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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. I. TURKEY AT A GLANCE. Historical Overview.

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Country Risk & Emerging Markets

Course: Professor Michel H. Bouchet

A Risk Analysis of Turkey

Daniel Smith Peter Blahnik Alberto Lopez

April 2002



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.

Turkey Crisis 1994

  • Overvaluation of TL between 1989 – 1993.

Increased Trade deficit

Capital flight

Decrease of reserves


Macroeconomic Scenario Before Nov 2000.


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.


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

















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 (%)


2000/2001 crisis

1994 crisis

Source: Central Bank of Turkey


GDP - Composition by Sector

Sectors of the economy:

Sector growth:

Source: Central Intelligence Agency



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


Source: IMF, Letter of Intent


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
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
Projected Obligations to IMF

(in millions SDRs, based on existing use of resources and holdings of SDRs)

Source: IMF, Letter of Intent

imf turkey
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
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
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
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.
  • 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.
foreign direct investment
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.
taxation investment incentives
Taxation & Investment Incentives
  • 1998 New tax Act.
  • -decrease income tax load of real & legal persons.
  • -corp. tax decreed to be 30%.
  • -withholding tax applied to dividend distributing corps. in addition to corp. tax.
  • -investment allowance » deduction on corp. revenues.
  • -VAT exemption for investment in machinery & equipment.
  • -main disadvantage – advance tax (4 periods).
  • Introduction of inflation-adjusted accounting practices from 2003.
investment infrastructure
Investment Infrastructure
  • Turkey has to improve conditions for investment.
  • Currently 19 “unnecessarily complicated” bureaucratic steps to set up a company in Turkey and takes 10 weeks.
  • Kemal Dervis plans to convene a top-level investment council once a year from 18th July.
  • Turkey also planning to establish an Investment Promotion Agency. Lack of common economic vision within government could limit positive effects of these plans.


As of 04/04/02





64 (Out of 100)


54th places


Business Environment Risk Intelligence (2001)

Political risk index: 42.

Decrease in the past few years due to:

- Political arguing between

- Warring with Kurdish separatists

- Heavy military presence in the notion’s politics

Operational Risk Index: 36

Declined from 1995’s score of 48 due to:

- Real GDP has declined by approximately 5%

- Turkey’s stock market decreased by 37.5 %

- Consumer price rose 67.3 %

Remittance and Repatriation factor: 37

Declined from 1995’s score of 48.

- Turkey is borrowing to pay interest on past economy policy

- The large trade deficit impacted Turkey’s ability to repay loans


Balance of Power (Prince Model)

Positive Influence

Economic Minister

Mr. Kemal Dervis


Mr. Ahmed Sezer

Prime Minister

Mr. Bulent Ecevit


Mr. Kivrikoglu

IMF/World Bank

Kurdistan Workers Party

Mr. Abdullah Ocallan


Mr. Alaatin Cakici

Clean Party

Mr. Erdogan

Negative Influence

strengths weaknesses
Strengths & Weaknesses



  • High inflation and weak currency
  • Political instability
  • Underground economy (corruption)
  • Economy relies on imports to fuel exports
  • Recent financial crisis (’99, ’01)
  • Kurdish separatists (war in southeast)
  • Heavy short-term debt burden
  • Cyprus dispute unresolved since 1974
  • Military influence in government
  • Natural disasters (earthquakes)
  • Strong IMF & World Bank support
  • Mr. Kemal Dervis (reliable and connections)
  • International support post Sept 11
  • Markets showing signs of recovery
  • Strong structural, banking and fiscal reforms
  • Geography (link between Europe and Asia)
  • New tax program
  • Drive to join European Union
  • Turkey is currently too risky as an investment.
  • Recommendations for the next year:
  • Monitor consistency of economic forecasts
  • Monitor implementation of IMF & World Bank reforms
  • If conditions are favourable and improved in 2003, consider investment.
  • Currently, tourism industry is the most attractive investment opportunity in Turkey.
main data sources
Main Data Sources

World Bank –



Central Intelligence Agency –

Financial Times –

Bradynet –



Moodys –

FitchIBCA –

Standard & Poors –

Economist Intelligence Unit –

The Fraser Institute –

The British Broadcasting Corporation –

CIA Director of Central Intelligence –

Press Agency Ozgurluk –

Committee of Project Journalists –

Transparency International –

Doing Business in Turkey –

Online Turkey –

The Economist –

Australia & New Zealand Banking Group Ltd. –

Central Bank of Turkey –

National Centre for Policy Analysis –


This presentation was prepared by:

Peter Blahnik –

Alberto Lopez –

Daniel Smith –