Turkey – why FDI? Status quo and salient factors Simon Quijano-Evans,

1. Turkey – why FDI? Status quo and salient factors Simon Quijano-Evans, Senior Economist, CAIB/HVB Group simon.quijano@ba-ca.com

2. Why does Turkey need FDI? • To sustain future economic growth rates • To increase competition and maintain productivity at home • To cater for a growing population and labour force • To cover a wider current account deficit, without raising foreign debt • To secure net FDI as Turkish firms increasingly look to invest abroad • To maintain competitiveness versus EU accession peers • To help secure a peaceful development in the surrounding region

3. Turkey – market volatility has calmed – pre-condition for FDI Source: Reuters, HVB Group

4. Factors of relevance to FDI 1. First increase confidence at home 2. Then look to secure foreign investor confidence 3. Foreign investors need reform anchors – EU and IMF 4. Do lower corporate tax levels make a difference to FDI? 5. Important to look at Turkey from a regional perspective 6. A young population – plenty of water – room for infrastr. investments

5. First increase confidence at home – Strong rise in TRY deposits Source: Central Bank of Turkey, HVB Group

6. First increase confidence at home - Substantial domestic investment Source: Central Bank of Turkey, HVB Group

7. Factors of relevance to FDI 1. First increase confidence at home 2. Then look to secure foreign investor confidence 3. Foreign investors need reform anchors – EU and IMF 4. Do lower corporate tax levels make a difference to FDI? 5. Important to look at Turkey from a regional perspective 6. A young population – plenty of water – room for infrastr. investments

8. Then increase confidence abroad – Hugejump in portfolio investment Source: Central Bank of Turkey, ISE, Takasbank

9. Then increase confidence abroad – LT loans on the rise, FDI follows Source: Central Bank of Turkey, HVB Group

10. Factors of relevance to FDI 1. First increase confidence at home 2. Then look to secure foreign investor confidence 3. Foreign investors need reform anchors – EU and IMF 4. Do lower corporate tax levels make a difference to FDI? 5. Important to look at Turkey from a regional perspective 6. A young population – plenty of water – room for infrastr. investments

11. Investors need reform anchors – EU talks & IMF program Maastricht debt levels by end-07 CAIB baseline scenario Public sector gross debt/GNP EU talks quicker than others? We see possibility for EU accession around 2012 Source: European Commission, CBT, HVB Group. Note: For BG and RO, assumption is they join EU in Jan-07

12. Investors need reform anchors – bring positive ratings dynamics Source: S&P, Bloomberg, HVB Group

13. Factors of relevance to FDI 1. First increase confidence at home 2. Then look to secure foreign investor confidence 3. Foreign investors need reform anchors – EU and IMF 4. Do lower corporate tax levels make a difference to FDI? 5. Important to look at Turkey from a regional perspective 6. A young population – plenty of water – room for infrastr. investments

14. Do lower corporate tax levels make a difference to FDI? • Not at first sight, but picture blurred by: • Special tax incentives • Extra taxes (municipal) • Tax holidays • So also important: • Red tape and legal costs • Cost of labour • Education of workforce • Stage of privatisations • Domestic company landscape Source: Finance Ministries, Reuters, HVB Group

15. CEE Corporate tax rates as of Jan-2006 Source: Finance Ministries, Reuters, HVB Group

16. Factors of relevance to FDI 1. First increase confidence at home 2. Then look to secure foreign investor confidence 3. Foreign investors need reform anchors – EU and IMF 4. Do lower corporate tax levels make a difference to FDI? 5. Important to look at Turkey from a regional perspective 6. A young population – plenty of water – room for infrastr. investments

17. Turkey’s purchasing power in line with Bulgaria and Romania… Source: Eurostat, HVB Group Source: Eurostat, HVB Group NMS10 = 10 New EU Member States EU25 = EU15+NMS10 = All current EU Member States

18. …but GDP/capita of large part of population closer to Poland • 37mn people in the Aegean/Mediterranean/Marmara area account for 64% of GDP (with percap GDP of € 4,170) • Marmara comes close to level in Poland and around € 1,600 below average level of 10 New Member States • The Marmara region makes up for around 26% of the estimated 72m population and 37% of GDP • And GDP/GNP data to be revised soon in line with ESA95 standards Marmara € 4,830 18.5mn Central Anatolia € 3,310 12.4mn Black Sea € 2,540 9.0mn GDP/capita Population Aegean € 3,870 9.5mn Mediterr. € 3,140 9.3mn S.E. Anatolia € 1,740 7.0mn E. Anatolia € 1,540 6.5mn Source for Map: http://www.e-cografya.com Data Source: Central Bank of Turkey, with forecasts by CAIB 2004 estimates

19. Factors of relevance to FDI 1. First increase confidence at home 2. Then look to secure foreign investor confidence 3. Foreign investors need reform anchors – EU and IMF 4. Do lower corporate tax levels make a difference to FDI? 5. Important to look at Turkey from a regional perspective 6. A young population – plenty of water – room for infrastr. investments

20. Turkey’s population will remain young • Age bracket 15-59 to rise to 63% by 2025 in TR and fall to 55% in GER • Turkey to make up for 15% of EU-29 population in 2025 • By 2025, TR median age to rise to 33 from 25 - In GER to 48 from 40 Share of EU-29 population in % Source: United Nations, HVB Group EU29=EU25+Bulgaria+Croatia+Romania+Turkey. TR=Turkey, GER=Germany

21. There’s plenty of water – and potential elsewhere • Turkey has abundant freshwater – an economic imperative • Internet and mobile telephony have potential – require investments Total freshwater resources – yearly avg. Internet access and mobile phones Source: Eurostat, HVB Group Internet data for 2004, except Bulgaria and Poland for 2003. Phone data 2002 Source: Eurostat, HVB Group

22. Conclusions • FDI needed to sustain future growth rates and EU convergence • Government has secured domestic confidence… • …and is now securing foreign investor confidence • Low financial/political volatility is imperative for securing FDI • Corporates require transparency on taxation etc & need reform anchors • Plenty of room for public sector infrastructure investments • FDI is important to secure Turkey’s role in the region

23. Important Information 23