"Turkish Economy" is an annual publication of Istanbul Chamber of Industry and it comprises both the evaluation of Turkish economy in year 2008 and the economic forecasts for year 2009.

FORWARD
The Turkish Economy in 2009 covers developments in the country’s economy in 2008 as well as expectations for 2009 in parallel with developments in the world economy. National income, public financing, population, employment, price movements, foreign trade and monetary developments in 2008 are examined in detail in the study, and expectations in the overall balance of the economy, the budget, inflation and foreign trade in 2009 are also taken up together with our Chamber’s assessments of the situation.

From 2002 to 2007 the Turkish and the world economy enjoyed a period of growth that could be regarded as exceptional by any standard. An abundance of liquidity drove growth around the world, a global trend of which Turkey too reaped the benefits. But this positive period came to an end with the crisis in the U.S. housing market in the second half of 2007. Starting in the U.S., the financial crisis took on global proportions in the fall of 2008, spreading inexorably from the European Union to the whole world.

As a part of the global economy, Turkey too was naturally affected by the crisis. But the restructuring of the banking sector following the crisis of 2001, and the decline in the rate of public borrowing and in the budget deficit through financial discipline were important advantages for Turkey, and kept problems from growing unmanageably large in the financial dimension. On the other hand, the global crisis had a virtually devastating impact on the real sector as production, exports and employment were all extremely hard hit. In principle, production problems in Turkey date back to before the crisis. Turkish industry had begun hemorrhaging much earlier.

Following the fluctuation in May 2006, domestic demand began to ebb. In a climate in which domestic demand was quite stagnant, Turkey’s industry nevertheless succeeded in sustaining production by turning heavily to exports. But when the country’s export market, mainly the European Union, also began to dry up due to the global crisis, it became impossible for Turkish industrialists to continue orienting their production around exports, and Turkish industry, which was already having trouble sustaining production growth, has essentially been in the doldrums since 2005.

Under the impact of these unfavorable developments in industrial production, GDP contracted by 6.2% in the last quarter of 2008 when the growth period that had continued for 27 straight quarters came to an abrupt end. GDP growth in 2008, which was forecast at 4% in the economic program for 2009, came to 1.1% by initial provisional estimates. This is the lowest rate of annual growth in the post-2001 period.

When national income estimates were announced in the 2008 national income statistics published at the end of March 2009, GDP growth figures in the first, second and third quarters of 2008 were substantially revised. Following the revision, GDP growth was revised upwards from 6.7% to 7.3% in the first quarter, from 2.3% to 2.8% in the second quarter, and from 0.5% to 1.2% in the third.

Based on the same statistics, GDP rose at the rate of 12.7% in current prices to TL 950,144 million. Per capita GDP in 2008 was TL 13,367 in current prices, or 10,436 dollars, yielding a dollar exchange rate of TL 1.28085 when the ratio of the two figures is taken. Calculated on the basis of this figure, GDP in 2008 was 741,804 million dollars.

As part of national income estimates, revisions were undertaken in the growth rates of value added created in most branches of economic activity. In manufacturing, value added growth was revised upwards from 7.3% to 8.8% for the first quarter, from 3.4% to 4.8% for the second, and from a contraction of 1.1% to growth of 0.5% for the third. In the last quarter, value added in Turkey’s manufacturing sector contracted by 10.8%, yielding value added growth of 0.8% for the year in general.

Based on the monthly index of industrial production, production in manufacturing was down by 8.2% in October, 14.9% in November and 20.1% in December of 2008. In the last quarter the average drop in production was roughly 14.4%. The decline in value added in the same period was 10.8%. This leads us to believe either that productivity rose in the last quarter, or that development in informal economic activity developed more positively than production in the enterprises included in the production index.

Another point worth noting in the latest national income estimate is in the financial sector. Growth rates in financial institutions were 9.3%, 9.6%, 8.0% and 9.5% by quarter. In 2008 in general, value added in the financial institutions grew by 9.1%. In other words, growth in the value added created by financial intermediaries in 2007 and 2008 was very large in magnitude even as growth in the economy was slowing down. It is rather difficult to explain this development.

A look at estimates of national income on the expenditures basis in 2008 reveals that private consumer spending fell by 4.6% in the last quarter. For the year however it grew by 0.3%. Public sector consumer spending in the last quarter of 2008 was up by 6.1% with a growth rate of 1.8% for the year.

Turning now to fixed capital investment spending, this fell by 17.5% in the last quarter and 4.6% for the year in general. Public sector investments were up by 15.9% in the last quarter and by 13.1% for the year. Private fixed capital investment spending, which also rose by 8.6% in the first quarter of 2008, fell by 3.4% in the second, by 8.9% in the third and by 23.5% in the fourth. In 2008 as a whole private fixed capital investment spending declined by 7.3%.

Foreign trade in goods and services grew worldwide in 2008 by an average 4.1%. Growth in exports was 3.1% in the developed economies and 5.6% in the developing and emerging economies. Growth in imports on the other hand was 1.5% in the developed economies and 10.4% in the developing and emerging economies. In Turkey growth rates were 23.0% in exports, 18.8% in imports, and 11.5% in the volume of foreign trade. As the figures indicate, Turkey’s foreign trade developed in 2008 at levels well above those in the developing economies as a whole.

Exports, which got off to a rather good start with growth of 61.9% in January, continued to rise rapidly up to September when export growth came to 41.5%. With the deepening of the global crisis in October, however, and the stagnation in foreign trade particularly with the European Union, Turkey’s biggest market, exports fell sharply month by month for the first time in many years. This falling trend, which started with a drop of 1.8% in October, continued at an increasing rate of 17.5% in November and 20.7% in December.

A look at the distribution of exports by country group shows that Turkey’s exports to the European Union, which made up 56.3% of the total in 2007, declined in 2008 to a 48.0% share. Growth in Turkey’s exports to the EU countries in 2008 was 4.9%. As the EU countries’ share in Turkey’s exports shrank, that of the Near and Middle Eastern countries expanded. Making up 14.1% of the total in 2007, exports to these countries came to 19.3% of total exports in 2008. At the same time, the share of Turkey’s exports to the African countries also expanded from 5.6% to 6.9%, with a growth rate of 51.6% from 2007 to 2008. As Turkey’s exports were contracting due to the global crisis, this movement in the markets of Africa and of the Near and Middle East can be regarded as a positive, albeit slight, development in terms of discovering new markets.

A similar trend is evident in the development of Turkey’s imports, which started the year with 18.1% growth in January 2008 and rose without interruption up to September. With growth of 23.7% in that month, their growth rate then began go fall, by 4.4% in October, 27.4% in November and 29.3% in December.

As a forecast for 2008 given in the economic program for 2009, the foreign trade deficit is 80.5 billion dollars. Due however to the falls observed in imports, especially in the last three months, exceeding those in exports, the foreign trade deficit in 2008 came to 70 billion dollars, yielding an export/import offset ratio of 65.3% in 2008, up from 63.1% in 2007.

The current account deficit was estimated at 51.5 billion dollars in 2008 in the economic program for 2009. Parallel with the contractions in both exports and imports, however, the foreign trade deficit narrowed and, under the impact of this development, the current account deficit narrowed as well, to 41.6 billion dollars, and below the 51.5 billion dollar estimate.

On the other hand, the slowdown in global trade due to the crisis also resulted in a decline in the amount of direct investment coming to Turkey. Down by 22.8% on the previous year, net direct investments came to 15,400 million dollars in 2008.

Due to the growing impact of the global crisis in the second half of 2008, many countries and international institutions rapidly revised their growth estimates and foreign trade expectations for 2008. Turkey in the same period, however, undertook no revisions of the targets in its 2009 economic program. In the program for 2009 announced at the end of October 2008, GDP growth in 2008 was estimated at 4%, a figure that remained unchanged in expectations for 2009. It was only in the 2008 Pre-Accession Economic Program announced on 13 April 2009 that the economic targets for 2009-2011 were finally revised, albeit rather late.

Based on these estimates, the Turkish economy is envisaged to contract in 2009 in keeping with global trends and to embark on a recovery process in 2010. Based on the new economic targets in the 2008 pre-accession economic program, GDP is expected to contract at the rate of 3.6% in 2009. The expected contraction in the industrial sector meanwhile is 9.7%.

Alook at the GDP estimate on the expenditures basis in the 2008 pre-accession economic program shows that total consumer spending in 2009 is expected to fall by 2.3% and private consumer spending by 3.1% while public sector consumer spending in contrast is expected to rise by 3.1%. In fixed capital spending, a contraction of 13.3% in expected, at 14.4% in the private sector and 7.3% in the public sector. Declines of 10.9% in exports of goods and services and 15.5% in imports of goods and services are also forecast for 2009.

The budget deficit, which was estimated at 13,351 million Turkish liras in 2009 in the economic program for the year, has been revised downwards to TL 10,397 million in the 2009 estimated budget. In the 2008 pre-accession economic program the budget deficit was revised upwards to 48.0 billion Turkish liras. The overall state deficit, which was 1.5% of GDP in 2008, is envisaged to rise to 4.6% in 2009. Meanwhile the ratio to GDP of the non-interest surplus, which was 4.1% in 2008, is expected to fall to 1.7% in 2009. And the ratio to GDP of the volume of overall state debt, at 39.5% in 2009, is expected to climb to 43.1% in 2009.

Inflation has been targeted at 7.5% in both the 2009 economic program and the 2008 pre-accession economic program. Exports are envisaged to fall by 21.2% to 104 billion dollars and imports by 31.7% to 138 billion dollars in 2009 in the 2008 pre-accession economic program. As the figures show, the volume of foreign trade, which is contracting rapidly under the impact of the global crisis, is expected to contract in 2009 by proportions not seen in years.

The current account deficit is envisaged to come to 11.0 billion dollars in 2009 in the 2008 pre-accession economic program. As a ratio to GDP it is therefore expected to decline from 5.7% in 2008 to 1.9% in 2009. The new economic targets for 2009 appear to be largely in harmony with current economic trends.

The global economy has been sending a few encouraging signals since the second quarter of the year, especially following the world leaders’ agreement at the G-20 summit on 2 April on a 1.1 trillion dollar economic package to shore up the global economy. Looking at these optimistic signs, however, it is still not possible to say that the crisis has bottomed out. Uncertainty continues in the global economy, and 2009 is going to be a difficult year for Turkey as for the whole world. Turkey is especially hard put when it comes to production and employment. Let us remember, however, that these difficult times, like all difficult times, are going to pass.

A probable correction abroad is naturally going to impact Turkey positively, but what is essential is that we be able to put our house in order and eliminate our shortcomings. Economic packages aimed at combating the crisis must continue without interruption to enable this dire situation to become a motivating force for eliminating the obstacles to our competitiveness and for solving the problems that have been building up over the years to the point that they are virtually fossilized today.

If we can do this, we will have turned the crisis into an opportunity. As Turkish industrialists, we are determined to continue combating the crisis with all our might. Our expectation is that our government will assist us in that struggle. It is our hope that the unfavorable trend can be stopped after the first quarter through the measures that have been, and are going to be, taken and that a recovery, albeit slow, will get under way in the second half of the year.

C. Tan›l KÜÇÜK, Chairman
The Board of Directors
The Istanbul Chamber of Industry

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Publication no. 2009/09 of the Istanbul Chamber of Industry
Department of Research
Meflrutiyet Cad. No: 62
Tepebafl› 34430 Istanbul-Turkey
Phone: 0.212 252 29 00 (pbx)
Fax: 0.212 245 32 82
www.iso.org.tr
ISSN 1303-4030
ISBN 978-9944-60-490-1
June 2009

CONTENTS
FOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
OVERALL ASSESSMENT . .. . . . . . . . . . . . . . . . . . . . .9
Overall Assessment . . . . . . . . . . . . . . . . . . . . . . . . .11
Developments in the Turkish Economy . . . . . . . . . . . .11
Production and GDP . . . . . . . . . . . . . . . . . . .11
Per Capita GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
The Overall Balance of the Economy . . . . . . . . . .12
Foreign Capital . . . . . . . . . . . . . . . . . . . .  . . . . . . . . . . . . . . . .13
The Public Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Internal Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
External Debt . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . .13
The Central Administration Budget . . . . . .. . . . . . . . .13
Population and Employment . . . . . . . . . . . . . . . . . . .14
The Foreign Exchanges . . . . . . . . .. . . . . . . . . . . . . . . . . .15
Prices . . . . . . . . . . . . . . . . . . . .  . . . . . . . . . . . . . . . . . . . . . .15
Foreign Economic Relations . . .. . . . . . . . . . . . . . .16
Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Imports . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .16
The Current Account Deficit . . . . . . . . . . . . . . . . . . . . .17
Expectations for 2009 . . . . . . . . . . . . . . . . . . . . . . . . .17
PRODUCTION AND GROSS NATIONAL PRODUCT . .  . . . . . . . .21
Production and Gross National Product . . . . . . . . . . . . . . . . . . .23
Developments in the Primary Sectors of the Economy . . . . . . . . .23
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Other Sectors of the Economy . . . . . . . . . . . . . . . . . . . . . .24
GDP and Per Capita GDP in 2009 . . . . .. . . . . . . . . . . . . .25
THE OVERALL BALANCE OF THE ECONOMY . . . . .. . . . . . . . .29
The Overall Balance of the Economy . .31
The Sectoral Distribution of Fixed Capital Investment Spending . . . . . . . . .36
Investment Incentive Certificates . . . . . . . . . . . . . . . .38
Foreign Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
THE BALANCE OF PUBLIC FINANCING . . . . . . . . . . . . . . . .43
The Balance of Public Financing . . . . . . . . . . . . . . .45
The Public Debt . . . . . . . . . .  . . . . . . . . . . . . . . . . . . . . .45
Internal Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
External Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Privatization . . . . . . . . . . . . . . . . . . . . . . . . . . .50
The Social Security Agencies . . . . . . . . . . . . . . . . . . . . . .50
The Central Administration Budget . . . . . . . . . . . . . . . . . . . .50
POPULATION AND EMPLOYMENT . .  . . . . . . . . . . . . . . . . . .55
Population and Employment . . . . . . . . . . . . . . . . . . . . . .57
The Structure of Employment . . . . . . . . . . . . . . . . . . . . . . . . .57
The Sectoral Distribution of Employment . . . . . . . . . . . . . . . . . . . . . . .57
The Population Covered by Social Security Programs . . . . . . . . .59
MONETARY DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . .61
Monetary Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Developments in the Analytical Balance Sheet of the Central Bank . . . . . . . . . .. . . .63
Developments in the Stand-by Balance Sheet . . . . . . . . . . . . . . . . . .64
Developments in Deposits, the Volume of Credit and the Monetary Aggregates . . . . . . . . . . .65
The Foreign Exchanges . . . . . . . . . . . . . . . . . . . . . .67
Real Exchange Rates in 2009 . . . . . . . . . . . . . . . .68
PRICE MOVEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Price Movements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
The Consumer Price and Cost of Living Indexes . . . . . . . . . . . .71
The Producer Price and Wholesale Price Indexes . .  . . . . . . . . . . .73
FOREIGN TRADE . . . . . . . .  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77
Foreign Trade . . . . . . . .  . . . . . . . . . . . . . . . . . . . . . . . . . .79
Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
Imports . . . . .  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
Oemeler Dengesi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83
THE ECONOMY, THE OVERALL BALANCE OF THE ECONOMY AND
THE ESTIMATED BUDGET IN 2009 . . . . . . . .  . . . . . . . . . . . . . . . . . . .85
The Economy, the Overall Balance of the Economy, and the Estimated Budget in 2009 . . . . . . . . . .87
Targets in the Overall Balance of the Economy . . . .. . . . . . . . . . .87
The Central Administration Budget .  . . . . . . . . . . . . . . . . . . .87
EXPECTATIONS IN INFLATION AND FOREIGN TRADE IN 2009 . . .89
Expectations in Inflation and Foreign Trade in 2009 . . . . .. . . . . . . . . .91
Inflationary Expectations in 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91
Expectations in World Foreign Trade in 2009 . . . . .  . . . . . . . . . . . . .91
Expectations in Turkey抯 Foreign Trade in 2009 . . . .. . . . . . . . . . . . .91
The Current Account Balance . . . . . . .. . . . . . . . . . . . . . . . . . . . .91
SUPPLEMENTARY TABLES . . . . . .  . . . . . . . . . . . . . . . . . . . . . .93

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