Turkish Economy “Recent developments” Ekrem Keskin November 2008

Turkish Economy / November Turkey is an open economy, capital flows are free and there is no exchange rate restriction for residents and non-residents There is no discretionary regulation for international investors Current exchange rate regime is a floating system The Central Bank has been implementing a formal inflation- targeting framework since 2006 Turkey and EU had an agreement of the “Customs Union” in 1995 and began Turkey and EU had an agreement of the “Customs Union” in 1995 and began accession negotiations for full membership. The EU’s economic criteria regarded as the nominal anchor Sovereign credit rating, currently is BB-

Turkish Economy / November Population is about 72 million in which the group of age has a share of 65 percent. Competitive human resources with well trained young and dynamic population sustain strong domestic demand which is the main force behind the growth. Long term average growth rate is about 5 percent. GNP is about USD 760 billion, 17th largest in the world, 6th in the EU; 2nd in the region after Russia. Income per capita is around USD 11,000. Unemployment rate is about 10 percent

Turkish Economy / November Services and industry have shares of 60 percent and 30 percent, respectively. Foreign trade volume to GDP is 55 percent. The main trade partner is the EU with 50 percent share. Turkey, situated at the junction of Europe, Middle East, Caucasia and Mediterrenian is becoming a geo-strategic base for international business as the regions account for 40 percent of the world’s GDP. Turkey is a secular country and has close historical, cultural and economic ties with the countries among the regions. Turkey outstands with its vast agricultural land and natural water recources.

Turkish Economy / November Macro economic policies in conjunction with a positive international environment led to economic performance to improve considerably since Disinflationary monetary and tight fiscal policies supported by the structural reforms created an environment for higher growth led by the private sector. Succesfully implemented free market principles encouraged private sector and foreign investment and increased the international competitiveness. The start of accession negotiations has further reinforced the dynamism of Turkey to complete economic reforms to meet the EU directives.

Turkish Economy / November High growth performance: Stable and strong growth, over the long term average of 4%, after 2002.

Turkish Economy / November A leading role of private sector : Acceleration in private sector’s fixed capital investment of new technology and expanding capacity

Turkish Economy / November The share of external borrowing in fixed capital investment

Turkish Economy / November The share of external borrowing in fixed capital investment

Turkish Economy / November Unemployment rate remained at 10% as wages increased slowly

Turkish Economy / November Rapid disinflation: Inflation has declined to the historically lowest level during the free market economy, although it’s decending trend halted recently and has reversed slightly.

Turkish Economy / November Substantial fiscal adjustment: One of the main reasons behind the positive outcomes was the tight fiscal policy which led to a substantial decline in PSBR and budget deficit

Turkish Economy / November Reduced debt burden...

Turkish Economy / November Jump in net capital inflows from an annual of USD 3 billion in the 90’s to USD 54 billion in 2008 September

Turkish Economy / November Rapidly widening current account deficit...

Turkish Economy / November Private sector borrowed heavily from external markets

Turkish Economy / November Public sector debt in EU and Turkey

Turkish Economy / November Budget deficit in EU and Turkey

Turkish Economy / November Inflation in EU and Turkey

Turkish Economy / November Main issues are: Widening savings deficit in the private sector Increased reliance on volitile foreign savings Pressures on inflation mainly due to rising energy prices High degree of currency substitutions Short term maturity of domestic savings Small financial market with heavly depending on banking sector

Turkish Economy / November

Turkish Economy / November Jump in loans...

Turkish Economy / November Loans to deposits ratio soared

Turkish Economy / November Banks and consumers discovered each other.

Turkish Economy / November Stronger shareholders’ capital and high capital adequacy

Turkish Economy / November Significant growth potential in the banking sector and...

Turkish Economy / November Private sector’s share in capital markets

Turkish Economy / November Thank you.