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Doing Business in Turkey

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  1. Doing Business in Turkey Funda Güngör Koç Holding A.Ş.

  2. Why Turkey ? Source: Investment Support and Promotion Agency of Turkey

  3. Contents Demographic Advantages Growing Economy Energy Corridor Strengthening Financial Sector Strong Manufacturing Industry Important Sectors at a Glance

  4. Unique Geographical Location… • Unique geographical location… • Turkey enjoys a very special location at the crossroads between East and West, overlapping Europe and Asia geographically • Turkey occupies an area approximately equivalent to the quarter of the size of the EU • Favorable economic and political environment… • Democratic parliamentary regime • Open market economy • Strong ties with Caucasia and Central Asia…. • Turkey is the leading investor in Caucasian and Central Asian Turkic Republics • Turkey provides privileged access and a perfect base to develop business with these countries

  5. International Associations – Commitment to Global Standards Bilateral Investment Treaties with 79 countriesDouble Taxation Prevention Treaties with 68 countriesSocial Security Agreements with 22 countriesFree Trade Agreements with 11 countries

  6. Large and Young Population – Increasing Urbanization Population & Labor Growth Rates, % Population Breakdown (%) Poland Turkey Portugal Romania Belgium Holland Spain Italy France Germany Poland Turkey Portugal Romania Belgium Holland Spain Italy France Germany The Changing Nature of Turkish Urbanization, Large (around 70 million) and Young Population Present New Opportunities for Growth

  7. Demographic Advantages Growing Economy Energy Corridor Strengthening Financial Sector Strong Manufacturing Industry Important Sectors at a Glance

  8. From Boost & Bust Cycles to Sustainable Growth GNP Growth Rates Before 2002: Boost and Bust Cycles Consecutive High Growth Rates Contribution of Private Sector Investments–% pps Avg GDP Growth 3.1% Avg GDP Growth 7.1% Source: Turkstat

  9. Automotive Consumer Durables Food & Retail Energy Finance Low Penetration Levels Passenger Cars Organized Food & Retail Market Share, % Vehicles Penetration, % Ownership per Thousand Loans + Deposits / GDP, % Per capita consumption toe

  10. Sustainable and High Growth Potential Projected real growth in GDP and income per capita: 2005-2050 (%pa) Source: PricewaterhouseCoopers estimates (rounded to nearest percentage point)

  11. 19th Largest Economy of the World as of 2005Expected to become the 17th largest economy by 2008* * World Economic Outlook, IMF

  12. EU Membership – An Economic and Political Anchor… FDI/GDP, Annual Average (%) Average Growth Rate (%) • Customs Union since 1996 • Full membership process since October 2005

  13. Increasing Share of Value-added Sectors Sector Output Shares (%) Employment by Economic Activity (%) 72.7 59.0 62.5 45.0 41.5 29.8 37.5 27.3 11.2 13.5 Source: Turkstat

  14. Fiscal Prudence & Sustainable Disinflationary Trends Consolidated Budget (% of GNP) Inflation (%, YoY) 2001 2002 2003 2004 2005 2006 2007 92 73 -0.7% -2.5% 35.9 28.3 7.4 3.7 -17% Source: Ministry of Finance Source: Central Bank

  15. YTL- Fixed FX & FX-linked YTL - Floating Declining Sovereign Risk YTL Billion, % 93 358 Euro Zone Average Maastricht Criterion 58 Domestic Debt External Debt 2007 1Q : US$ 213 bn 2002 : US$ 130 bn 2007 August : US$194.9 bn 2001 : US$144.0 bn Maturity (months): 12.8 24.8 Source: Treasury

  16. Stronger Integration to World Markets Foreign Trade (US$ Billion) 160 100 41 31 Exports by Country Groups – Jan-July 2007 (%) Imports by Country Groups – Jan-July 2007 (%) Source: Turkstat

  17. Already Increasing Levels of FDI Better Means of Financing the C/A Deficit Growth vs Current Account Deficit, % The New FDI Law The main principles are as follows:• Equal Treatment for domestic and foreign capital companies • No pre-entry or pre-establishment screening requirements • No need to notify to the Undersecretariat of Treasury • No obligation to choose a specific company name • Unrestricted foreign ownership Rights of International Investors• Free Transfer of Funds • Acquisition of real estate • Dispute settlement either in local courts or international arbitration bodies • Valuation of non-cash capital • Work permits for expatriates • Opening a liaison office Foreign Direct Investment (US$ Billion) Official Reserves (US$ Billion) 62 2001 2002 2003 2004 2005 2006 2007 72 20 19 38 12.1 Source: Central Bank, Investment Support and Promotion Agency of Turkey

  18. Growing Opportunities for the Private Sector and Foreign Players Privatization & SDIF Sales, 2008-2009 Privatization Revenues (US$ mn) Source: Privatization Administration and local media

  19. Financial MarketsThe resilience of the financial markets against global shocks increased significantly Trigger: Japan’s interest-rate hikes & Global liquidity Duration:2 months Dev. Rate:29% YTL / $ Trigger: Start of FED rate hikes Duration:3 months Dev. Rate: 28% Trigger: Mortgage Crisis in US Duration:3 months Dev. Rate:8% Trigger: Expectation of strong FED rate hikes Duration:2 months Dev. Rate: 7% 1.1757 2004 2005 2006 2007 Interest Rates % Interest Rates Inc: 7.65 bp Interest Rates Inc.: 1.80 bp Interest Rates Inc.: 7.35 bp Interest Rates Inc.: 0.17 bp 16.33 2004 2005 2006 2007 Source: Reuters, Koç Holding

  20. 2007-2008 Expectations

  21. Demographic Advantages Growing Economy Energy Corridor Strengthening Financial Sector Strong Manufacturing Industry Important Sectors at a Glance

  22. Strategically Located on Critical Energy Corridors Oil Pipelines Natural Gas Pipelines Kirkuk – Ceyhan Iraq’s largest export line Capacity: 70 mn tons p.a. Baku – Tbilisi – Ceyhan Decreasing transportation and financial costs Capacity: 50 mn tons p.a. Samsun – Ceyhan Ceyhan to become an energy hub Capacity: 70 mn tons p.a. Nabucco Major alternative route for gas to EU to be partially operational by 2012 Construction will end in 2017 (max capacity: 31 bcmy) Turkey – Greece – Italy Turkey – Greece part is in the final stages of construction Construction of the “Italy-Greece” section : 2008 - 2011 Estimated capacity: 8-10 bcm p.a.

  23. Opportunities in Energy Sector : Gas & Oil Turkey annually exports 35-40 billion m3 of natural gas to Europe and 250-300 million tons of petroleum to world markets Gas • New distribution networks • Privatization of major gas distribution companies • International gas transit projects passing through Turkey • Gas import contracts of BOTAS - 16 lots of 250 mcm have already been sold Oil • New oil pipeline projects such as the Samsun-Ceyhan Project offers opportunities for construction and engineering companies. • New Petroleum Law is expected to stimulate exploration and production activities • Collaboration opportunities with the American companies regarding hydrocarbons in Iraq. • Black Sea as an offshore region – need for deep water-related services

  24. Opportunities in Energy Sector : Electricity According to the Ministry of Energy and Natural Resources, Turkey requires energy investments of $128 billion through 2020 in order to sustain its economic growth • Privatization of 20 electricity distribution regions • Sale of 16,000 MW of state generating plants (12,200 MW thermal and 3,800 MW hydro) • Additional generating capacity of 54,000 MW to be created by 2020. (1/3 in hydro) • Construction of over 600 HEPPs (High Energy Particle Physics) with a capacity of 11,000 MW (2007). Hydro facility of 12,578 MW are in operation and it is projected that 35,000 MW capacity will be reached by 2020. • Investment opportunities in Renewable Energy • Wind turbines (The installed capacity to reach up to 3,000 in 2020) • Solar energy thermal potential (61 million Toe) • Creation of nuclear capacity of 5,000 MW by 2020.

  25. Demographic Advantages Growing Economy Energy Corridor Strengthening Financial Sector Strong Manufacturing Industry Important Sectors at a Glance

  26. Low Penetration Levels - High Growth Prospect Banking System in Turkey 47 46 No of Banks 81 79 61 53 51 51 51 Banking Highlights

  27. Restructuring in the Banking System Stronger Risk Management, Higher Capitalization, Higher Profitability Capital Adequacy Ratio – % RoE - % Non-performing Loans – % Open FX Position – US$bn Net NPLs (0.4%) Source: Banking Association of Turkey

  28. Total Loans Lending Penetration – Total Loans to GNP, % Developed Countries Developing Countries (Europe&S.Africa) Latin America Developing Countries (Asia) Source: Merrill Lynch

  29. Mortgage Loans Mortgage Penetration – Mortgage Loans to GNP, % Developed Countries Developing Countries (Europe&S.Africa) Latin America Developing Countries (Asia) Source: Merrill Lynch

  30. Contents Demographic Advantages Growing Economy Energy Corridor Strengthening Financial Sector Strong Manufacturing Industry Important Sectors at a Glance

  31. Strong Competitive Advantages • Strengths • Geographical location • Customs Union with the EU • A large export base • Product development capability • Competitive and flexible manufacturing • Strong and competitive domestic supply base • Low labor costs • High quality standards • High domestic demand versus comparable Eastern European countries • Highly educated, young, dynamic and qualified workforce • Flexible and long working hours • Opportunities • Growing markets in the surrounding geography • Efforts to increase efficiency

  32. Strong Competitive Advantages Source: Investment Support and Promotion Agency of Turkey

  33. Increasing Emphasis on R&D R&D Support by Tubitak (Scientific and Technological Research Council of Turkey) Private Sector Support for Technology & Innovation, YTL mn R&D Expenses/ GDP - % R&D Investment at Koç Group–€ mn R&D Personnel at Koç Group

  34. Special Investment Zones Technology Zones (14 + 8) Organized Industrial Zones (93) Free Zones (20) Investors operating in the zones located in 54 selected provinces benefit from the following advantages: • 100% exemption from income tax for employed workers. • 100% exemption from the employer’s share of social security costs. • Free land allocation. • Up to 50% support for electricity costs. • Exemption from real estate tax, waste water charges, building construction duties and the use-of-building. • Offices ready to rent and infrastructure facilities provided. • Profits derived from software and R&D activities are exempt from income and corporate taxes until 2014. • Deliveries of application software produced exclusively in TDZ’s are exempt from VAT until 2014. • Wages of researchers, software and R&D personnel employed in the zone are exempt from all taxes until 2014. • A VAT exemption during the exemption period of income and corporate taxes is provided for IT specific sectors. • Exemption from customs and duties as well as fund levies. • %100 exemption from custom duties and other assorted duties • %100 exemption from corporate income tax for production companies • %100 exemption from the value added tax (VAT) & sp. Cons. taxes • Companies are free to transfer profits from Free Zones abroad as well as to Turkey without restrictions. Source: Investment Support and Promotion Agency of Turkey

  35. Contents Demographic Advantages Growing Economy Energy Corridor Strengthening Financial Sector Strong Manufacturing Industry Important Sectors at a Glance

  36. Main Export Sectors Sectoral Composition of Exports – Largest 500 Companies, % Sectoral Composition of Exports – 2nd Largest 500 Companies, % Mining Mining 3.5 3.5 7.5 Food&Tobacco 7.4 Autıomotive Oil and Coal derivatives 10.9 Oil and Coal derivatives 7.5 Textiles&Leather 13.3 8.4 Iron&Steel Machinery&Equipm. 17.3 10.5 Food&Tobacco 17.7 Iron&Steel 11.7 Machinery&Equipm. Automotive 26.9 46.5 Textiles&Leather 0 5 10 15 20 25 30 0 10 20 30 40 50 Source: ISO Source: ISO

  37. Examples to Most Attractive Export Sectors Most Attractive Export Sectors 60% Motor Vehicles 50% 40% Iron & Steel Export Growth, 200-2005 % Telecom & Audio 30% Fruit & Vegetables Textile 20% Metallic Goods Electrical machinery Apparel 10% 0% 0% 1% 2% 3% 4% 5% 6% Market Share in Global Exports, 2005 % Source: WTO …the 6th largest vehicle producer in EU-25 and 15th largest worldwide; the 3rd largest producer in light vehicles in EU-25 and the largest producer in bus in EU-25; …the largest producer and exporter of agricultural products in the Near East and North Africa …the largest hazelnut and apricot produce…Agricultural production is equivalent to 40% and 20% of EU-25 production of fruits and vegetables …the 2nd largest white goods producer in Europe, following Italy and producing about 16% of total European production…the 1st TV manufacturer in Europe …the 7th largest apparel, 3rd largest home textile and 15th textile exporting country internationally…the 2nd largest supplier of the EU after China, meeting 12% (in volume) and 15% (in value) of the textile and garment requirement of the EU.…the 7th largest apparel, 3rd largest home textile and 15th textile exporting country internationally …among the top countries who export construction services …the world’s 6th largest producer of cement and cotton Motor Vehicles Agricultural Products White Goods & Electronics Textile & Apparel Construction Cement&Cotton

  38. Thank you… Further information on business environment and trade & investment opportunities in Turkey can be reached at: www.ito.org.tr invest.gov.tr www.yased.org.tr www.treaury.gov.tr www.igeme.org.tr www.tusiad.org.tr www.foreigntrade.gov.tr www.deik.org.tr Istanbul Chamber of Commerce Investment Support and Promotion Agency of Turkey International Investors Association Undersecretariat of Treasury Export Promotion Center Turkish Industrialists’ and Businessmen’s Association Undersecretariat of Foreign Trade Foreign Economic Relations Board