Turkey’s Economic & Political OutlookApril 2, 2014

Mehmet Şimşek Minister of Finance

1

Economic & Political Outlook

Structural Reforms & Priorities

Long-Term Prospects

Outline

2

3

Political Outlook:Is Political Stability at Stake?

Local Election Results

Source: Anadolu AgencyAK PARTY: Justice and Development PartyCHP: Republican People’s PartyMHP: Nationalist Movement Party BDP: Peace and Democracy Party

( %)

AK PARTY CHP MHP BDP Others0

10

20

30

40

5045.6

27.9

15.2

4.0

7.3

38.8

23.1

16.1

5.7

16.3

2014

2009

2 More Elections Ahead

Presidential• August 2014

Parliamentary• June 2015

5

6

Economic Fallout from Political Uncertainty?

7

Growth

8

Real GDP

Source: Turkstat, Eurostat*Poland, Romania, Hungary, Bulgaria, Croatia, Lithuania, Latvia

Q1-

08 Q2

Q3

Q4

Q1-

09 Q2

Q3

Q4

Q1-

10 Q2

Q3

Q4

Q1-

11 Q2

Q3

Q4

Q1-

12 Q2

Q3

Q4

Q1-

13 Q2

Q3

Q4

85

90

95

100

105

110

115

120 119.8

107.8

97.9

100.0

106.5

Turkey

Emerging Europe*

Euro Area

USA

Reel

GSY

H (2

007

Ç4=1

00, m

.a.)

Fast

Growth

Moderate but Sustainable Growth

9

Upside• Stronger external demand

• EU pulling out of recession• Arab Spring becoming less

disruptive• TL Depreciation

Downside• Political uncertainty• Tighter financial conditions

Growth Outlook

Employment, Unemployment & Labor ParticipationEm

ploy

men

t sin

ce 2

007

(mn

peop

le s

.a.) Created nearly

4.8 million jobs since 2007

Source:TURKSTAT

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

20

21

22

23

24

25

26

27

25.8

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

12M

ay-1

2Se

p-12

Jan-

13M

ay-1

3Se

p-13

8

9

10

11

12

13

14

15

16

45

46

47

48

49

50

51

52

Unemploymen Rate (Left Axis)Labor Force Participation Rate (Right Axis)

(s.a., %)(s

.a.,

%)

10

11

Growth

Inflation19

81

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

20

40

60

80

100

120

140

Source: TURKSTAT

(CPI

, Ann

ual,

%)

12

13

Upside• TL Depreciation

Downside• Monetary Tightening• Widening Output Gap• Benign Commodity

Prices

Inflation Outlook

( %)

14

Tightening Monetary Policy

Source: CBRT

550 bps hike in upper bandO

ct-1

1

Apr

-133

5

7

9

11

13

15

8.00

12.00

10.00

CBRT Funding Rate O/N Borrowing O/N Lending Policy Rate

15

Fiscal Outlook: Room to Manoeuvre

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.010.8

7.9

4.1

0.1

-1.3

0.2

1.6

5.5

3.0

0.41.0 1.0 1.1

Maastricht Criteria: 3%

Achieved Maastricht Criteria except 2009

Source: Ministry of Development

Budg

et D

efici

t-to

-GD

P, %

16

Low Deficit

Budget Deficit (2014)

17

Budg

et D

efici

t-to

-GD

P, %

Source: IMF, OECD, Ministry of Development

OECD EU-27 EMs Turkey0.5

1

1.5

2

2.5

3

3.5

4

4.5

4.0

2.9

2.248

1.1

Source: IMF

Fiscal Strength in EMs

0 1 2 3 4 5 6 70

20

40

60

80

100

120

140

Tu

Sp

SoAf

Slov

Slvk

Serb

Rus

Rom

Pol

Phil MexLith

Latv

Ire

Indo

Hun

Fr

Cro

Col

Bul

Br

ArmGro

ss D

ebt /

GD

P (%

)

Fiscal Deficit /GDP (%)

19

Upside• Recent tax measures

Downside• Weakening domestic

demand

Fiscal Outlook

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 201425

30

35

40

45

50

55

60

65

70

75 74.0

67.7

59.6

52.7

46.5

39.940.0

46.1

42.339.1 36.2 36.3

33.0

Lower Public DebtD

ebt-

to-G

DP,

%

Satisfying Maastricht Criteria since 2004

Maastricht Criteria: 60%

Source: Treasury 20

Public Debt (2014)

Source: IMF, OECD, Treasury 21

Deb

t-to

-GD

P, %

OECD EU EMs Turkey20

30

40

50

60

70

80

90

100

110

120111.8

90.0

33.7 33.0

22

(%)

Interest Payments

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

60

70

80

9085.7

14.9

43.2

11.9

Interest Payments/Tax Revenues Interest Payments/Budget Expenditures

Source: Ministry of Finance

23

Turkey’s Soft Spot

Current Account Deficit

24

(% o

f GD

P)

Net Gold Exports• 2011: -$4.8 billion• 2012: +$5.7 billion• 2013: -$11.8 billion

Source: CBRT

Factors behind high C/A Deficit (2011-13)

Strong domestic demand

Euro crisis

Energy prices

Arab Spring

25

Outlook for C/A Deficit

26

• Europe pulling out of recession• Softening domestic demand• Exchange rate weakness• Relatively more stable MENA

region• Gold imports likely to fall• Higher tourism revenues

Significant adjustment

is likely

Financial Stability & Turkey’s FX Risk?

27

Turkey's FX Position

Source: CBRT, BRSA, Treasury * Assets: CBRT FX Deposits of Treasury+ CBRT Foreign Assets; Liabilities= Public gross external debt+CBRT Liabilities to Non Residents. Data from CBT dated Mar. 24, 2014; data from gross external debt stock as of Q3-13** Data - Jan. 2014*** Data - Dec. 2013 **** Data - Mar. 2013*****Data-21.03.2014 28

Billion $ Assets Liabilities Net Position

Public*133,4 118,9 14,6

Banking Sector**482,1 482,6 -0,5

Real Sector***92,2 266,1 -173,9

Short Term76,9 94,9 -18

Household****191,0 0,5 190,5

FX Deposit *****81,7

FX Loans: All Firms

29Source: CBRT

No FX Loans 63%

FX Loan w/ export earning 25%

FX Loan w/o export earning 12%

9,500 firms Total net sales at 71% of GDP.

30

Banks: Safe & Sound

Capi

tal A

dequ

acy

Ratio

, %

2002 41640

17.6

2.7

NPL

Rati

o of

Loa

ns (%

)

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-

09Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-

11Ju

l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2Ja

n-13

Apr-

13Ju

l-13

Oct

-13

Jan-

14

0

5

10

15

20

25

15.1

Legal Rate: %8

Target Rate 12%

Source: BRSA

Households: Low Leverage

Source: CBRT, ECB

(Hou

seho

ld L

iabi

lities

, % o

f GD

P, Ju

ne 2

013)

31

No FX exposure

DenmarkNetherlands

IrelandUnited Kingdom

PortugalSweden

SpainFinland

Euro AreaGreece

MaltaGermany

FranceLuxembourg

BelgiumAustria

ItalyEstoniaPoland

Czech RepublicLatvia

SloveniaHungarySlovakia

LithuaniaTurkey

20 40 60 80 100 120 140

65

23Chart Title

Priorities & Structural Reforms

32

Chapter- 1

Moving up the Value-

Chain

Deepening Capital

Markets

Combatting Shadow Economy

Improving Infrastructure

33

Moving up the Value-Chain

34

High Added Value in Exports

Strengthening the link b/w commerce and R&D

Value of export products per kg

Turkey $1.58

South Korea $3.0

Turquality $3.28

Japan $3.5

Germany $4.1

35

Source: The Scientific and Technological Council of Turkey

R&D Spending

• 3.00%2023

• 1.8%2018

• 0.92%2012• 0.53%2002

36

Industrial Design Applications

45,091 applications in 2013

Up by 122% since 2002

Source: TPI

37

Trade Mark Applications

38

(201

2, T

hous

and)

TURK

EY

Fran

ce

Germ

any

Italy

Spai

n UK

Port

ugal

Switz

erla

nd

Norw

ay

Pola

nd

0

20

40

60

80

100

120

108*

86

64

54

4441

17 16 14 14

Source: TPI*Turkey’s 2013 data

Patent Applications

Source: TPI

2002 20131,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

1,874

12,053

Mor

e than

5 ti

mes

39

Deepening Capital Markets

40

Deepening Capital Markets

New Capital Markets Law

Restructuring of Borsa Istanbul

Incentives for Private Pensions

41

2009 72nd

2014 47th

2018 25th

Global Financial Centres Index

Source: Global Financial Centres Index 15

Rio de Jeneiro ISTANBUL Warsaw Mauritius Mexico Prague Budapest20

30

40

50

60

70

80

4547

60

63

70

7577

42

Combatting Shadow Economy43

44

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

30

35

40

45

50

55

52.1 51.7

50.1

48.2

47.0

45.4

43.5 43.843.3

42.1

39.0

36.7

Info

rmal

Em

ploy

men

t (%

of T

otal

Em

ploy

men

t)Informal Employment

Source:TURKSTAT

Size of Shadow Economy (%, GDP)

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

26

27

28

29

30

31

32

3332

.2

31.5

30.7

30.4

29.1

28.4

28.9

28.3

27.7

27.2

26.5

Source: Schneider, 2013

Down 6 percentage points

45

Size of Shadow Economy (%, GDP)

Source: Schneider, 2013

But still higher than EU average

46

Bulg

aria

Rom

ania

Croti

a

Latv

ia

Esto

nia

TURK

EY

Lith

uani

a

S. C

ypru

s

Mal

ta

Pola

nd

Gre

ece

Slov

enia

Hun

gary

Italy

Port

ugal

Spai

n

EU A

vera

ge

Belg

ium

Czec

h Re

p.

Slov

akia

Swee

den

Nor

way

Den

mar

k

Finl

and

Ger

man

y

Irel

and

Fran

ce

Uni

ted

King

dom

Net

herl

ands

Luxe

mbu

rg

Aust

ria

5

10

15

20

25

30

35

31.2

28.4

28.4

28.0

27.6

26.5

25.5

25.2

24.3

23.8

23.6

23.1

22.1

21.1

19.0

18.6

18.4

16.4

15.5

15.0

13.9

13.6

13.0

13.0

13.0

12.2

9.9

9.7

9.1

8.0

7.5

Size

of I

nfor

mal

Eco

nom

y (2

013,

%, G

DP)

Improving Infrastructure

47

1,714 KmTotal of Motorways

4,387 KmTotal of State and

Provincial Dual Carriageways

Total: 6,101 Km

January 2003

2,244 KmTotal of Motorways

20,807 KmTotal of State and

Provincial Dual Carriageways

Total: 23,051 Km

January 2014

48

İSTANBUL

EDİRNE

ESKİŞEHİR

Polatlı

ANKARA

KONYA

İZMİR

SİVAS

AFYONKARHİSAR

KAYSERİ

BURSA ERZİNCAN

ERZURUM

KARS

MERSİN ADANA

DİYARBAKIR

ELAZIĞ

MALATYA

ZONGULDAK SAMSUN

Bandırma

VAN

MUŞ

BİLECİK

ÇANKIRI

KIRIKKALE

TEKİRDAĞ

İZMİT

BALIKESİR

AYDIN

DENİZLİBURDUR

ISPARTA

UŞAKMANİSA

KARAMAN

NİĞDE

OSMANİYE

K.MARAŞ

AMASYA

BATMAN

MARDİN

Yerköy

KARABÜK

Yenişehir

Constructed (1.724 km)Under Construction (2.500 km)Bidding Phase (1.600 km)

GAZİANTEP

Çobanbey

1,724 km of railroad constructed since 2003

o.w. 1,366 km High Speed Train Lines

49

High Speed Railway Projects

• The number of airports serving

scheduled flights = 262003

• The number of airports serving

scheduled flights = 522013

Active Airports in Turkey

Airports serving Scheduled Flights (52)

Airports under Construction (3)

Airports Planned (1)

50

Chapter- 2

Enhancing Human

Capital Stock

Increasing Labor Market

Flexibility

Reducing Energy

Import Bill

Reducing Regional

Development Gaps

51

Enhancing Human Capital Stock

52

Students (%, Total Population)

53

Turkey EU15

20

25

30

35

40

45

39

22

Source: TURKSTAT, Eurostat Included Informal Education

2002 20148

10

12

14

16

18

9.4

18

Source: Ministry of Finance

Share of Education in Budget%

54

Investment in Education

Over the last decade, we have• Built 205,000

classrooms• Hired 410,000 teachers

Source: Ministry of Education55

Gross Schooling Rates

Source: Ministry of Development56

12 Years of Mandatory Education

57

9.5 9.7 9.9 10.1 10.3 10.5 10.7 10.9 11.1 11.3 11.56

7

8

9

10

11

12

13

14

USA

UK

TURKEY

Switz.Spain

Port.

Poland

New Zeal.

Mex

Lux

Japan

Italy

France

Finland

Estonia

Den.

Czech R.

Chile

Canada

Belg.Austria

Austral.

Aver

age

Year

s at

Sch

ool o

f Pop

’n o

ver 2

5 Ye

ars

Income per Capita (PPP, log)

Source: OECD

58

2002

91,1 girls per 100 boys

2012

101,8 girls per 100 boys

Come on girls, lets go to school!Daddy, send me to school

Improving Girls’ Education

59Source: OECD

Science Math30

35

40

45

50

55

60

65

70

75

8076

74

47

51

38

46

2006 2009 2012

Enhancing Human Capital Stock: PISA Results, Gap b/w Turkey & OECD

Healthcare

60

Healthcare Expenditures

Source: The Ministry of Finance61

Healthcare Indicators

Source: The Ministry of Health62

(Yea

rs)

2002 201370

72

74

76

78

71.8

77

Life Expectancy At Birth Infant and Maternal Mortality Rate

(per

thou

sand

)

(per ten thousand)

2002 20130

5

10

15

20

25

30

35

0

1

2

3

4

5

6

731.5

7.4

6.4

1.5

Infant Mortality Rate (Left Axis)

Maternal Mortality Rate (Right Axis)

Healthcare Indicators

Source: TURKSTAT

2003 201330

40

50

60

70

80

39.5

74.7

(%)

Patient Satisfaction with Healthcare Services

63

Tax Incentives for Medical Service Exports

50% tax relief on CIT & PIT

And• VAT down to 8% from 18% • PIT and CIT exemption for 5 years• Regional Investment Incentives

64

PPP in Healthcare

65

Projects at Funding Phase

• Kayseri• Ankara Etlik• Ankara Bilkent• İkitelli• Elazığ• Yozgat• Manisa• Adana• Mersin• Gaziantep• National Public Health Agency

Projects at Funding Phase worth almost $6bn

Projects at Tendering & Contract Phase

• Isparta• Kocaeli• Eskişehir• Bursa• Konya Karatay• İzmir Bayraklı• İstanbul Bakırköy• İstanbul Üsküdar

Increasing Labor Market Flexibility

66

Average Retirement Age

Female Male30

35

40

45

50

55

60

65

41.0

44.9

61.963.3

Turkey OECD

Source: OECD

67

Labor Participation Rate, Female

Source: Fraker, A. and D. Ozdemir, 2011, “Female Labor Force Participation How Does Turkey Compare?”, TEPAV 68

Fem

ale

Labo

r Par

ticip

ation

Rat

e (%

)

Income per Capita (log)

69

Average Usual Weekly Hours Worked on the Main Job

TurkeyKore

a

Mexic

o

Greece

Czech

RepublicIsr

ael

Slova

k Republic

Poland

Iceland

Slove

nia

Hungary

Portugal

Chile

Canada

Estonia

Spain

France

Austria

Italy

New Zealand

Finland

Luxe

mbourg

Belgium

Sweden

United Kingdom

Australia

Germany

Switz

erland

Ireland

Norway

Denmark

Netherlands

30

32

34

36

38

40

42

44

46

48

5048.9

(201

1, h

our)

OECD Average: 38.5

Source: OECD

Reducing Energy Import Bill

70

Source: TURKSTAT, Bloomberg

Energy Import Bill(Brent, $ pbl)

Ener

gy Im

port

s (B

illio

n D

olla

rs)

71

High Dependence on Energy Imports

72% Total Energy

92% Oil

98% Natural-Gas

72

Developing Local & Renewable Resources

Source: Ministry of Energy and Natural Resources

Electricity Generation Installed Capacity

MW % of Total

Current Installed Capacity (2013) 64,044

- Renewable Energy 25,596 40.0

Power Plants Under Construction 14,338

- Renewable Energy 10,804 75.4

In 5-to-7 years 78,382

- Renewable Energy 36,401 46.4

73

74

JVs in Renewable EnergyO

ver t

he n

ext

deca

de in

Tur

key,

• 20,000 MW, wind power generation • 3,000 MW, solar power plants • 600 MW, geothermal power plants

• An energy stock market will be established

Building Nuclear Capacity

Akkuyu: JW with Russia

SinopJW with a Japanese-French consortium

Working on a 3rd plant

75

Improving Energy Efficiency

Industry 20%

Transportation 15%

Construction 30%

76

Reducing Regional Development Gaps

77

Southeast Anatolian Project

₺36.1 bn invested in Southeast Anatolian Project during 2003-13

22 dams, almost completed

416 thousand, new jobs since 2009

$6.6bn contribution to the economy

78

79

East Anatolian Project (DAP)

Source: Ministry of Development Division of GAP Administration

Create 1.2 mn jobs

Contribute $1.4bn to the economy

Konya Plain Project (KOP)

80

14 irrigation

3 drinking

water

1 energy

18 GREAT PROJECTS

Strong Long-Term Prospects

81

82

GDP Per Capita

2002 2013 5 000

7 000

9 000

11 000

13 000

15 000

17 000

19 000

21 000

8 667

20 500

GDP Per Capita (PPP,$)

2.4 T

imes

Source: TURKSTAT, Ministry of Development

2002 2013 600

800

1 000

1 200

1 400

1 600

1 800

1 099

1 609

GDP Per Capita ( , Real) ₺

1.5 Times 2002 2013

1 000

3 000

5 000

7 000

9 000

11 000

3 492

10 782GDP Per Capita ($)

3.1 T

imes

Real Convergence with AMs

2002 201320

25

30

35

40

45

50

55

60

65

22.7

35.537.0

58.6Turkey / USA

Turkey /European Union

Source: IMF,OECD, Turkstat83

Determinants of Long-Term Growth

Quality of Institutions

Demographics

Productivity

84

Improving Quality of Institutions

Corruption Perception: 2013: 53rd in 177 2002: 65th in 102

Ease of Doing Business: 2013-14: 69th in 185 2006: 84th in 175

Global Competitiveness: 2013: 44th in 148 2005: 71st in 117

85Source: WB, WEF, Transparency International

Corruption Perceptions Index (2002)

(65th among 102 countries)İta

lya

Yuna

nist

an

Brez

ilya

Mek

sika Çin

TÜRK

İYE

Arja

ntin

Hin

dist

an

Russ

ia

Indo

nesi

a

20

30

40

50

60

70

80

90

100

31

44 45

58 5965

7073 74

96

Source: Transparency International

86

Corruption Perceptions Index (2013)

(53rd among 177 countries)

Source: Transparency International

TURK

EY

Italy

Braz

il

Chin

a

Gre

ece

Indi

a

Arge

ntina

Mex

ico

Indo

nesi

a

Russ

ia

40

50

60

70

80

90

100

110

120

130

140

53

6972

80 80

94

106 106

114

127

87

Within the period of 2005-2012, Turkey has ranked higher than Russia, Argentina and Greece.(71st among 117 countries)

Port

ekiz

Hun

gary

Slov

ak R

ep.

Italy

Pola

nd

Indi

a

Gre

ece

Chin

a

Russ

ia

Arge

ntina

Braz

il

Mex

ico

Rom

ania

Ukr

aine

Indo

nesi

a

TURK

EY

30

35

40

45

50

55

60

65

70

75

31

3536

38

4345 47

48

53 54

57 59

67 6869 71

Source: World Economic Forum

Global Competitiveness Index (2005)

88

(44th among 148 countries)

Source: World Economic Forum

Global Competitiveness Index (2013)Ch

ina

Indo

nesi

a

Pola

nd

TURK

EY

Italy

Port

ugal

Mex

ico

Braz

il

Indi

a

Hun

gary

Russ

ia

Rom

ania

Slov

ak R

ep.

Ukr

aine

Gre

ece

Arge

ntina

25

35

45

55

65

75

85

95

105

29

38

42 44

49 5155

5660

6364

76 78

84

91

104

89

(84th among 175 countries)

Source: World Bank

Ease of Doing Business (2006)M

exic

o

Italy

Uru

guay

Rom

ania

TURK

EY

Arge

ntina

Russ

ia

Chin

a

Gre

ece

Braz

il

Indo

nesi

a

Ukr

aine

Croa

tia

Indi

a

60

70

80

90

100

110

120

130

140

62

69 70 71

84

93

97

108111

122

131132 134

138

90

(69th among 189 countries)

Source: World Bank

Ease of Doing Business (2013)M

exic

o

Italy

TURK

EY

Gre

ece

Rom

ania

Uru

guay

Croti

a

Russ

ia

Chin

a

Ukr

aine

Braz

il

Indo

nesi

a

Arge

ntina

Indi

a

20

40

60

80

100

120

140

53

65 6972 73

88 8992

96

112 116120 126

134

91

Favorable Demographics

Source: Eurostat

Shar

e of

15-

24 y

ears

old

in T

otal

Pop

. (%

)

92

SpainItaly

AndorraSlovenia

GreecePortugalBulgaria

GermanyCzech Republic

SerbiaSwitzerland

IrelandCroatiaEstonia

LatviaFrance Austria

HungaryLuxembourg

FinlandNetherlands

UkrainePoland

DenmarkSweden

United KingdomSlovakiaNorway

MaltaLithuania

MontenegroIceland

MacedoniaGeorgia

MoldovaTurkey

Azerbaijan

7 9 11 13 15 17 19 21

16.6

TURKEY OECD EU-270.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0 2.0

0.7

0.3

Annu

al A

vera

ge G

row

th R

ate

(%, 2

001-

11)

Working Age Population Growth

Source: OECD, Eurostat, Turkstat 93

Have Investors Noticed the Transformation?

94

International Companies Operating in Turkey (1000s)

Source: Ministry of Economy

95

Foreign Direct Investment Inflows

Source: CBRT

(Bill

ion

dolla

r)

96

1980-2002 2003-20130

25

50

75

100

125

150

14.8

136.3

REER Appreciation

Source: CBRT

(200

3=10

0)

97

Thank You…

98