Presentation of the OECD 2018 Economic Survey of Turkey

2018 OECD ECONOMIC SURVEY OF TURKEY

Upgrading business investment Paris, 13 July 2018 http://www.oecd.org/eco/surveys/economic-survey-turkey.htm

@OECDeconomy @OECD

Growth remains strong despite headwinds Annual GDP growth in % 12

12

10

10

8

8

6

6

4

4

2

2

0

0

-2

-2

-4

-4

-6

2008 2010 2011 2012 2009 Source: OECD Economic Outlook database.

2013

2014

2015

2016

2017

-6

2

The dispersion of incomes has narrowed Income convergence

Growth of real average disposable incomes, 2007-16, % 25

25

20

20

15

15

10

10

5

5

0

Poorest

2

3

4

5

6

7

8

9

Richest

0

Equivalised disposable income deciles

Source: Turkstat.

3

Tax and transfers can play a more important role Gini coefficient, 2015 or latest year

0.60

After taxes and transfers

Before taxes and transfers

0.60 0.55

0.50

0.50

0.45

0.45

0.40

0.40

0.35

0.35

0.30

0.30

0.25

0.25

0.20

0.20

ISL SVN SVK DNK CZE FIN BEL NOR AUT SWE LUX HUN DEU POL FRA KOR CHE IRL NLD CAN ITA EST JPN PRT AUS GRC ESP LVA NZL GBR ISR USA TUR CHL MEX

0.55

Source: OECD (2018), OECD Income Distribution (database).

4

Women continue to suffer from unequal opportunities Composition of the working-age population (over 15 year-old), in per cent Formal salaried Formal unpaid family workers

Informal salaried Informal unpaid family workers

Formal self-employed Unemployed

Informal self-employed Inactive

100 90 80 70 60 50 40 30 20 10 0

2000

2005

2010 Men

2016

2000

2005

2010

2016

Women

Note: Formal unpaid family workers are family members doing household work, paying social security contributions and earning pension rights.

Source: Turkstat.

5

Carbon emissions per unit of GDP are still not falling CO2 per GDP - production based kg/USD, 2010 PPP prices

0.6

0.6 Turkey

0.5

OECD

0.5

0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1

0.0

1990

1993

1996

1999

2002

2005

2008

2011

2014

0.0

Source: OECD (2018), Green Growth Indicators.

6

MACROECONOMIC REBALANCING IS REQUIRED

7

Investment is dynamic but increasingly funded by debt Total investment and total debt, % of GDP 31

Investment (left axis)

220

Debt (right axis)

30

215

29

210

28

205

27

200

26

195

25

190

24

2010

2011

2012

2013

2014

2015

2016

2017

185

Source: OECD Economic Outlook and OECD Financial Accounts (databases).

8

Construction has gained a very large weight in investment Gross fixed capital formation in construction, % of GDP 19

TUR

MEX

POL

OECD

19

17

17

15

15

13

13

11

11

9

9

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

7

Source: OECD Economic Outlook database.

9

The export sector has grown below potential Shares in world exports, index 2000 = 100 225

TUR

CZE

KOR

POL

225

200

200

175

175

150

150

125

125

100

100

75

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

75

Source: OECD Economic Outlook database.

10

The deficit of current account is rising Current account balance, % of GDP 0

0

-1

-1

-2

-2

-3

-3

-4

-4

-5

-5

-6

-6

-7

-7

-8

-8

-9

-9

-10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

-10

Source: OECD Economic Outlook database.

11

Debt sustainability is at risk 100 90

Gross external debt, in per cent of GDP Baseline

2010-17 average

Current account shock

e-shock

100 90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Note: The "2010-17 average" scenario extends average parameters observed over 2010-17 until 2050. The "baseline" scenario assumes an interest rate of 1.5% in 2018 rising by 0.5 percentage points per year and stabilising at 4.0% from 2023 onwards, real GDP growth of 5%, inflation of 7%, effective exchange rate depreciation of 5%, a current account deficit of 4% and net FDI inflows of 1.5% of GDP per annum. "CA shock" assumes a current account deficit of 6% while the "e-shock" scenario assumes 7% nominal depreciation per year (all other fundamentals equal to baseline for both shock scenarios).

Source: OECD calculations based on IMF (2018), Balance of Payments (database) and OECD (2018), OECD Economic 12 Outlook (database).

Fiscal consolidation is at risk General government cyclically-adjusted balance, % of GDP 0

0 Turkey

-1

Advanced economies

Emerging market and middle-income economies

-1

-2

-2

-3

-3

-4

-4

-5

-5

-6

-6

-7

-7

-8

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

-8

Source: IMF (2018), Fiscal Monitor, April 2018.

13

Inflation is rising sharply Inflation expectations and inflation target, y-o-y % changes

11

12-month ahead

24-month ahead

11

Inflation target

10

10

9

9

8

8

7

7

6

6

5

5

4

4

3

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

3

Source: Central Bank of the Republic of Turkey.

14

The Lira has depreciated significantly Real exchange rate (2010=1) 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60

Source: OECD Economic Outlook databases.

15

The recent tightening of monetary policy is welcomed The interest rate corridor and the main funding rates

%

Interest rate corridor CBRT average funding rateš Late liquidity window lending rate²

O/N interest rate in BIST Interbank Repo Marketš 1 week repo rate

%

20

20

15

15

10

10

5

5

0 2012

2013

2014

2015

2016

2017

2018

0

16

POLICY RECOMMENDATIONS

 Publish quarterly general government accounts according to international standards and a regular Fiscal Policy Report covering all contingent liabilities and quasi-fiscal activities of the government.  Tighten fiscal and quasi-fiscal policies, macroprudential rules and rein in housing loans.

strengthen

the

 Restore the credibility of monetary policy by committing all stakeholders to the independence of the central bank.  Forward guidance should be provided on how the authorities plan to achieve the inflation target.

17

UPGRADING THE BUSINESS SECTOR WITH HIGHER QUALITY AND BETTER ALLOCATED INVESTMENTS

18

Entrepreneurial dynamism contrasts with regulatory restrictions Gap between entrepreneurial dynamics and institutions Gap between entrepreneural dynamics and institutional quality (left axis) 0.3

Quality of institutions that support entrepreneurship (right axis)

Entrepreneurial qualities (right axis)

1.2

0.2

1.0

0.1

0.8

0.0

0.6

-0.1

0.4

-0.2

0.2

-0.3

TUR

CHL

HUN

ITA

MEX

POL

PRT

CZE

USA

ESP

KOR

DEU

Source: Global Entrepreneurship Research Association, London Business School, Global Entrepreneurship Monitor (database, http://www.gemconsortium.org/data) and Global Entrepreneurship and Development Institute, Global Entrepreneurship Index 2018. The quality of institutions supporting entrepreneurship and entrepreneurial qualities are scored between 0-1.

0.0

19

Small firms considerably lag behind in labour productivity Labour productivity of small firms relative to large firms, large firms=100, 2014 or latest 45

45

40

40

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

MEX

TUR

HUN

CZE

POL

PRT

0

Note: Small (large) firms are defined as those employing less than 10 (more than 250) persons.

Source: OECD (2017), Entrepreneurship at a Glance 2017.

20

Informality has declined but remains high Share of informal activities in total value-added, 2017, % 30

30

25

25

20

20

15

15

10

10

5

5

0

CZE

PRT

ESP

GRC

POL

HUN

TUR

0

Source: Medina and Schneider, "Shadow Economies Around the World: ", 2018.

21

Machinery and equipment investments grow at uneven paces across firm types Manufacturing, lagged machinery and equipment stock (real prices) % points deviation from average 10 8

Small firms Listed firms Unweighted firm average (right axis)

Medium firms Young high-tech firms

% changes 10 8

6

6

4

4

2

2

0

0

-2

-2

-4

-4

-6

-6

-8

-8

-10

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-10

Note: Investment growth rates of small firms (employing less than ten workers and which are more than five years old); of medium-sized firms (employing from 50 to 249 workers); of firms listed on the stock exchange; and of young technologyintensive firms (less than four year old firms in upper-middle and high technology sectors) are shown in percentage point deviation from the manufacturing sector average, after controlling for sectoral composition differences.

Source: OECD/CBRT dataset on the basis of Enterprise Information System (EIS).

22

Medium-sized firms and high-tech start-ups are particularly leveraged % points deviation from average 8 Small firms

Total liabilities to total assets of firms, manufacturing Medium firms

Young high-tech firms

Ratio in %

Unweighted firm average (right axis)

62

6

60

4

58

2

56

0

54

-2

52

-4

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

50

Note: Small firms (employing less than ten workers and which are more than five year old), medium-sized firms (employing from 50 to 249 workers), and young technology-intensive firms (less than four year-old firms in upper-middle and high technology sectors) ratios are shown in percentage point deviation from the manufacturing sector average, after controlling for sectoral composition differences.

Source: OECD/CBRT dataset on the basis of Enterprise Information System (EIS). Note: Small firms (employing less than ten workers and which are more than five year old), medium-sized firms (employing from 50 to 249 workers), and young technology-intensive firms (less than four year-old firms in upper-middle and high technology sectors) ratios are shown in percentage point deviation from the manufacturing sector average, after controlling for sectoral composition differences.

Source: OECD/CBRT dataset on the basis of Enterprise Information System (EIS).

23

Digitalisation advances but core applications should spread more broadly Digitalisation among enterprises, 2017, % of all enterprises 50

50

Share of enterprises having : A website and using social media

45

45

Enterprise resource planning software

40

40

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

PRT

TUR

CZE

HUN

POL

0

Source: Eurostat (2017), The Digital Economy and Society Index.

24

R&D expenditures are low but rising R&D expenditure, % of GDP 1.8

Turkey

1.8

OECD

1.6

1.6

1.4

1.4

1.2

1.2

1.0

1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0

1995

2000

2005

2010

2015

0.0

Source: OECD Main Science and Technology Indicators database.

25

The credit costs of all firms can be reduced considerably EMBI spreads

EMBI spread and domestic interest rate

Basis point

500

TUR MEX

3-year moving averages

CZE

CHL POL

400 300 200 100 0 -100 2013

2014

2015

2016

2017

2018

18 16

600 Real interest rate on business loans (left axis) EMBI spread (right axis) 550

14

500

12

450

10

400

8

350

6

300

4

250

2

200

0

2005 2007 2009 2011 2013 2015 2017

150

Source: Thomson Reuters Datastream (database) and Central Bank of the Republic of Turkey.

26

Equity risk premia are high Price/earning ratio, average first half 2018 30

30

25

25

20

20

15

15

10

10

5

5

0

RUS

TUR

HUN

KOR

POL

CZE

DEU

ITA

CHN

MYS

ESP

MEX

BRA

USA

0

Source: Thomson Reuters Datastream (database).

27

POLICY RECOMMENDATIONS  To reduce the funding costs of the economy improve the international credibility of governance institutions, fiscal transparency and price stability.  Carry out a strategic review to identify and address the most binding constraints to the development of the currently weak ecosystem for equity financing of investment.  Evaluate the uptake of the various recent social security contribution cuts granted and make permanent those which have proven most supportive of formalisation, financing this through better tax enforcement.  Encourage family firms through technical support and awareness campaigns to develop standard corporate governance, professional management and financial transparency.

28

POLICY RECOMMENDATIONS (cont.)  Enforce the compulsory auditing rules of the new Company Law. Reduce audit costs - while maintaining audit quality standardsvia tax incentives in the early years of audited financial reporting.  Undertake a cost-benefit analysis of the credit guarantee system and normalise its size, tighten the macroprudential rules and contain the quasi-fiscal activities of public financial institutions.  Complete and enforce a holistic strategy of digitalisation, encompassing education, life-long learning and infrastructure and internet access policies.

29

STRENGTHENING TURKEY’S INSTITUTIONAL AND HUMAN CAPITAL BASIS

30

The quality of institutions can be improved (Rule of law, control of corruption, government effectiveness) 70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

2006

2011 Rule of Law

2016

2006

2011

2016

Control of Corruption

2006

2011

2016

0

Government Effectiveness

Source: World Bank (2017), Worldwide Governance Indicators.

31

The quality of education should be improved Secondary students' mathematics skills Turkey

OECD average 14

500

12

480

10

460

8 440

6

420

4

400 380

2 2006

2012 PISA score

2015

0

2006

2012

2015

Share of top performers, %ยน

1. Proficiency level 5 or above on a scale of 1 to 6.

Source: OECD (2016), PISA 2015 Results: Excellence and Equity in Education (Vol. I) and OECD (2016), Skills Matter: Further Results from the Survey of Adult Skills.

32

The skills of the working age population should be strengthened Adult population's numeracy skills % of 16-65 year-olds 100

Below level 1

Level 1

Level 2

Level 3

Level 4/5

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

Chile

Turkey

Poland

OECD

Czech Republic

0

Source: OECD (2016), PISA 2015 Results: Excellence and Equity in Education (Vol. I) and OECD (2016), Skills Matter: Further Results from the Survey of Adult Skills.

33

Future growth prospects hinge on reforms Projected gains in real GDP per capita from gradual convergence with OECD good practices, % difference from baseline 35 30

Rule of law Labour market policies Educational attainment Product market regulation

Total

35 30

25

25

20

20

15

15

10

10

5

5

0

0

2020 2025 2030 2035 2040 Source: Estimations based on "OECD Long-term Scenarios for the World Economy" database.

34

POLICY RECOMMENDATIONS  Strengthen the rule of law, judiciary independence and step up the fight against corruption.  To reorient spending to top priority areas, implement the strategic and performance-oriented budgeting objectives of the Public Finance Law 5018 to help reorient spending.  Grant more autonomy and resources per student to education institutions, against greater performance accountability.  Facilitate further women’s labour force participation, notably by increasing the provision and quality of early child education and child and elderly care.  Assess the additional impact on carbon emissions and use economic instruments such as harmonised pollution taxes and emission permits to reduce them

35

For more information Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

http://www.oecd.org/eco/surveys/economic-survey-turkey.htm 36