MAJOR MACRO ECONOMIC INDICATORS

(e) Estimate (f) Forecast

RISK ASSESSMENT

Growth rate suffers from weakening domestic demand

In 2014, household consumption, the main engine of growth (70% of GDP), will suffer from the combined effects of the depreciation of the Turkish lira, high inflation, rising interest rates and the measures aimed at controlling imports (namely increased taxes on imported cars). In this climate of slowing growth, new arrivals on the labour market could have difficulty finding a job. As a result unemployment could increase to more than 10% of the active population (9.9% in November 2013). As for industry, the improvement in price competitiveness associated with the depreciation of the lira as well as the upturn in external demand should benefit the high added value export sectors (automobile, durable consumer goods) and the tourism-related services. In addition, public investments will continue in the run-up to the local and presidential elections, respectively scheduled for March and August 2014. The banking sector is well capitalised, with non-performing loans held at less than 3% of total loans. The increases in interest rates will however be a burden on private sector investment as well as on household credit. Finally, together with other pressures on consumption, inflation will rise with the cost of imported products following the depreciation of the Turkish lira.

Exchange rate vulnerability

Management of public finances remains conservative. This has resulted in a primary balance (excluding debt interest payments) that is in surplus. The level of revenues in 2014 will suffer as a result of weak consumption. As a result, the current public deficit does not undermine the viability of the public debt: the level of which is moderate while maturity and proportion of local currency increasing.

Although imports should fall, the current account deficit in 2014 will remain substantial. The scale of this, the second highest in the world by value after the United States, represents the principle point of vulnerability of the Turkish economy and its financing will continue to depend on volatile capital inflows. The ongoing tightening of US monetary policy, heralded in May and begun in December 2013, has triggered an outflow of capital from the major emerging economies. Turkey has been hit especially hard with risk aversion further exacerbated by the political conflicts that surfaced in December. The Turkish lira depreciated by 20 % in 2013. The late reaction from the central bank at the end of January 2014 was significant with the raising of its main interest rates from 425 to 550 base points. The central bank reserves (excluding gold) previously had declined by USD 10 billion to USD 105 billion. They are still however sufficient, representing 5 months of imports. In 2014, reflecting the political tensions and the continuing high level of the current account deficit, the Turkish lira could again prove to be highly volatile.

Political context under pressure

The lack of political visibility is also a destabilising factor for the Turkish economy. The government of Prime Minister Erdogan has been weakened following the revelations of December 2013 concerning corruption involving ministers’ families, members of the AKP and various business people close to the government. The second instalment of the scandal began in early February with phone recordings between the Prime Minister and his son. At the same time large-scale purge have been carried out by the government involving the reassignment of thousands of senior members of the police, judges, the reform of the HSYK (Judge and Prosecutors High Council), as well as the passing of a law aimed at controlling the internet. The designated responsible is the Gülen movement, a powerful worldwide network with schools (dershane) and Turkish cultural centres. Indeed, Fethullah Gülen says he is becoming concerned about the increasingly authoritarian drift of the Prime Minister. AKP wants to find ways of limiting the spread of this movement. The upcoming local elections, at the end of March, will be held in this extremely sensitive political context. AKP could lose its domination. If not, and if its ascendency is confirmed, bearing in mind the lack of alternatives, Prime Minister Erdogan could be a candidate in the presidential elections in August (the first with universal suffrage), especially as he cannot hold the office of Prime Minister for a third time in succession. The political climate will therefore remain tense, intensified by the weariness among the population with regard to the current executive power.

Moreover, the peace process begun in May 2013 with the Kurdistan Workers Party (PKK) remains precarious. Finally, the presence of 500,000 refugees and the Syrian military attacks on Turkish territory are also sources of tension that could worsen during 2014.

Automotives

The automotive sector came to a halt after the catastrophe caused by the tsunami in Japan, which paralysed car factories and their suppliers. Despite the slowdown in the eurozone, which is directly affecting the motor industry, the Turkish automotive sector is growing, with new investments and constant growth in employment. Car producers in Turkey created 4,000 jobs in 2011 and are expected to increase this figure further in 2012, unlike most of their counterparts in Europe, which have begun to sack workers in anticipation of a slowdown in European markets. Toyota, for example, announced in November that it wanted to increase production in Turkey and is expected to invest €150 million and take on 400 workers at the Sakarya factory, following the example of Ford and Fiat, which are also planning to invest.

Pharmaceuticals

Turkey is one of the main European markets, sustained by very dynamic domestic demand. However, the sector is weakened by the existence of a number of big players. In 2011, the government twice reduced the price of medicines in order to control health spending. These adjustments, by greatly reducing profit margins, put pressure on manufacturers, already suffering from exchange rate fluctuations. They also caused liquidity problems for the under-capitalised pharmacies, which could lead to mergers or bankruptcies. Despite the negative effects of government measures, the Turkish market is expected to grow between 2011 and 2015 and to continue to attract foreign investors. For example, the America pharmaceutical group, Eli Lilly, is said to have chosen Turkey for its future investments.

Consumer electronics

The domestic consumer electronics market, which includes IT equipment, mobile handsets, and video, audio and electronic games products, reached €7 billion in 2011. Government projects play a key role in this sector. The €1.2 billion “IT for Education” programme is intended to equip 40,000 schools with the most recent information technology within 3 years. Strong competition and low profit margins are, however, the two main threats to the sector. In response to this, mergers are expected in the near future. The information technology sector will, nevertheless continue to attract big international groups because of the strong growth potential linked to the youth of the Turkish population (26% of the population are between 10 and 19 years).

Textiles

Thanks to its level of technical development, its skilled workforce and its geographic location, Turkey is one of the world main textile suppliers. The textile industry represents a significant share of GDP, with annual production reaching $20 billion and a large share of exports. However, the sector’s growth remains dependent on the development of international trade. In 2009 and 2010, the decline in external demand affected the competitiveness of Turkish exports. In 2011 the sector had to face the instability of the Turkish lira. Turkish textile businesses’ export experience will enable them in future to maintain a favourable position on the global market, through the development of higher-value-added products, brand creation and the opening of new markets in Africa, in the Middle East and the CIS countries.

PAYMENTS

In the domestic market, traditional instruments for credit payment are still in common use as they not only constitute a means of payment but also can often serve as negotiable instruments.

This is the case for promissory notes in regular use for commercial transactions by smaller and medium-sized companies. Similarly, with the postdating of cheques a commonplace practice, the cheque serves as both a title of payment and a credit instrument. Cheques circulate in the domestic market as negotiable instruments until the maturity date.

The new law on cheques, in force since December 2009, focuses on protection of the rights of cheque holders (beneficiaries) and institutes three categories of cheques – cheques for business users, cheques for consumers, and pre-printed bearer cheques – to facilitate tracking this payment instrument and to combat the underground economy.

Although banks are now required to exercise greater vigilance as regard the profile of their clients, the law also provides for large financial sanctions payable by the drawer of the cheque in case of non-payment.
Likewise, according to the amendment on 3 February 2012, the drawer of a dishonoured cheque will be banned from drawing cheques and / or opening cheque accounts for 10 years, by decision of the public prosecutor (administrative sanction instead of penal sanction).

There are, as such, particular advantages deriving to creditors from the use of negotiable instruments like bills of exchange, promissory notes, and cheques – provided they have been duly established and that any legal action is taken within the legal limitation period. They enable creditors, without obtaining a prior ruling, to approach directly the enforcement office (Icra Dairesi) for service on the debtor of an injunction to pay and then, as necessary, to proceed with the seizure of the debtor’s assets.

The debtor has 10 days to settle the arrears in question or 5 days to approach the enforcement court and to oppose payment on grounds that, for example, the signature on the document is not his own or that the debt no longer exists. In case of opposition on abusive grounds, the debtor is liable to large penalties.

Finally, for rapid and secure processing of bank transfers, the SWIFT electronic network is well-established in Turkish banking circles and constitutes the most commonly used instrument for international payments.

DEBT COLLECTION

Out of court settlement is always advisable to taking legal action, and as a result, the sending of formal notice to pay, followed up by repeated telephone calls, remains a relatively effective method. As well, on-site visits can moreover pave the way for restoring communication between the supplier and his customer and thereby enhance the chances for negotiating a transaction.

Depending on the debtor's solvency, the terms the transaction can range from payment in full to repayment by instalments, or even to a partial payment as final settlement.

In the absence of a voluntary settlement, the threat of a bankruptcy petition (iflâs) is a frequently employed tactic to elicit a response from the debtor and prompt him to repay the arrears.

In cases where the validity of the claim is disputed, the only recourse is to initiate the ordinary proceedings via a summons to appear in court.

In cases where Turkey has not signed a bilateral treaty or a reciprocity treaty with the plaintiff’s country, the plaintiff will be required to put up a surety bond, judicatum solvi, representing about 15 % of the claim, with the competent local court. It's the same with a Turkish applicant who has no permanent residence in Turkey.

At the commencement of the proceedings as well, the plaintiff must also put up one quarter of the court fees, which are proportional to the amount of the claim.

The ordinary proceedings are organized in three phases: first phase involving position statements by each party (statement of claim and statement of defence); then in a second and longer phase, the court investigates the case, examining the relevance of the evidence submitted, whether conclusive or discretionary evidence ; and finally in the main hearing that constitute the third phase, the court hears the parties and their lawyers and issues a ruling.

The civil procedure code specifically states that the judge may at any time during the legal action encourage amicable settlement of the dispute, provided that it results from a real desire by the parties to seek an out-of-court settlement via a negotiated transaction.

The “LAW ON MEDIATION IN CIVIL DISPUTES” (Law No. 6325) has entered into force completely on June 22,2013. The Law stipulates that mediation shall be applied only in the resolution of private law conflicts, including those having a foreignness element, arising from acts or transactions of interested parties who have the capacity to settle such conflicts.

In this context; mediation is defined as “a method of voluntary dispute resolution system carried out with the intervention of an impartial and independent third party who is specially trained to convene the relevant parties by way of systemic techniques and with a view to help such parties mutually understand and reach a resolution through a process of communication”.

Mediation is, first of all, is a dispute resolution system. However, this resolution system is a voluntary dispute method.

Here, the parties create their own ways of solution by themselves and they try to understand each other while doing this. Mediation is based on the principle of doing meetings and negotiations and is entirely a process of communication. While the parties are creating their own ways of solution, an impartial and independent third party (a mediator) who enables the parties to establish communication, have meetings, understand each other shall be included in the process.

On the other hand, the parties are free to apply to a mediator, to continue the process, to finalize or to abandon the process.The parties may also settle on the issue of applying to a mediator before the filing a lawsuit or while the lawsuit is pending; and the court may advise, encourage the parties to apply to a mediator.

The commercial court (asliye ticaret mahkemeleri), which is a specialized chamber of the court of first instance, is competent to hear commercial disputes and insolvency proceedings. Commercial courts exist in the main Turkish cities.

To combat against lengthy lawsuits and courts workload, the new civil procedure code, effective as of 1^st October 2011, aim to accelerate and simplify the proceedings.

Also, the parties have to submit their arguments of defence, their counter claims and available evidence at the commencement of the trial. These documents will be reviewed by the court during a preliminary hearing, in the course of which the parties will be encouraged to compromise.

The litigants’ examinations and cross examinations will now be conducted by lawyers to discharge the judges who had so far a great tendency to resort to expert opinions to assist them in the content of the judgment. That is why, the new code limits the list of technical and scientific experts registered with the Ministry of Justice.