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Turkey: the trade route to higher growth opportunities

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Disclaimer :

The views expressed in this report reflect the personal views of the analysts about the subject of this report. No part of the compensation(s) of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific views in this report. This report was prepared on behalf of ING Bank N.V. (“ING”), solely for the information of its clients. This report is not, nor should it be construed as, an investment advice or an offer or solicitation for the purchase or sale of any financial instrument or product. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, ING makes no representation that it is accurate or complete in all respects. The information contained herein is subject to change without notice. Neither ING nor any of its officers or employees accept any liability for any direct or consequential loss or damage arising from any use of this report or its contents. Copyright and database rights protection exists with respect to (the contents of) this report. Therefore, nothing contained in this report may be reproduced, distributed or published by any person for any purpose without the prior written consent of the copyright holders. All rights are reserved. Investors should make their own investment decisions without relying on this report. Only investors with sufficient knowledge and experience in financial matters to evaluate the merits and risks should consider an investment in any issuer or market discussed herein and other persons should not take any action on the basis of this report. ING Bank N.V. is a legal entity under Dutch Law and is a registered credit institution supervised by the Dutch Central Bank (“De Nederlandsche Bank N.V.”) and the Netherlands Authority for the Financial Markets (“Stichting Autoriteit Financiële Markten”). ING Bank N.V., London branch is regulated for the conduct of investment business in the UK by the Financial Services Authority. ING Bank N.V., London branch is registered in the UK (number BR000341) at 60 London Wall, London EC2M 5TQ. ING Financial Markets LLC, which is a member of the NYSE, NASD and SIPC and part of ING, has accepted responsibility for the distribution of this report in the United States under applicable requirements.

Authors:

Mrs Sengül DagdevirenChief Economist ING Turkey, Economic ResearchSengul.Dagdeviren@ingbank.com.tr

Mr Julien ManceauxSenior Economist ING Belgique, Economic ResearchJulien.Manceaux@ing.be

Mr Philippe LedentSenior Economist ING Belgique, Economic ResearchPhilippe.Ledent@ing.be

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Introduction Belgium is a small, open economy. The aggregate export of goods and services accounted for 83% of the country’s GDP in 2011. External trade therefore plays a very important role in the Belgian economic cycle: generally, a recovery is kick-started by an increase in exports. This positive move then generates more activity and business confidence, creating more jobs, stimulating household income and lastly private consumption. As a consequence, it is no surprising to observe a close relationship between the evolution of international trade and Belgian activity.

However, developing the external trade of a country is challenging. The objective is to target the best product mix, ie being able to export goods that are increasingly demanded in growing markets. As such, it is important to evaluate both sectoral and geographical decompositions in order to assess the strengths and weaknesses of Belgian external trade. In previous studies1, we analysed the evolution of Belgian exports over the past decade, in order to derive some guidance for the future. In this paper, we try to look more precisely at an important emerging market that constitutes an opportunity for the Belgian economy, Turkey. Indeed, the Turkish economy is increasingly connected to the EU, and is at the same time open to emerging markets in North Africa or the Middle East.

More than stylised facts that could be found in other publications2, this special paper aims to offer some added value to those interested in exporting or doing business in Turkey. It is born of long-lasting economic know-how developed by ING in Turkey, and ‘classical’ studies of economic research in Brussels concerning Belgian external trade.

The paper is divided into four sections. In order to better understand the Turkish economy, the first section briefly considers a SWOT analysis of the country. This could help investors to establish a more precise picture in addition to the common stylised facts not published here. Given that the economic environment is a key factor in determining the attractiveness of any country, section two details recent economic developments in Turkey. Our economic outlook is also explained and illustrated by ING forecasts up to 2014. Section three offers some interesting insights into external trade between Belgium and Turkey, while section four provides our conclusion.

1 See the ING FOCUS External trade, available (in FR and NL) at this address: http://www.ing.be/about/showdoc.jsp?docid=057466_FR&menopt=pub|fbe 2 See, for example, the publication of the Belgian Agency for External Trade on the Turkish economy and external trade between Belgium and Turkey/

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1. SWOT analysis of Turkey

Strengths • The banking sector is structurally strong (following 2001

recapitalisation/consolidation/banking regulation and supervision). Moreover, sustainable fiscal discipline along with an independent central bank laid the groundwork for improving credit conditions in the market.

• Turkey benefits from its membership of a customs union with the EU (with continuing accession talks for full membership), and has been building closer economic relations with high-growth neighbouring countries that makes it a highly attractive hub for export-oriented manufacturers.

• The population is young and dynamic, allowing the country to maintain labour force advantage relative to peers at least until 2030 and supporting inward-oriented investment. Moreover, the higher education standard in Turkey is comparable with that of Belgium or the US3.

• In the last World Economic Forum (WEF) Global Competitiveness Report 2012-13, Turkey’s domestic market ranks 15th among 144 countries.

Weaknesses • The high current account (C/A) deficit increases the economy’s vulnerability to

investment flows.

• There still exists widespread tax evasion. As a consequence, government revenue is dependent on indirect taxes (c.70% of the total).

• Labour flexibility and non-wage costs are relatively higher than for peers.

• Turkey needs to build up more of its human resources base through better primary education and healthcare.

Opportunities • The government has pushed forward new pension reforms and is about to enact

labour reforms that should diminish vulnerability to external conditions and lower labour costs for businesses.

• In the last incentive programme, the government listed: mining, railways and marine transportation and freight, test centres, wind tunnels and related activities, tourism investment in certain regions, primary, middle and high school investment by the private sector, specified pharmaceutical products and the defence industry as priority investment areas.

• R&D, as well as large-scale investment that enhances technological capacity and international competitive advantage, are providing stronger incentives.

• Eligible minimum investment sizes to be lowered for chemicals, the automotive and automotive sub-industry, harbour and harbour services, the electronics industry, medicine and manufacturing.

Threats • Geopolitical risks in the region constitute the main threat to the country.

3 http://www.webometrics.info: 8.5% (14 out of 164) of total universities in Turkey rank in the world’s top 1,000 universities, while this ratio is 7.7% in Belgium (seven out of 91), 7.9% in the US (258 out of 3,263) and 20.8% in the UK (65 out of 313).

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2. Economic situation

a. Recent developments in activity

Turkey is a large and attractive market with a growing population (at a faster pace relative to peers in Europe). Turkey’s successful stabilisation following the 2001 crisis markedly improved macro fundamentals, supporting long-term growth where inflation has fallen to single digits, and also pulling rates down. The CAGR4 has risen to above 5% with less volatility along with a more prudent fiscal stance and significant improvement in public finances.

Fig 1 Growth stability strengthens…

Fig 2 …as inflation falls from double to single digits

9.3

0.9

6.08.0

-5.5

7.2 7.07.5

3.1

-3.4

6.8

-5.7

6.25.3

9.4 8.46.9

4.7

0.7

-4.8

9.28.5

3.54.8 5.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012F

2013F

2014F

CAGR-F GDP: 5%

2002-2011 CAGR GDP: 5.3%

1990-2001 CAGR GDP: 3%

125.5

10.46.2

0

20

40

60

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120

140

1990

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Source: Turkstat, ING Source: Turkstat, ING

More recently, the strong domestic demand-driven rebound from the 2009 recession pulled the external deficit up to new record levels in 2010 and 2011, where policy tamed risks from a weaker Turkish lira (TRY) and slower loan growth at the expense of temporarily higher inflation. Consequently, Turkey’s ability to manage a soft landing since mid-2011 continues to support the economic outlook.

Turkey grew 8.8% on average in 2010 and 2011 (5.3% since 2002), and growth is expected to stabilise at between 3% and 5% (ie the long-term trend) in 2012-14F. With policy-driven rebalancing between domestic and external demand since mid-2011, net exports’ contribution to annual growth turned positive, accounting for 3.4ppts of 4.9% YoY in annual GDP by mid-2012.

Fig 3 Successful soft landing: first time in history net exports turned positive in a growth year, 2012

Fig 4 Recent rebalancing in the economy has helped to tame the non-energy deficit

-6%

-2%

2%

6%

10%

14%

2002

2003

2004

2005

2006

2007

2008

2009

2010

1Q20

11

2Q20

11

3Q20

11

4Q20

11

1Q20

12

2Q20

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4Q20

12F

4Q20

13F

4Q20

14F

Private Consumption Gross Fixed Capital FormationNet Exports Change in StocksGDP

-10%-8%-6%-4%-2%0%2%4%6%8%10%

-10%-8%-6%-4%-2%0%2%4%6%8%

10%

4Q98

3Q99

2Q00

1Q01

4Q01

3Q02

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1Q04

4Q04

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1Q07

4Q07

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2Q12

GDP Growth (annual) CAB / GDP rhs

Non-energy CAB / GDP rhs

Source: Turkstat, ING Bank Source: Turkstat, CBT, ING

b. Imported energy dependence is a key structural problem

4 Compound annual growth rate (= average growth rate)

Turkey is a large and attractive market with a growing population

Turkey’s ability to manage a soft landing since mid-2011 continues to support the economic outlook

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Turkey’s C/A problem is hardly a new one and mostly structural. More than half of the deficit consists of net energy imports and accordingly, the C/A deficit is likely to remain between 7-8% of GDP in coming years (unless oil prices drop significantly). Specifically each US$10 rise in oil prices adds c.0.4-0.5% to the C/A deficit relative to GDP. Moreover, most of the weakening since the 2000s comes from the rise in oil prices in parallel with expanding global liquidity and a low interest rate environment in general. For example, if oil prices in 2011 stood at their 2003 levels, the C/A deficit would have been about 4.9ppts5 lower relative to GDP, ie 5.1% instead of 10%.

Fig 5 C/A balance (as a % of GDP)

Fig 6 Production index per hour worked (2005:100)

-12.0-10.0

-8.0-6.0-4.0-2.00.02.0

C/A Balance w/o oil price effect (2003=100)Energy import price effect C/A Balance

90

100

110

120

130

140

150

Total Industry Durable Energy

Source: CBT, Turkstat, Treasury, ING Source: Turkstat

However, as experience show, high energy prices coincide with easier external financing conditions (what we call “high global liquidity”). The deficit could then be easily financed, even if this raises the risk of a possible balance of payments (BOP) crisis.

Considering possible sources of such a risk, the IMF lists key factors behind financial and economic crises as: weak domestic financial systems; large and persistent external or domestic imbalances (including current account deficits or fiscal deficits, or both); high levels of external and/or public debt; exchange rates fixed at inappropriate levels and spillovers of economic and financial crises from other countries; natural disasters; armed conflicts or large swings in the price of key commodities, such as food and fuel6. Looking at the Turkish economy, on all of these factors except the last one which is probably more bad luck than anything else, the economy is actually robust.

In particular, the Turkish banking sector proved its resilience during the 2008-09 global crisis. In 2011, the bank capital/asset ratio was 12.3% compared with an average of 6.8% in EU and OECD countries, while the non-performing loan (NPL) ratio was 3.1% compared with 6.1% in the EU and 3.2% in OECD countries.

On the fiscal front, there is no twin deficit problem in Turkey. The general government primary surplus averaged 2.1% of GDP between 2006-11 compared with 0.3% in emerging markets (EM) and -0.9% in the Eurozone. The government continues to target a surplus above 1% of GDP in the medium term. Looking at debt levels, Turkey’s public debt to GDP averaged 42.4% between 2006 and 2011 compared with 37.2% in EM, and the IMF expects Turkey’s gap with the EM average to narrow until 2017. At 40%, Turkey’s total external debt to GDP is lower than that of Poland at 67%, Hungary at 130% and remains comparable to commodity economies, Russia (29%) and South Africa (27%).

In conclusion, as long as: (i) banks are strong enough to absorb shocks; (ii) foreign capital inflows are managed prudently; and (iii) fiscal discipline is maintained, local triggers for any BOP crisis should be very limited. In addition, high growth in recent years

5 Percentage points 6 http://www.imf.org/external/np/exr/facts/crislend.htm

High oil prices explain most external weaknesses in which the energy balance structurally has a big share

Banks are strong enough to absorb shocks, FX inflows are managed prudently and fiscal discipline is maintained, so worries of a BOP crisis should be limited 6

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has not been artificial, as it has been supported by productivity increases. Production per hour worked in 2011 was 11% higher than the long-term average, while improvements in energy, durable and capital goods manufacturing were higher. This also constitutes a safety factor.

c. Currency remains supportive of rebalancing

After eliminating overvaluation of the TRY against major currencies in 2011, the Central Bank of Turkey (CBT) successfully stabilised the currency by aggressively tightening short-term rates until recently.

New policy tools along with strong foreign currency inflows into the system have pulled FX reserves back to August 2011 levels. The CBT’s total reserves stood at US$108.7bn at end-August, lifting import coverage from 4.1 months at end-2011 to 5.2 months.

The TRY in ‘real’ terms remains 10% weaker against other EM currencies compared with its long-term average as at end-August. In nominal terms as at mid-September relative to 2009, the TRY is also the weakest among peer EM currencies against both the EUR and USD.

Looking ahead, while the CBT should continue to cap excessive volatility up/down in the TRY’s value via multiple policy tools, we see scope for slight appreciation against a 50:50 EUR:USD FX basket with the EUR/TRY driven by the EUR/USD accordingly. The currency remains supportive of the rebalancing in the economy between domestic and external demand, and monetary policy should cap both excessive appreciation and/or volatility in the currency.

Fig 7 ING interest rates and FX forecasts

2Q12 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 4Q14F

CBT policy rate (%) 5.75 5.75 5.75 5.75 5.75 5.75 6.50 6.50 2y benchmark (cmp) (%) 8.58 7.80 7.20 7.90 8.30 8.50 8.80 8.50 10y bench. (cmp) (%) 8.77 8.30 7.75 8.40 8.80 9.00 9.30 9.00 USD/TRY 1.82 1.81 1.82 1.80 1.78 1.70 1.70 1.65 EUR/TRY 2.26 2.21 2.18 2.12 2.14 2.13 2.18 2.15 EUR/USD 1.24 1.22 1.20 1.18 1.20 1.25 1.28 1.30 50:50 EUR:USD 2.04 2.01 2.00 1.96 1.96 1.91 1.94 1.90 Source: CBT, Reuters, ING

d. Attractiveness

Given the slack capacity in the economy, Turkey’s inflation problem has not been demand driven. We have also seen the unit labour cost index maintain its upward trend since 2007, while inflation experienced a downward trend. Inflation is mostly driven by food and energy prices, while the TRY’s value affects core inflation rates. More specifically, last year’s double-digit inflation was driven by a weak TRY (policy-driven in 1H11), tax hikes and food prices, which should be almost completely eliminated in 4Q12, pulling inflation down to its target range. The monetary policy framework with multiple tools has already gained confidence and tamed inflation expectations. Short-term rates are managed in a broad band (between a policy rate of 5% and 11.5% since October 2011, and 10% more recently) along with high reserve requirements, while the policy rate has been fixed since August 2011.

The TRY in ‘real’ terms remains 10% weaker against other EM currencies compared with its long-term average

We see scope for slight appreciation against a 50:50 EUR:USD FX basket

With the elimination of base effects in 4Q12F, inflation is expected to fall to its target range

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Fig 8 Turkey preserves competitiveness (2000=100)

Fig 9 Monthly minimum wages as of 2H12 (€)

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Real hourly wage (TRY)Productivity indexHourly wages in EUR

0 500 1,000 1,500

BulgariaRomaniaLithuania

LatviaEstonia

Czech Rep.HungarySlovakia

PolandCroatiaTurkey

PortugalGreece

SpainSlovenia

USAUK

IrelandBelgium

Source: OECD, Eurostat Source: Eurostat

From an export-oriented foreign investment perspective, Turkey does not have, at first sight, a particular unit labour cost (ULC) advantage as unit labour costs increased strongly from 1998 to 2002, and continued thereafter albeit at a slower pace. Hourly wages also increased rapidly, but this was partly compensated by the depreciation of the TRY (compared with the EUR). Moreover, what was not compensated by the depreciation was actually compensated by the productivity increase. OECD labour productivity data also show that productivity has increased much faster in Turkey than in many other peers since 2001 (also since the 1990s). Specifically, we see labour productivity rising 44% on a cumulative basis compared with 54% in Korea, 41% in Poland, 55% in Russia, 16% in the OECD in total and only 3% in Belgium in that period. Minimum wages in 2012 also remains comparable with those in Croatia and Poland.

Lastly, Turkey’s growth potential and developing relations within neighbouring regions (Turkey has already been diversifying its trade towards more growth areas, especially MENA7) might remain as an attraction by itself. In the WEF Global Competitiveness Study, Turkey has been positioned as transitioning from an efficiency-driven economy to an innovation-driven economy. Unsurprisingly, R&D, technological excess, energy investment and investment targeting co-operation between sectors (horizontal or vertical integration) are providing stronger incentives. Looking ahead, Turkey aims to increase value-added in exports partly by lowering the import dependency of production.

d. Economic outlook

Turkey’s outlook remains relatively strong. The ongoing soft landing (investment remains weaker than we previously expected) continues to diminish external imbalances. More importantly, falling commodity prices along with weak capital utilisation are likely to keep inflation in single digits over the next few months and converge with the target range at year-end (5% + 2ppt), supporting normalisation in the CBT’s short-term interest rate policy.

Looking ahead and noting that the ratio of exports to GDP is low in Turkey: 18% vs 10% in Brazil, 28% in Russia, 38% in Poland, 78% in Hungary as of 2011, we expect domestic demand management to remain a key task while economic growth sails along at c.5%, ie a long-term trend in coming years.

With a net energy deficit of c.5% of GDP (6.7% as at mid-2012 – see next section), Turkey’s outlook is certainly bounded by global risk appetite, as the country is dependant on external financing. But, with a successful soft landing, the C/A deficit has already fallen from 10% of GDP in 2011 to 8.2% by mid-2012. The decline in the non-energy deficit is even greater, falling from 4.2% of GDP as at 3Q11 (its historical peak, based on 12-month cumulative statistics) to 1.5% as at 2Q12.

7 Middle East and North Africa

Turkey has little labour cost advantage relative to its near CEE peers, but its market size remains an attraction with total competitiveness rising fast

Turkey’s leading export sectors (automotive, iron and steel, machinery, chemicals, etc) also take a large share of imports

Turkey’s outlook remains relatively strong

The net energy deficit of c.5% of GDP (6.7% as at mid-2012) remains as a big challenge

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Strong fiscal balances as well as a robust banking system should continue to avoid a BOP crisis (arising from bad luck or bad policy). These two elements remain strong anchors, as seen in Moody’s June rating upgrade to Ba1 (+/outlook). The prospect of Turkey becoming investment-grade in the next 12 months remains (current ratings are: Moody’s Ba1 positive outlook/S&P BB stable outlook/Fitch BB+ stable outlook). Eurozone issues and geopolitical risks could create further volatility in markets, while we expect the CBT’s policy to continue to support the TRY to the extent needed, despite normalisation.

All in all, the major risk factor remains linked to easier external credit conditions as high financing requirements keep Turkey’s outlook very much bounded by “global credit markets” despite the recent improvement in the C/A deficit. Nevertheless, Turkey should comfortably manage to finance 3-5% GDP growth in the coming period, but for higher growth rates, a better outlook in the global economy remain a prerequisite.

Fig 10 ING major variables forecasts for Turkish economy

2008 2009 2010 2011 2012F 2013F 2014F

Real GDP (% YoY) 0.7 -4.8 9.2 8.5 3.5 4.8 5.0 GDP (€bn) 501 442 552 559 627 740 809 Household consumption (% YoY) -0.3 -2.3 6.7 7.8 1.9 4.8 4.5 Fixed investment (% YoY) -6.2 -19.0 30.5 18.5 1.8 8.3 10.9 CPI (avg, % YoY) 10.1 6.5 6.4 10.4 6.2 6.2 5.2 General budget (% of GDP) -1.8 -5.5 -3.6 -1.3 -2.3 -2.1 -2.0 Current account (% of GDP) -5.6 -2.2 -6.4 -10.0 -8.0 -8.1 -8.1 Net FDI (% of GDP) 2.3 1.1 1.0 1.7 1.6 1.7 1.6 FX reserves (% of GDP) 9.6 11.5 11.0 10.1 11.6 11.1 10.5 External debt (% of GDP) 37.9 43.7 40.0 39.6 43.0 39.1 35.9 CB key rate, 1w repo (%, eop) 15.00 6.50 6.50 5.75 5.75 6.50 6.50 USD/TRY (average) 1.29 1.55 1.50 1.67 1.80 1.76 1.67 EUR/TRY (avg) 1.90 2.15 1.99 2.32 2.28 2.15 2.16 Source: Turkstat, CBT, Ministry of Finance, Treasury, ING

3. Belgian- Turkish trade relationships

a. Belgian exporters and the Turkish market

Belgium and Turkey have been reinforcing their links in the past decade as Belgian exports towards Turkey more than doubled between 2000 and 2011 (at an annual speed averaging twice the pace of Turkey’s GDP growth). Overall, Belgian exports to Turkey increased more rapidly than those towards the non-Eurozone countries (which represented only 32% of Belgium’s total exports last year) during the last decade. This allowed the share of Turkey among Belgian exports’ non-Eurozone destinations to rise from 2.4% in 2001 to 4.3% in 2011. Turkey is therefore an important partner: with 4.7 Bn euros of exports in 2011, Turkey was Belgium’s fourth non-European partner after the US, India and China.

Belgium is specialized in four “core” export sectors8 representing 40% of its trade with the world: pharmaceutical products (chp30), vehicles (chp87), fuels (chp27) and organic chemicals (chp29). They are all present in Turkey but they represented less than one third of exports to this country in 2010. The main Belgian exports towards Turkey are rather plastics (chp39) and metals (iron and steel industries – chp 72). The latter is due to the high specialization of the Turkish industry itself: metallurgy represents 8% of Turkish industrial production (Turkey is actually the second European steel producer after Germany) and 13% of total Turkish exports but the industry lacks raw materials and has to import them, from Belgium, among others.

8 By sector, we mean chapters of the harmonised European nomenclature. There are 100 chapters. The first 11 represent 75% of Belgian exports. Aside from the four main sectors described above, we find several traditional Belgian industries: plastics (39), diamonds (chp71), processed food, machinery (mechanical - chp84; electrical - chp85; optical - chp90), clothing and metals (iron and steel - chp72).

BE-TR trade links have recently been reinforced…

…with Turkey becoming the fourth export destination for Belgian products outside the Eurozone

The main Belgian export sectors are present in Turkey…

…but plastics and metals are performing better

All in all the major risk factor remains linked to more external credit conditions

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Fig 11 Belgian exports to Turkey have been increasing faster than to other non-Eurozone destinations

Fig 12 Belgian exports to Turkey are concentrated in six sectors representing 60% of BE-TK trade

-45%

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BE exports to Turkey (% YoY) BE exports outside the EZ (% YoY)

+70% YoY

Plastics (39)16%

Iron/Steel (72)16%

Pharma (30)10%

Meca. Mach. (84)9%

Fuels (27)8%

Vehicles (87)7%

Organic chemicals (29)

7%

Others27%

Source: Eurostat Source: Eurostat (% of total Belgian exports to Turkey)

During the past ten years, Belgium managed to maintain a high trade surplus with Turkey of c.20% of total BE-TR trade. As BE-TR trade increased over the past decade, the trade surplus rose from c.€650m at the end of the 1990s to €1.65bn last year. This is particularly important as it represents 17.5% of the total Belgian trade surplus, while Belgium actually runs a deficit with most non-Eurozone countries.

Belgian imports from Turkey are concentrated in three sectors. 40% of Belgian imports are vehicles: Belgium exports tractors, bicycles and car parts, but imports cars and trucks. Turkey is among the top ten car manufacturers in the world (and aims to become the third in Europe by 2015). The sector (led by world giants such as Ford, Hyundai, Renault, Fiat and Toyota) represents 8.4% of total industrial production and 11% of exports, mainly aimed at European markets for which Belgium provides an entrance. Another important Turkish import in Belgium are textiles, as this is the main sector in the Turkish industry: it represents 18% of total industrial production (15% of the labour force) and 9% of total exports. In fact, it has a 4% share of the world clothing trade and is among the top three exporters to the EU. The third sector is electrical machines (11.7% of Belgian imports are from Turkey).

b. Belgian exporters and their European competitors in Turkey

If we compare the growth of different sectors in Belgian exports and Eurozone exports to Turkey, we see that over the past decade, Belgium actually gained market shares vs its European competitors given that its exports performed better than the average. This is the case for all sectors located south of the diagonal line in Figures 13 and 14. Among Belgium’s main export sector (signalled in orange on the graph), only fuels (oil refined in Belgium and re-exported) grew quickly: exports of Belgian fuels have grown 22x whereas fuel exports from the Eurozone only increased by 180%. The same comment holds for metals (iron and steel, chp72): Belgian metal exports have risen 6x (the Eurozone average being 4x). One sector stands out: shoes (among clothing chapters, chp64). Although shoe exports from Belgium have grown 65x (against a Eurozone average of 4x), it remains a small part (3%) of Belgian exports to Turkey. Indeed, note that Belgium has underperformed the Eurozone average even in its main export sector: it has actually been losing market share in organic chemicals (chp29; 7% of Belgian exports to Turkey) and pharmaceuticals (chp30; 10% of Belgian exports to Turkey). The main Belgian export to Turkey (plastics, chp39; 16% of Belgian exports to Turkey) evolved in line with the Eurozone average over the past decade, while machinery (chp84 and 85) has been lagging the Eurozone (except for optical machines – chp 90 – which represent only 2% of Belgian exports to Turkey). As far as cars are concerned, Belgian exports decreased

Belgian exports performed slightly better in Turkey than the Eurozone average over the past decade…

…but whereas it performed outstandingly in some sectors (fuels and metals)

…the country lost market shares in its other ‘core’ export sectors against European competitors

Belgium operates a positive trade surplus with Turkey…

…as its imports from Turkey are mainly limited to cars and clothes

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during the period, while Eurozone exports increased 50%, a clear sign that Turkey is a competitor for Belgian assembly lines.

Fig 13 Belgian and Eurozone exports* to Turkey

Fig 14 Belgian and UK exports* to Turkey

29 TOT

(27) +2100%

(64) +6400%72

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BE Export to Turkey (% 2010/2000)

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+2100%

*Figures refer to chapter numbers (as in the European HS4 harmonised nomenclature, as described earlier in the text) Source: Eurostat, ING estimates

Source: Eurostat, ING estimates

Over the past decade, Belgian exports grew more than the Eurozone average, but this conclusion relies on two very dynamic sectors: fuel and metals (combined, these represent 25% of Belgian exports to Turkey). Other Belgian ‘core’ exports have been – at best – evolving in line with the European average.

The same analysis can be conducted to compare Belgian external trade to the performance of a non-Eurozone country. It is done here for the UK (Belgium’s main non-Eurozone external trading partner). It shows that even if Belgium exports much less to Turkey than the UK (€4.1bn vs €7.2bn for the UK), it has been winning market share at a fast pace in the sectors described earlier and to which we can add machinery (as all types of machinery exports increased faster than in the UK during the period). Overall, while Belgian exports to Turkey more than doubled, UK exports nearly stagnated during the past decade. Metal is the exception, as UK exports in this sector have increased 11x in ten years although UK exports of metals were still worth less than €1bn last year.

On the contrary, Belgian trade with Turkey evolved much faster than UK trade over the past decade

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4. Conclusion

Turkey constitutes an important and growing market for Belgian exporters. Moreover, as an open door to the Black Sea, Mediterranean, North African and Asian markets, Turkey is certainly ‘a potential hub’ for European investors/exporters. The share of MENA in Turkey’s total exports increased from 15% in 1996 to 34% in January-July 2012, while the share of the EU27 fell from 54% to 38.8%.

The Turkish government and central bank have made considerable efforts to stabilise the economy. Currently, the Turkish economy remains sound. Moreover, the young active population (average age of 29.7 years with 36.5%concentrated in the top five cities) is certainly a plus for the country’s growth potential, where domestic market size remains a notable competitive advantage.

The lasting C/A deficit has until now been easily financed by foreign capital inflow, and thanks to the soundness of the banking sector, this does not represent an immediate threat. However, it has to be managed in order to reduce further the risk of a BOP crisis in the future.

In this context, Belgian exporters are already boosting external trade with Turkey. This has been the case over the past decade, and also during the past four years. Between 1H08 and 1H12, overall exports from Belgium increased 3.9%. During the same period, they increased almost 21% to Turkey. Belgian exports to Turkey are mainly oriented to the Belgian economy’s standard specialities: plastics, iron and steel, and pharmaceutical products.

However, compared with global external trade between the Eurozone and Turkey, more could be done in Belgium to boost exports further, especially in the Belgian economy’s key sectors. Indeed, despite its specialisation in the export of vehicles, pharmaceutical products and organic chemical products, Belgium seems unable to perform much better than the whole Eurozone in these three sectors.

As a conclusion, there are still significant challenges to Belgium fully benefiting from the growing opportunity that Turkey represents.

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