Presentation of the Economic Survey of Turkey 2021

OECD ECONOMIC SURVEY OF TURKEY 2021

BOOSTING THE RECOVERY Paris, January, 14th 2021 http://www.oecd.org/economy/turkey-economic-snapshot/ @OECDeconomy

@OECD

The pandemic hit Turkey severely New daily cases per million inhabitants 7-day moving average 750

TUR

ITA

POL

PRT

HUN

625 500 375 250 125 0 07-Feb

07-Apr

07-Jun

07-Aug

07-Oct

Source: European Center for Disease and Prevention Control (ECDC) though Our World in Data.

07-Dec

2

Government support centred on massive quasi-fiscal credit stimulus Fiscal and quasi-fiscal support during the COVID-19 pandemic In % of GDP Additional spending and foregone revenue

Equity, loans, and guarantees

35 28 21 14

Source: IMF Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 pandemic.

DEU

JPN

GBR

FRA

CZE

ESP

TUR

BEL

KOR

DNK

FIN

POR

CHE

NOR

SWE

POL

SGP

NLD

CAN

NZL

USA

CHL

0

AUS

7

3

Domestic demand responded sharply Real GDP growth and its components Q-o-q growth in % (LHS), %pts (RHS)

%, Q-o-q growth

% pts

24

24

16

16

8

8

0

0

-8 -16 -24

Private consumption

Government expenditure

-8

Gross captital formation

Exports of goods and services

-16

Imports of goods and services

Real GDP growth (LHS)

2019Q1

2019Q2

2019Q3

2019Q4

2020Q1

2020Q2

2020Q3

-24

Source: OECD (2020), OECD Economic Outlook: Statistics and Projections (database).

4

-8 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4

External imbalances increased Current account balance In % of GDP

4

2

0

-2

-4

-6

Source: OECD Economic Outlook: Statistics and Projections (database).

5

Recent monetary tightening and credit containment are welcome Consumer loan growth In %, annualised, 13-week moving average, FX adjusted 250

Private Banks

200

Public Banks

150 100 50

Source: Turkish Data Monitor.

Dec-20

Oct-20

Aug-20

Jun-20

Apr-20

Feb-20

Dec-19

Oct-19

Aug-19

Jun-19

Apr-19

Mar-19

Dec-18

Nov-18

Sep-18

Jul-18

May-18

Mar-18

-50

Jan-18

0

6

The recovery will be gradual and risks persists Macroeconomic projections Annual percentage changes, volumes (2009, prices)

Gross domestic product Private consumption Gross fixed capital formation Exports Imports Unemployment rate (%) Consumer price index

2021

2022

2.6 3.9 2.6 7.6 9.3 13.7 12.0

3.5 5.7 3.8 7.4 8.8 14.5 10.0

Source: OECD Economic Outlook 2020 Issue 2 projections for Turkey.

7

Recommendations for short-term support  Use the room still available in public finances for transparent, temporary and targeted direct fiscal supports.  Replace the concessional loans and one-off transfers to households at risk of poverty into a targeted direct allowance for a limited period.  Resume fiscal tightening once the recovery is firmly underway.  Continue to offer support to workers and fundamentally sound firms in temporarily affected activities (e.g. tourism).

8

SECURING LONGER-TERM MACROECONOMIC STABILITY

Risk premia are high EMBI spread Basis points

Basis point 900

Turkey

Chile

Mexico

Poland

750 600 450 300 150 0

2013

2014

2015

2016

2017

2018

2019

2020

Source: Refinitiv.

10

Public debt will rise substantially

90

% of GDP

Baseline

Public debt scenarios General government debt, in % of GDP Higher ageing costs

Structural reforms

Lower risk premia

75 60 45 30 15 0

2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

Source: OECD calculations.

11

Corporate debt is high Corporate debt Total liabilities in % of total assets

% 80

Micro

75

Small and medium

Large

Young startups

70 65 60 55 50

2006

2008

2010

Source: Entrepreneur Information System (EIS).

2012

2014

2016

2018

12

Without re-balancing, external debt will become unsustainable External debt scenarios Gross external debt, in % of GDP 200

160

Baseline

Interest rate shock

Current account shock

Exchange rate shock

Risk premium shock

120

80

40

0

2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

Source: OECD calculations.

13

Bad loans might rise again Non-performing loans In % of total cash loans

10

Banking sector

Domestic private

Public

Foreign

8 6 4

Source: Source: IMF (2020), IMF Financial Soundness Indicators Database and Banking Regulatory and Supervisory Authority (BRSA).

Nov-20

Sep-20

Jul-20

May-20

Mar-20

Jan-20

Nov-19

Sep-19

Jul-19

May-19

Mar-19

Jan-19

Nov-18

Sep-18

Jul-18

May-18

Mar-18

0

Jan-18

2

14

The credibility of the inflation target should be restored Inflation expectations have risen In %, y-o-y growth rate

18

12-month ahead

15

24-month ahead

Target

12 9 6 3 0

2006

2008

2010

2012

2014

2016

2018

2020

Source: Refinitiv, and OECD Main Economic Indicators (database).

15

Recommendations to secure longerterm macroeconomic stability  Outline and communicate a coherent macroeconomic policy framework encompassing fiscal, quasi-fiscal, monetary and financial policies.  Restore the independence of the central bank. Maintain the real policy interest rate in positive territory as long as inflation and inflation expectations diverge from official projections and targets.  Replenish foreign reserves as conditions allow and actively communicate on the foreign reserve position according to the information needs of financial markets.  Re-evaluate and reduce the weight of government-owned financial institutions.  Disclose the results of the stress tests of individual banks and of the banking system as a whole to the public.

16

UNLEASHING THE FULL POTENTIAL OF THE BUSINESS SECTOR

Turkey has a remarkably entrepreneurial population

70

%

Share of respondents who indicate that fear of failure would prevent them from setting up a business 2018, Percentage of 18-64 year-old population

60 50 40 30

10

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

20

Source: Global Entrepreneurship Monitor (2019).

18

Entry and exit rates in the business sector are high % 16

Average entry and exit rates in international comparison In % of all firms in business sectors, average 1998-2015 Entry rates

12 8 4 0 -4 -8

Source: OECD Structural Analysis (STAN) Database.

JPN

ITA

ESP

FIN

SWE

BEL

NOR

CAN

PRT

HUN

NLD

AUT

TUR

-16

FRA

Exit rates

-12

19

Large firms are a lot more productive

Thousand 180

Productivity across firm sizes over time Real value added per employee, in Turkish Lira Micro

Small to medium

Large

Young startups

150 120 90 60 30 0

2006

2008

2010

2012

2014

Source: World Bank and the Central Bank of the Republic of Turkey.

2016

2018 20

Informality remains high Share of unregistered employment 2019, in % of total, by firm size

50 40 30 20 10 0

Total

Source: TurkStat (2020).

Less than 11

11-19

20-49

50 and more 21

The cost of capital of listed firms is high

10

%

A. Cost of equity 2018, in %

B. Cost of debt 2018, in % 10

8

8

6

6

4

4

2

2

0

CHL ESP ISR

ITA MEX PRT POL TUR

Source: OECD calculations based on Refinitiv.

0

%

PRT ITA ESP POL ISR CHL MEX TUR 22

Turkey is falling behind in digitalization 100

Adoption of basic and advanced ICT tools and activities Business economy, 2019 or latest year available Turkey

OECD

Best performing country

80

60

40

20

0

ERP

CRM

E-sales

Source: OECD ICT Access and Usage by Businesses database..

Social media

Cloud computing

Fast broadband 23

Recommendations to unleash the full potential of the business sector  Facilitate new equity injections in order to restore the investment capacity of non-financial firms after the Covid shock.  Remove remaining obstacles to firms’ upscaling and transition to the formal sector.  Implement the recently introduced arbitration, mediation and framework agreement measures for financial restructurings.  Be prepared to phase in further measures to help courts to deal with insolvencies in case of need.  Make progress, in collaboration with EU partners, with the extension of the Customs Union agreement to agriculture, services and public procurement.  Develop a holistic strategy for digital skills and upgrade digital abilities in school curricula.

24

EMPLOYMENT GROWTH WITH HIGHER QUALITY JOB CREATION IS KEY FOR SOCIAL COHESION

Employment rates have fallen 90

Employment rate 15 year-olds over, in % of total working age population

%

Men

75

Women

54

Total (RHS)

50

Sep-20

Jul-20

May-20

Mar-20

Jan-20

Nov-19

Sep-19

Jul-19

May-19

Mar-19

Jan-19

Nov-18

Sep-18

Jul-18

30

May-18

0

Mar-18

34

Jan-18

15

Nov-17

38

Sep-17

30

Jul-17

42

May-17

45

Mar-17

46

Jan-17

60

Source: TurkStat (2020).

26

Labour market reforms would facilitate job creation Employment protection regulation 2019, Scale from 0 to 6 (most strict)

5.0

Temporary work agency contracts

Fixed-term contracts

4.0

3.0

2.0

1.0

0.0

CZE

POL

MEX

CHL

PRT

GRC

ESP

ITA

TUR

Source: OECD Employment Protection Legislation Database.

27

Digital skills are weak Individuals with basic or above basic overall digital skills 2019 or latest year available, in % 90 75 60 45 30

NOR

NLD

FIN

GBR

SWE

DEU

DNK

AUT

LUX

EST

CZE

BEL

OECDยน

FRA

ESP

LUT

SVN

IRL

PRT

GRC

HUN

POL

LVA

ITA

0

TUR

15

Source: Eurostat (2020).

28

Recommendations to improve employment and job quality  Promote women’s labour force participation by increasing the provision and quality of early child care and education.  Make fixed-term and temporary work contracts more flexible in the formal sector.  Make statutory minimum wages more affordable for lower productivity firms by promoting enterprise level bargaining according to local conditions.  Grant employer and employee social security cost exemptions for all young workers for a temporary period.  Consider exempting employers from all or part of of health insurance contributions on a durable basis, by financing these cuts from other fiscal sources and savings.  Develop a holistic strategy for digital skills and upgrade digital abilities in school curricula.

29

LARGE GAPS IN PUBLIC GOVERNANCE AND ENVIRONMENTAL SUSTAINABILITY

The rule of law and the independence of the judiciary should be improved Rule of law Overall score

Constraints on government power Government powers are effectively limited by the judiciary 1.0

1.0 0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0

0.0

TUR MEX POL ITA CHL PRT CZE KOR DEU DNK

TUR MEX POL CHL KOR ITA CZE PRT DEU DNK

Source: 2020 World Justice Project.

31

Fighting corruption should be a priority Corruption Perception Index Scale: 0 (worst) to 100 (best), 2019 90 75 60 45 30

NZL

DNK

NLD

DEU

CAN

BEL

JPN

USA

FRA

CHL

PRT

POL

CZE

SVK

HUN

TUR

0

MEX

15

Source: World Bank, Worldwide Governance Indicators.

32

Air quality is low 30 25

Annual mean concentration of particulate matter PM2.5 2017 Limit recommended by World Health Organisation

20 15 10 5 0

ESP

GRC

CZE

POL

Source: OECD (2020), "Air and Climate" and "Waste" in OECD Environment Statistics (database) and EEA (2020), Air pollution statistics.

TUR

33

Recommendations to improve public governance and environmental sustainability  Improve public governance and rule-of-law, with special focus on the independence of the judiciary.  Adopt a strategy of fight against corruption.  Implement a carbon pricing policy.  Prepare and publish daily local air quality indicators according to international standards in the entire territory and develop a holistic strategy to improve air quality.  Consider tax reliefs for energy-saving investments in buildings.  Prepare the business sector to the introduction of border carbon taxes by trade partners.

34

REFORMS ARE KEY FOR A BETTER FUTURE

Structural reforms and stronger economic institutions would boost growth Policies

Additional annual growth compared to a no policy baseline over the next 10 years

Scenario 1: Market reform package • • •

Improve product market regulations Improve employment protection regulation Decrease corporate income taxes and labour tax wedges

+0.4%

Scenario 2: Institutional and social progress package • •

Increase quality of education Increase rule-of-law

Scenario 3: Market reforms and institutional and social progress package

+0.5%

+0.9%

36

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.

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