial statistics 6A & 6B
Real GDP Growth (%) Earthquake 2000/2001 crisis 1994 crisis Source: Central Bank of Turkey
GDP - Composition by Sector Sectors of the economy: Sector growth: Source: Central Intelligence Agency
Inflation Source: Australia & New Zealand Banking Group Limited
Trade Analysis Source: Central Intelligence Agency
Trade Analysis Source: Central Intelligence Agency
Trade Partners Source: Central Intelligence Agency • solid/stable trade partners • not dependent on one nation for trade
Balance of Payments Source: IMF, Letter of Intent
Trade Openness Ratio (X+M/GDP) Source: IMF, Letter of Intent
External Public Debt Outstanding by Debtors Source: BIS
Liquidity Ratio Current account balance/GDP Source: IMF, Letter of Intent
Liquidity Ratio Budget deficit/GDP Source: IMF, Letter of Intent
Solvency Ratio External debt/GDP Source: IMF, Letter of Intent
Solvency Ratio ST Debt/foreign reserves Source: IMF, Letter of Intent
IMF Influence • Total loan size: 16.3bn USD • Conditions of the loan: • Adopt medium-term economic program (outlined in letter of intent) • Keep macroeconomic policies in-line with strengthened program adopted May 2001 • Continue structural reform of Turkey’s private and banking sectors • Meet requirements as scheduled in the agreement
Projected Obligations to IMF (in millions SDRs, based on existing use of resources and holdings of SDRs) Source: IMF, Letter of Intent
IMF & Turkey • Turkey has met all conditions outlined in 2001 by their due date • Many reforms were completed ahead of schedule • Political instability in Summer ’01 lead to rise in interest rates, however dispute has been mended • September 11 events hurt Turkish economy and the funding process however it is slowly improving • Due to September 11, Turkey needs to modify benchmarks outlined in their progress schedule • Last letter of intent signed January 28, 2002
World Bank Influence • Works with IMF and other IFIs on restructuring policies. • World Bank concentrates on long-term growth and reducing economic vulnerability. • New Economic Program stresses: public sector reform, banking sector reform, liberalization of markets and strengthening social assistance.
International Bank of Reconstruction & Development • June 7, 2001 Turkey asks IBRD for Special Structural Adjustment Loan of 1.2 bn USD for FY01-03 period on top of 5 billion USD already pledged. • 4 billion USD aimed to support structural reforms. • 1billion USD will create a base for lending, particularly to support social and environmental projects.
International Financial Corporation • IFC to provide support for financial sector reform and corporate restructuring. • Turkey accounts for 4.6% of IFC portfolio. • IFC corporate clients are leveraged and export oriented.
MIGA • Turkey’s share of MIGA portfolio: 165 million USD. • MIGA has not had any problems with its guarantees in Turkey. • MIGA continues to have strong demand for activities relating to Turkey.
IFC & MIGA Program FY1998-2001 Source: World Bank
Foreign Direct Investment • Establishing a company in Turkey involves 19 steps and takes at least ten weeks. • Even the government admits this is “unnecessarily complicated.” • Turkey is planning an Investment Promotion Agency. • Need reforms to remove obstacles to domestic and foreign investment. • Tax and accounting reforms are also expected by the next budget.