Country Analysis Report Turkey in Depth PESTLE Insights [PDF]

Zitiervorschau

Turkey In-depth PESTLE insights

Country Profile Series

Report Code:

ML00002-050

Published:

September 2021

1.

Overview

1.1.

Catalyst

This profile analyzes the political, economic, social, technological, legal and environmental (PESTLE) structure of Turkey. Each of the factors is explored in terms of four parameters: current strengths, current challenges, future prospects and future risks.

1.2.

Summary

1.2.1.

Key findings

The country is a member of international organizations, but foreign political tension is a matter of concern Turkey is a member of numerous international organizations, which has substantially enhanced its international standing. In addition to its relationships with NATO and the EU, Turkey is also a member of the OECD, the Organization for Security and Cooperation in Europe (OSCE), and the Council of Europe. The country is also a member of the UN, the World Trade Organization (WTO), the Euro-Atlantic Partnership Council, the Group of 20 (G-20), the International Monetary Fund (IMF), the World Bank, and the Organization of Islamic Cooperation (OIC). However, in October 2020, the country’s relations with the EU took a turn for the worse when Turkey’s capital Ankara voiced dissatisfaction with the result of the EU summit and the country’s bid for membership looked bleak. In December 2020, the US sanctioned Turkey because of the acquisition of the S-400 missile system by the latter. The sanctions came into effect in April 2021. The Biden administration of the US also confirmed that it intends to exclude Turkey from the F-35 Joint Strike Fighter program. The US stance regarding the refugee crisis has also added to the rising tension between the two countries.

The country has a stable banking sector but the depreciation of the Turkish lira because of the COVID-19 pandemic is a risk to the economy The country has a stable banking sector and has endured several financial crises. After the global financial crisis, the Central Bank of Republic of Turkey (CBRT) adopted a policy mix where reserve requirements and the interest rate were used to reduce the negative effects of volatility in capital flows. This helped the country to maintain a resilient Turkish financial system. During the COVID-19 pandemic, the rapid worsening of the economic outlook and the complete change of risk perception affected both the banks' lending appetite and demand for loans; however, with a stable banking sector, the CBRT was able to announce various measures to ensure the uninterrupted continuation of loan flows and to support the consumers affected by the outbreak. According to the ‘Financial Stability report May 2021’, the non-performing loans (NPL) ratio of the banking sector stood at 3.8% as of March 2021, compared to 5.4% at the end of 2019. However, the Turkish lira has hit an all-time low against the US dollar amid mounting geopolitical and macroeconomic risks in the region in 2020. Apart from clashes between Armenia and Azerbaijan, tensions between the US and Turkey are high due to sanctions on Turkey for purchasing S-400s from Russia in October 2020 and the Middle East migrant crisis. Another reason for the free fall of the lira was that the informal measures proposed by the Central Bank did not suffice to stabilize the lira and proved to be temporary amid the global pandemic. In 2021, an unsure monetary policy stance, coupled with heightening geopolitical risks in the area, has led to the depreciation of the lira.

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Turkey’s young population is a demographic advantage, but a large disparity among socioeconomic groups is a matter of concern According to the CIA World Factbook, Turkey has one of the youngest populations in Europe, with a median age of 32.2 years as of 2020. According to MarketLine, in 2020, the age structure showed that 23.3% of the population belonged to the 0–14 age group, 68.3% to the 15–64 age group, and 8.4% to the 65+ age group. With the rest of Europe facing an increase in the average age of its population, Turkey has an opportunity to increase its employment rate by capitalizing on its young labor force. However, the female labor force participation rate is low in comparison to other OECD countries. In 2020, the female labor force participation rate in Turkey was 37.6%, compared to Greece at 58.4%, according to MarketLine, indicating the large disparity among gender. The gender wage gap is also significant in Turkey.

Turkey has ambitious targets for its ICT sector; however, high piracy levels are a problem Turkey’s ICT sector has improved significantly over the last decade. According to TUBISAD (Turkish Informatics Industry Association), the ICT sector reached a volume of TRY152.7bn (US$18.42bn) in June 2020. According to "Turkey's Digitalization Index Report”, the country’s digitization rating stood at 3.06 in 2020, compared to 2.94 in 2019, out of a total score of five. Under the government’s “Vision 2023” strategy, the country aims to reach 30 million broadband subscribers, supply 50% of the ICT sector with domestic products and services, increase the ICT sector’s share to 8% of GDP, increase R&D expenditure to 3% of GDP, and increase computer literacy to 80% of the population. However, Turkey is recognized as a country where IPR protection and enforcement is a key challenge. Software piracy rates continue to be high, due to widespread use of unlicensed software by enterprise end users. According to the BSA’s ‘Global Software Survey 2018’, the country’s software piracy rate was 56%, representing a commercial value of US$208m. The global average was 37% during the same year.

Despite a business-friendly environment, high product market regulation is a dampener Turkey’s robust framework for business entities creates a successful commercial environment and drives growth. In the World Bank’s 2020 Doing Business report, Turkey was ranked 33rd out of 190 countries, compared to Greece’s rank of 72nd. To start a business in Turkey, it takes seven days, which is much lower than the Europe and Central Asian average of 11.9 days, and the OECD high income average of 9.2 days. The time taken to deal with construction permits in Turkey (100 days) is lower than the Europe and Central Asian average of 170.1 days and the OECD high income average of 152.3 days. However, in terms of market regulation, Turkey is overly cautious. Product market indicators are a set of metrics that measure the extent to which policies are framed by the government to promote or inhibit competition in areas where competition is possible. Many sectors in Turkey are more regulated than their European counterparts, especially communications, transportation, and professional services. Turkey has some of the most stringent professional services regulations in the OECD. However, regulatory laws concerning market entry, advertising, prices and fees, and restrictions on incorporations are hindering the creation of efficient and competitive markets for these professions. According to the OECD’s Economy-wide Product Market Regulation Indicator 2018, Turkey scored 2.28 out of six (value range from 0–6, from most to least competition friendly regulatory regime), lower than the OECD average of 1.43, and Greece at 1.56.

Turkey has strong environment policies but poor performance on the Environmental Performance Index (EPI) is a challenge The country has strong environmental policies and has been modernizing its environmental laws as part of its EU accession initiatives. Local municipalities have important roles in recycling, waste sewage treatment, water purification, solid waste management, and environmental remediation. The country’s environmental policies emphasize energy efficiency and most EU laws in this area have been implemented. The Energy Efficiency Law and the Law on Utilization of Renewable Energy Resources form the backbone of the nation’s environmental policy. In July 2020, the Environment Ministry signed a new circular “Maritime Waste Practice” envisaging stricter measures for waste originating from ships, along with the monitoring of waste from ships using online applications. PESTLE COUNTRY ANALYSIS REPORT: TURKEY © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED

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However, in the 2020 EPI, the country was ranked in 99th place out of 180 economies due to its poor performance in terms of environmental health and the conservation of biodiversity. Turkey must employ strict environmental laws to improve its ranking. According to the 2020 EPI, Turkey’s rank in terms of PM2.5 exposure is 117th out of 180 countries. In the biodiversity and habitat index category, Turkey was ranked 148th out of 180 countries, which implies a poor performance in this category. In the area of biome protection and marine protection, Turkey’s performance was poor compared to its peers, with a ranking of 177th and 117th out of 180 countries, respectively.

1.2.2.

PESTLE highlights

Political landscape •

In March 2020, the government announced its economic recovery plan to tackle the COVID-19 pandemic. As of August 2021, the total announced stimulus package stood at US$73.56bn (equivalent to 11.5% of GDP).

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In December 2020, the UK and Turkey signed a mutually beneficial trade deal. The trade deal is yet to be ratified by both the countries but has been applied provisionally. The deal is expected to facilitate the smooth transfer of goods, services and technology across borders between the two countries.

Economic landscape •

According to MarketLine, Turkey’s real GDP rose by 1.8% in 2020, compared to 0.9% in 2019. The headwinds caused by a sharp depreciation of the lira, along with a shaky recovery in key sectors of the economy, remain the biggest concern for 2021.

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In February 2021, the credit rating agency Fitch Ratings downgraded Turkey’s Long Term Issuer Default Ratings (LDRs) at BB-, changing the outlook to stable from negative, as a result of depleting foreign exchange reserves and a deepened current account deficit due to the heavy stimulus package announced by the government to combat the COVID-19 pandemic.

Social landscape •

According to MarketLine, Turkey had a literacy rate (15 years and above) of 96.4% for the total population in 2020. While the male literacy rate was 99.1%, the female literacy rate was lower at 93.2%. The relatively low literacy rate for women is the result of the feudal mindset that prevails in rural areas of the country.

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Weak labor laws, which hinder the formation of unions, have considerably restricted workers’ rights in Turkey. Since labor laws are not efficient, labor forces are open to exploitation in the form of long working hours without payment for overtime, unjustified terminations, and limitations on the usage of annual leave.

Technological landscape •

The low level of innovation in Turkey is reflected by a low number of patents registered, with the country trailing behind other developing nations. According to data from the United States Patent and Trademark office (USPTO), the number of patents granted was 223 in 2020 for Turkey. Turkey has performed worse than European counterparts, such as Poland, which secured 439 patents in 2020.

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Expansion of the mobile market has been a driving force behind the development of telecommunications services in Turkey. According to MarketLine, the total number of mobile users stood at 81.7 million in 2020, with a penetration rate of 98 per 100 people. Internet users stood at 76.6% of the total population, with a user base of 63.9 million in 2020.

Legal landscape •

Turkey is on the way to introducing a new constitution. In February 2021, President Recep Tayyip Erdoğan called for a new civilian constitution that will have greater emphasis on creating democratic institutions and equality for all. The new constitution will also allow citizens to propose new laws in parliament.

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Corporate tax is charged on income and earnings derived by public and private limited companies, including foreign and other joint venture companies. Turkey has increased the tax rate to 25% for 2021, and 23% in 2022, compared to the previous 20% tax rate.

Environmental landscape •

According to BP’s Statistical Review 2021, CO2 emissions increased from 276.3 million tons in 2010 to 369.5 million tons in 2020.

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Turkey charges relatively low transport fuel taxes, which indirectly encourages consumers to use more carbon-rich fuels, leading to more pollution. The low tax regime for fossil fuels is inhibiting the development and adoption of green technology and related entrepreneurship.

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1.3.

Recovery of the economy from the COVID-19 crisis

1.2.3.1

Snapshot

The country had its first COVID-19 case on March 11, 2020. As of August 10, 2021, the country had registered 5.97 million COVID-19 cases and 52,437 deaths. According to John Hopkins University, as of August 10, 2021, 79.2 million doses of the COVID-19 vaccine had been administered in Turkey. The pandemic has affected the Turkish economy mildly compared to peers. The strong stimulus measures have supported businesses and households during the crisis.

1.2.3.2

Vaccination

The vaccines primarily administered in Turkey are BioNTech, Pfizer, CoronaVac, and Sputnik. As of August 25, 2021, 42.5% of the population has been fully vaccinated and 13% has been partially vaccinated. Even though half of the population has been fully vaccinated, the eastern provinces are lagging behind due to severe vaccine hesitancy and a lack of awareness.

1.2.3.3

1.2.3.4

Government measures •

The Central Bank of Turkey reduced the policy rate for the ninth time in the last year to increase the flow of money into the economy.

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Stimulus packages of at least US$73.56bn (9.80% of the GDP) have been introduced by the Turkish government since the start of the pandemic.

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Turkey’s central bank tripled its currency swap agreement with Qatar on May 22, 2020, securing funding to compensate for the country’s widening fiscal deficit and potential full-year recession.

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The country may restrict the export of face masks for domestic purposes.

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Turkey's Central Bank increased the policy rate from 8.25% to 10.25% to restore the disinflation process and support price stability in September 2020.

Lockdown measures

Banned •

Turkey announced it would drop its curfews starting July 1, 2021. (June 21, 2021)

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Turkey announced a full lockdown for the country from April 29, 2021 to May 17, 2021. (April 27, 2021)

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Turkey maintained international entry and domestic travel restrictions as of February 2, 2021 amid COVID-19 outbreaks. (February 2, 2021)

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Effective Monday, December 21, 2020, all flights to and from the UK, Denmark, the Netherlands, and South Africa were suspended by Turkey’s Ministry of Transport and Infrastructure. (December 21, 2020)

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Turkish authorities tightened restrictions to curb the spread of the COVID-19 through a new weekend curfew and making face masks compulsory in public spaces; schools were expected to teach online for the remainder of 2020; senior citizens were not allowed to leave home; malls, markets and restaurants were closed during the weekend curfew starting November 20, 2020. (November 18, 2020)

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COVID-19 social gathering restrictions imposed by Istanbul authorities from September 12, 2020.

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Face masks were made mandatory in all public places in Turkey amid surging COVID-19 cases. (September 8, 2020)

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Turkish authorities reimposed strict measures to limit the spread of COVID-19 on August 4, 2020.

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COVID-19 restrictions were imposed in Turkey’s capital Ankara, with face masks mandatory in public places. There was also a ban on meetings and demonstrations. (July 2, 2020)

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Imposed a 24-hour nationwide curfew, with people in 81 cities banned from leaving home from May 23 to May 26. (May 23, 2020)

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Announced a four-day nationwide lockdown from May 23 onwards. (May 18, 2020)

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Two-day curfew imposed on 24 provinces beginning May 8 at midnight. (May 9, 2020)

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The Turkish government announced a four-day lockdown during April 23, 2020 – April 27, 2020 in 31 provinces. (April 20, 2020)

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Turkey's Ministry of Interior announced a 48-hour lockdown in 31 cities. The curfew applied to the following cities: Adana, Ankara, Antalya, Aydin, Balikesir, Bursa, Denizli, Diyarbakir, Erzurum, Eskisehir, Gaziantep, Hatay, Istanbul, Izmir, Kahramanmaras, Kayseri, Kocaeli, Konya, Malatya, Manisa, Mardin, Mersin, Mugla, Ordu, Sakarya, Samsun, Sanliurfa, Tekirdag, Trabzon, Van, and Zonguldak. (April 11, 2020)

Exempted •

Government announced that it would further ease restrictions from June 1, 2021. Under the new rules, the nation's existing weekday curfew was shortened by one hour to run 22:00–05:00; the weekend curfew, on the other hand, would run from 22:00 each Saturday to 05:00 the following Monday. Residents had to remain in their homes during curfew hours, except to perform essential services. (May 31, 2021)

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Turkey relaxed its lockdown and partially reopened restaurants by easing weekend lockdowns. (March 1, 2021)

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Passengers arriving from Afghanistan, Bangladesh, Benin, Burkina Faso, Congo (Dem. Rep.), Cote d'Ivoire, Djibouti, Gabon, Ghana, Guinea, Kenya, Mali, Mauritius, Niger, Senegal, Sierra Leone or Somalia were not allowed to enter the country. (July 27, 2020)

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Turkey allowed senior citizens (65 years and older) to travel for tourism purposes after obtaining permission from concerned authorities. (June 25, 2020)

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1.2.3.5

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Turkish Airlines resumes flights to Chicago and Washington from June 19. (June 21)

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Turkish authorities removed restrictions on international and domestic travel and provided “virusfree” certificates to hotels to encourage tourism. (June 21, 2020)

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Turkish authorities also made face masks mandatory in three major cities to curb spread of COVID19. (June 19, 2020)

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The country resumed flights to and from 40 countries on June 15. Individuals arriving in Turkey were told they may have to self-quarantine for 14 days if they had symptoms. (June 12, 2020)

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The country marked its first weekend without lockdown since March, 2020. (June 5, 2020)

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Restaurants, beaches and museums reopened; limited domestic flights resumed. (June 1, 2020)

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Inter-state travel that was imposed in April to be lifted in June. (May 27, 2020)

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Automotive industry resumed production; full capacity was expected by mid-July. (May 17, 2020)

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Travel restrictions were relaxed for nine provinces. (May 12, 2020)

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Shopping malls and barbershops were allowed to reopen from May 11 onwards. (May 11)

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Senior citizens were allowed to exercise outside on May 10, 2020. (May 10, 2020)

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The Turkish government announced plans for the gradual easing of lockdown. (May 5, 2020)

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The government lifted entry and exit restrictions on seven cities where COVID-19’s spread had been low. (May 4, 2020)

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The president announced extended weekend lockdowns from May 1, 2020. (April 28, 2020)

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Bakeries, hospitals, pharmacies and workplaces producing health products and medical supplies were allowed continue to operate during the curfew. Essential sectors such as water, print and media, gas cylinders, and emergency call centers were open during the lockdown. (April 16, 2020)

Travel restrictions •

The CDC has added Turkey to "Level 4: COVID-19 Very High" travel recommendations, urging people to avoid travel if possible and only to travel only if fully vaccinated. (Aug 17, 2021)

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Turkey has banned the entry of passengers from six nations: namely Bangladesh, Brazil, South Africa, India, Nepal, and Sri Lanka until further announcements. Passengers arriving from the UK, Iran, Egypt, or Singapore will need to present a negative PCR test taken within 72 hours prior to arrival. (July 27, 2021)

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Turkey announced it would be imposing a lockdown from April 29, 2021 which was expected to last until May 17, 2021. Turkish officials have affirmed that passengers who come from abroad or wish to travel abroad do not need a travel permit during a lockdown. (April 28, 2021)

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Turkey has announced the lifting of a ban on direct flights from the UK. Arrivals need not present a so-called “vaccine passport” but must show a negative PCR test result taken within 72 hours of travel. (April 24, 2021)

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From December 28, 2020, international passengers to Turkey arriving by air must submit a negative PCR virus test result obtained within the last 72 hours before their departure. From December 30,

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2020, all travelers arriving by land and sea routes must submit a negative PCR virus test result obtained within the last 72 hours before their departure. (December 25, 2020) •

Turkey imposed a weekend lockdown in all major cities including Istanbul, Ankara and Izmir amid a surge in COVID-19 cases. (December 5, 2020)

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The Turkish government introduced new restrictions in Ankara and Istanbul for people above the age of 65. People over 65 in Istanbul and Ankara will be allowed to go outside only between the hours of 10:00 to 16:00. (November 10, 2020)

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Travelers returning to Germany from Turkey, from November 9, 2020, will have to face mandatory quarantine upon arrival as Germany announced the extension of a partial travel warning for Turkey to the whole country. (October 28, 2020)

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Flights between Turkey and Iran were suspended until November 1, 2020. (October 6, 2020)

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Turkey was added to the UK’s high-risk list. Passengers reaching the UK from October 3, 2020 will need to self-isolate for 14 days upon arrival. (October 2, 2020)

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Flights between Turkey and Greece remained suspended until August 31, 2020. (August 13, 2020)

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Turkey suspended all flights to Iran and Afghanistan until September 1, 2020. Only Turkish citizens and those who held work visas were allowed to travel. (August 5, 2020)

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Air travel between Turkey and Iraq was suspended because of rising COVID-19 infections in Turkey. (August 2, 2020)

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Turkey announced that it would resume international flights to India, Russia, Kuwait and South Africa from August 1, 2020. (July 29, 2020)

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Restrictions on entry and exit for Turkish citizens and foreign nationals were lifted, however, the land border with Iran remained closed. (June 12, 2020)

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Turkey planned to resume international flights to 40 countries gradually as of June 10, 2020. International flights were allowed to carry passengers firstly to the Turkish Republic of Northern Cyprus, Bahrain, Bulgaria, Qatar, and Greece. Turkey came to an agreement with the Turkish Republic of Northern Cyprus, Austria, Lithuania, Serbia, Kazakhstan, Albania, Belarus, the UAE, Moldova, Uzbekistan, Ukraine, Morocco, Jordan, Sudan, and Italy. (June 4, 2020)

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Domestic flights resumed service from June 1, 2020, whereas international flights resumed from June 18, 2020. Turkish Airlines (TK) announced it would be flying to and from Germany, Switzerland, Austria, Netherlands, Denmark, and Sweden. (June 01, 2020)

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Turkish authorities announced that domestic commercial flights would resume from June 1, 2020. Flights were initially allowed to leave from Istanbul to major provinces including Ankara, Izmir, Antalya, and Trabzon. (May 30, 2020)

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Intercity train services resumed on a limited basis and at a limited capacity. Trains were allowed to make 16 trips daily, connecting the cities of Ankara, Istanbul, Konya and Eskisehir. (May 28, 2020)

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All scheduled international passenger flights from Turkey were suspended indefinitely. All domestic flights within Turkey were suspended until May 28, 2020. (May 18, 2020)

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Four-day partial curfew was imposed on major cities, including Istanbul and Ankara, over the holiday weekend beginning at midnight (local time) on Friday, May 15, 2020, and ending at midnight on Tuesday, May 19, 2020. Inter-city travel bans were lifted in nine more cities as a step towards easing

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COVID-19 restrictions. The affected cities were Adana, Diyarbakir, Mardin, Trabzon, Ordu, Denizli, Kahramanmaras, Sanliurfa, and Tekirdag. Restrictions remained in place for the three largest cities, Istanbul, Ankara, and Izmir. (May 12, 2020)

1.2.3.6

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Turkey announced a 48-hour lockdown in 31 cities, effective April 11, 2020, to limit the further spread of COVID-19. As per the directive, all movements were prohibited during the period. The curfew applied to the following cities: Adana, Ankara, Antalya, Aydın, Balıkesir, Bursa, Denizli, Diyarbakır, Erzurum, Eskişehir, Gaziantep, Hatay, İstanbul, İzmir, Kahramanmaraş, Kayseri, Kocaeli, Konya, Malatya, Manisa, Mardin, Mersin, Muğla, Ordu, Sakarya, Samsun, Şanlıurfa, Tekirdağ, Trabzon, Van, and Zonguldak. (April 10, 2020)

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Turkey, on May 4, 2020, announced that starting May 11, 2020, certain restrictions in the country would be eased. Travel restrictions were lifted in the provinces of Antalya, Aydin, Erzurum, Hatay, Malatya, Mersin, and Mugla from May 11, 2020. Travel restrictions remained in place for the rest of the country. (April 05, 2020)

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Around 31 cities were placed under quarantine, including Istanbul. As such, all entry and exit into municipalities was barred, except for the transport of essential supplies. The measure was expected to remain in place for an initial period of 15 days. (April 4, 2020)

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Turkey suspended all foreign flights. (March 27, 2020)

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The government applied flight restrictions on March 21, 2020, to a total of 68 countries, including Angola, Austria, Azerbaijan, Algeria, Bangladesh, Belgium, Cameroon, Canada, Chad, Czechia, China, Colombia, Djibouti, Denmark, Dominican Republic, Ecuador, Egypt, Equatorial Guinea, Finland, France, Germany, Guatemala, Georgia, Hungary, India, Italy, Iraq, Iran, Ireland, Ivory Coast, Jordan, Kazakhstan, Kenya, Kosovo, Kuwait, Latvia, Lebanon, Montenegro, Mongolia, Morocco, Moldova, Mauritania, Nepal, Niger, Norway, the Netherlands, North Macedonia, Oman, the Philippines, Panama, Peru, Poland, Portugal, South Korea, Slovenia, Sri Lanka, Sudan, Saudi Arabia, Spain, Sweden, Switzerland, the Turkish Republic of Northern Cyprus, Taiwan, Tunisia, Uzbekistan, the UAE, the UK and Ukraine. (March 21, 2020)

Stimulus measures •

Turkey's Central Bank increased the policy rate from 8.25% to 10.25% to restore the disinflation process and support price stability. (September 24, 2020)

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The BRSA reduced the general cap on the maturity of personal finance credits to 36 months from 60 months. (September 7, 2020)

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Additional state payments to the personnel working in health facilities affiliated with the Health Ministry were extended by three months as of August 1. (September 1, 2020)

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The special consumption tax (OTV) rate on mid-range and luxury passenger cars was raised and the price bracket for cheaper cars that are subject to lower OTV rates was levelled up. The VAT rate on education services was reduced to 1% from 8%. (August 30, 2020)

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The CBRT kept the policy rate unchanged while committing to continue with tighter TL liquidity measures. The CBRT also decided to raise the FX and TL reserve requirement ratios for banks, fulfilling real credit growth conditions. (August 20, 2020)

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The BRSA reduced the minimum asset ratio by 5pps to 95% for deposit banks and to 75% for participation banks. (August 10, 2020)

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The BRSA expanded the exemption from some of the restrictions on access to TL liquidity to encompass all international banks. (August 6, 2020)

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The BRSA exempted international development banks from some of the restrictions on access to lira liquidity. (July 29, 2020)

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The CBRT raised the reserve requirement ratios for all types and maturities of foreign exchange liabilities by 300bps for all banks. (July 18, 2020)

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The CBRT reduced the remuneration rate – the annual rate of interest that it pays on the lira required reserves – by 1% to 5%. The BRSA loosened the macro-prudential restrictions on credit card spending by low-income households and those households in arrears for credit card repayments. (July 10, 2020)

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The BRSA loosened the macro-prudential restrictions on credit card spending by low-income households and those households in arrears for credit card repayments. (July 10, 2020)

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BRSA raised the upper limit on instalment plans for credit card purchases of services from airlines, travel agencies and hotels to 18 months from 12 months. (June 9, 2020)

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The CBRT announced the reallocation of TL20bn (US$2.92bn) of the TL60bn (US$8.76bn) TL rediscount credit facility for exporters towards advance loans for investment in support of strategic projects. (June 5, 2020)

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The withholding tax on returns from FX mutual funds was raised to 15% from 10% for real persons and zero for legal persons, and the Capital Markets Board (SPK) imposed some limitations on the portfolio composition of FX mutual funds. (June 3, 2020)

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Public deposit banks Ziraat Bank, Halkbank and Vakifbank launched new retail loan campaigns for house purchases and consumer spending. (June 1, 2020)

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The BRSA amended the calculation of the Asset Ratio (AR), imposed on banks as of May to encourage domestic lending through long-term funding. (May 29, 2020)

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The CBRT lowered the policy rate by a cumulative 250bps to 8.25% as of May 21, 2020.

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The overall limit of the swap agreement between the Central Bank of the Republic of Turkey (CBRT) and Qatar Central Bank (QCB) was increased from US$5bn equivalent of Turkish lira and Qatari riyal to US$15bn equivalent of Turkish lira and Qatari riyal. (May 20, 2020)

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The maximum limit for the ratio of the OMO portfolio’s nominal size to the CBRT analytical balance sheet’s total assets, set at 5% for 2020 in the Monetary and Exchange Rate Policy for 2020 text, was revised to 10%. (April 17, 2020)

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A second package of CBRT measures (March 31) allowed for an increase in outright purchases of sovereign bonds and broadened the pool of assets for use as collateral in CBRT transactions. (March 31, 2020)

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The CBRT lowered the policy rate by 100bps to 9.75%, and a package of financial measures was introduced. (March 17, 2020)

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•

1.2.3.7

The reserve requirements on foreign currency deposits were reduced by 500bps for banks meeting lending growth targets. A new TL lending facility for SMEs in the export sector was set up. (March 17, 2020)

Impact on the economy

As a result of the COVID-19 pandemic, consumer and economic sentiment dipped, specifically in Q2 2020. Global lockdown measures and a considerable drop in Turkey’s foreign exchange reserves have elevated external financing and market pressures. External pressures and containment measures combined into an abrupt halt in domestic output in April–May 2020. The government’s strong stimulus measures and a loose monetary policy has been crucial for economic stability in 2020. Despite a turndown in the second quarter of 2020, the economy has recorded a recovery in GDP in the third and fourth quarters of 2020 and in the first quarter of 2021. GDP grew by 6.3% in Q3 2020 and 5.9% in Q4 2020 Y-o-Y. In Q1 2021, real GDP grew by 7.0% Y-o-Y. The COVID-19 shock has significantly intensified declining trends in labor force participation and employment. The unemployment rate increased to 14.1% in February 2021 compared to 13.5% in February 2020. In June 2021, the rate declined to 10.4%, though it still remains in the double-digit range.

1.4.

Key fundamentals

Table 1: Turkey – Key Fundamentals, 2018–2025f 2018

2019

2020

2021f

2022f

2023f

2024f

2025f

GDP, constant 2010 prices (US$ tn)

1.25

1.26

1.28

1.35

1.41

1.46

1.51

1.57

GDP growth rate (%)

2.96

0.92

1.79

5.74

3.72

3.73

3.77

3.75

GDP, constant 2010 prices, per capita (US$)

15,248.60

15,175.34 15,260.29

15,906.49 16,308.56

16,724.43 17,163.54

17,616.00

Inflation (%)

16.33

15.18

12.27

16.05

13.88

13.01

12.46

11.96

Exports, total as a percentage of GDP

30.24

32.17

30.21

36.40

34.37

32.00

30.47

28.95

Imports, total as a percentage of GDP

33.15

31.15

37.26

38.46

35.91

33.10

31.22

29.40

Mid-year population (million)

82.00

83.15

84.17

85.18

86.20

87.21

88.20

89.18

Unemployment rate (%)

11.00

13.71

13.13

12.38

10.98

10.41

10.13

9.87

Mobile penetration (per 100 people)

97.30

97.72

98.03

98.27

98.44

98.57

98.67

98.74

Source: Country Statistics, MarketLine

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Table of Contents 1.

OVERVIEW

2

1.1.

Catalyst

2

1.2.

Summary

2

1.3.

1.4. 2. 2.1. 2.2. 3. 3.1. 3.2.

3.3.

1.2.1.

Key findings

2

1.2.2.

PESTLE highlights

4

Recovery of the economy from the COVID-19 crisis

6

1.2.3.1

Snapshot

6

1.2.3.2

Vaccination

6

1.2.3.3

Government measures

6

1.2.3.4

Lockdown measures

6

1.2.3.5

Travel restrictions

8

1.2.3.6

Stimulus measures

10

1.2.3.7

Impact on the economy

12

Key fundamentals

12

KEY FACTS AND GEOGRAPHIC LOCATION

21

Key facts

21

Geographical location

22

PESTLE ANALYSIS

23

Summary

23

Political analysis

24

3.2.1.

Overview

24

3.2.2.

Current strengths

24

3.2.3.

Current challenges

24

3.2.4.

Future prospects

25

3.2.5.

Future risks

26

Economic analysis

27

3.3.1.

Overview

27

3.3.2.

Current strengths

27

3.3.3.

Current challenges

28

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3.4.

3.5.

3.6.

3.7.

4.

3.3.4.

Future prospects

29

3.3.5.

Future risks

29

Social analysis

31

3.4.1.

Overview

31

3.4.2.

Current strengths

31

3.4.3.

Current challenges

31

3.4.4.

Future prospects

33

3.4.5.

Future risks

34

Technological analysis

36

3.5.1.

Overview

36

3.5.2.

Current strengths

36

3.5.3.

Current challenges

36

3.5.4.

Future prospects

37

3.5.5.

Future risks

38

Legal analysis

39

3.6.1.

Overview

39

3.6.2.

Current strengths

39

3.6.3.

Current challenges

39

3.6.4.

Future prospects

40

3.6.5.

Future risks

40

Environmental analysis

42

3.7.1.

Overview

42

3.7.2.

Current strengths

42

3.7.3.

Current challenges

43

3.7.4.

Future prospects

44

3.7.5.

Future risks

44

POLITICAL LANDSCAPE

46

4.1.

Summary

46

4.2.

Evolution

46

4.2.1.

Pre-1975

46

4.2.2.

1975–2000

46

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4.2.3. 4.3.

4.4.

5. 5.1. 5.2.

5.3.

5.4.

5.5. 6. 6.1.

47

Structure and policies

49

4.3.1.

Key political figures

49

4.3.2.

Structure of government

49

4.3.3.

Structure of legislature

49

4.3.4.

Executive branch

49

4.3.5.

Key policies

51

Performance 4.4.1.

4.5.

2001 onwards

53

Governance indicators

53

Outlook

53

ECONOMIC LANDSCAPE

54

Summary

54

Evolution

54

5.2.1.

1923–1990

54

5.2.2.

1991 onwards

54

Structure and policies

55

5.3.1.

Financial system

55

5.3.2.

Istanbul Stock Exchange

56

Performance

57

5.4.1.

GDP and GDP growth rate

57

5.4.2.

GDP composition by sector

59

5.4.3.

Fiscal situation

63

5.4.4.

Exports and imports

63

5.4.5.

Monetary situation

64

5.4.6.

Unemployment

65

Outlook

66

SOCIAL LANDSCAPE

67

Summary

67

6.2.

Evolution

67

6.3.

Structure and policies

67

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6.4.

6.5. 7. 7.1.

6.3.1.

Demographic composition

67

6.3.2.

Religious composition

69

6.3.3.

Education

69

6.3.4.

Healthcare services

70

Performance

70

6.4.1.

Healthcare

70

6.4.2.

Income distribution

71

6.4.3.

Education

71

Outlook

72

TECHNOLOGICAL LANDSCAPE

73

Summary

73

7.2.

Evolution

73

7.3.

Structure and policies

73

7.3.1. 7.4.

R&D

73

Performance

74

7.4.1. 7.5. 8.

Telecoms and internet

74

Outlook

75

LEGAL LANDSCAPE

76

8.1.

Summary

76

8.2.

Evolution

76

8.3.

Structure and policies

76

8.4.

8.3.1.

Judicial system

76

8.3.2.

Tax regulations

77

8.3.3.

Labor laws

77

Performance 8.4.1.

8.5. 9. 9.1.

77

Effectiveness of the legal system

77

Outlook

78

ENVIRONMENTAL LANDSCAPE

79

Summary

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9.2.

Evolution

79

9.3.

Structure and policies

79

9.3.1. 9.4.

10.

79

Performance 9.4.1.

9.5.

Environmental regulations

80

Environmental impact

80

Outlook

81

APPENDIX

82

10.1.

Ask the analyst

82

10.2.

About MarketLine

82

10.3.

Disclaimer

82

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List of figures Figure 1: Turkey – Map, 2021

22

Figure 2: Turkey – External Debt Stock (% of GDP), Q1 2016 – Q1 2021

28

Figure 3: Turkey – Gross Government Debt (% of GDP), 2016–2025f

30

Figure 4: Turkey – Female Labor Force Participation (% of Female Population Aged 15–64), 202032 Figure 5: Turkey – Youth Unemployment as a Percentage of the Total Labor Force Aged 15–24, 2012–2020

33

Figure 6: Turkey – Public Social Expenditure (% of GDP), 2000–2019

34

Figure 7: OECD – Population with Tertiary Education (%), 2019

35

Figure 8: IPR Performance Scores Comparison (Low Scores Correspond to Lower Efficiency), 2020

37

Figure 9: Number of Patents Granted, 2020

38

Figure 10: Legal Component’s Score Comparison, 2020

40

Figure 11: Product Market Competitiveness, 2018

41

Figure 12: Environmental Performance Score Comparison, 2020

43

Figure 13: Turkey – Renewable Electricity, Installed Capacity (Billion Watts), 2010–2019

44

Figure 14: Turkey – GHG Emission, Million Metric Tons, 2010–2019

45

Figure 15: Turkey – Key Political Events Timeline

48

Figure 16: Turkey – Key Political Figures

49

Figure 17: Turkey – Distribution of Seats by Political Parties, 2018

51

Figure 18: Turkey – Evolution of GDP Growth (%), 2011–2020

55

Figure 19: Turkey – Stock Index, January 2020 – July 2021

57

Figure 20: Turkey – Real GDP and Real GDP Growth Rate (US$ Trillion/%), 2016–2025f

58

Figure 21: Turkey – GDP Composition by Sector (%), 2020

59

Figure 22: Turkey – Agricultural Output (TRY Billion/%), 2016–2021f

60

Figure 23: Turkey – Industrial Output (TRY Trillion/%), 2016–2021f

61

Figure 24: Turkey – Services Output (TRY Trillion/%), 2016–2021f

62

Figure 25: Turkey – External Trade (US$ Billion), 2016–2020

63

Figure 26: Turkey – Consumer Price Index and CPI-based Inflation, 2016–2025f

65

Figure 27: Turkey – Total Unemployment and Rate of Unemployment (Millions/%), 2016–2025f 66 Figure 28: Turkey – Major Religions, 2018

69

Figure 29: Turkey – Healthcare Expenditure (US$ Billion/%), 2011–2020

71

Figure 30: Turkey – Public Expenditure on Education (US$ Billion/%), 2011–2020

72

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Figure 31: Turkey – Internet Subscribers (Millions/%), 2016–2020

74

Figure 32: Turkey – Carbon Dioxide Emissions (Million Tons/%), 2010–2020

81

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List of Tables Table 1: Turkey – Key Fundamentals, 2018–2025f

12

Table 2: Turkey – Key Facts, 2021

21

Table 3: Turkey – Political Landscape, 2020

24

Table 4: Turkey – Economic Landscape, 2020

27

Table 5: Turkey – Social Landscape, 2020

31

Table 6: Turkey – Technological Landscape, 2020

36

Table 7: Turkey – Legal Landscape, 2020

39

Table 8: Turkey – Environmental Landscape, 2020

42

Table 9: Turkey – Mid-Year Population by Age (as a Percentage of the Total Population), 2020 68

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2.

Key Facts and Geographic Location

2.1.

Key facts Table 2: Turkey – Key Facts, 2021 Country and capital Full name Capital city

Republic of Turkey Ankara

Government Government type Head of state and government

Presidential republic President Recep Tayyip Erdogan (since 2014)

Population (2020)

84.2 million

Currency

Turkish lira (TRY)

GDP per capita (PPP) (2020)

US$30,272.5

Internet domain

.tr

Demographic details Life expectancy (2020)

75.7 years (total population) 73.3 years (men) 78.2 years (women)

Ethnic composition (2016 est.)

Turkish (70–75%), Kurdish (19%), other minorities (7–12%)

Major religions

Muslim 99.8% (mostly Sunni) Other 0.2% (mostly Christians and Jews)

Country area

783,562 sq. km

Languages

Turkish (official), Kurdish, other minority languages

Exports

Cars and vehicle parts, refined petroleum, delivery trucks, jewelry, clothing and apparel

Imports

Gold, refined petroleum, crude petroleum, vehicle parts, scrap iron

SOURCE: The CIA World Factbook

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2.2. Geographical location Turkey is located between Asia and Europe and is surrounded by the Mediterranean Sea, the Aegean Sea, the Sea of Marmara, and the Black Sea. It shares its borders with Greece, Bulgaria, Iran, Iraq, Syria, Armenia, Russia and Georgia.

Figure 1: Turkey – Map, 2021

SOURCE: The CIA World Factbook

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3.

PESTLE Analysis

3.1.

Summary

On April 16, 2017, the Turkish people validated a change to the composition of government, from a parliamentary to a presidential system, which granted President Erdogan expansive powers. In July 2018, Erdogan won the presidential election and Turkey completely transitioned to a presidential republic. This brought political stability to the country. However, foreign policy tensions are likely to continue as Turkey’s relationships with the EU and the US are in disarray. There is a growing concern over Turkey leaving NATO as its relationship with Russia becomes stronger due to converging mutual interests. In recent years, Turkey has become militarily involved in Libya, Syria, and Iraq by storming up patrols in the Eastern Mediterranean waters dispute. Turkey’s economy is characterized by a stable banking sector and sound public finances. The country improved its current account balance due to an improvement in exports. The current account deficit narrowed from 2.7% of GDP in 2018, to a surplus of 0.9% in 2019, aided by support from tourism revenues and a relatively low trade deficit, according to the IMF. According to the IMF, the current account registered a deficit of 5.1% of GDP in 2020. According to MarketLine, the country’s GDP growth is expected to accelerate by 5.7% in 2021 due to the impact of intense stimulus on economic activities. Turkey has one of the youngest populations in Europe. With the rest of Europe facing the problem of an aging population, the country has an opportunity to increase its employment rate by capitalizing on its young labor force. To enjoy the advantages associated with a young population, the government must improve its tertiary education outcomes and strengthen its labor laws, both of which can act as hindrances to labor market efficiency. The government is making efforts to eliminate child labor and is taking up initiatives to develop the rural economy. The Turkish technological landscape is characterized by a strong ICT sector, which offers investment opportunities for domestic and foreign investors. The government has played its part by encouraging foreign entities, prominent universities, and research organizations to perform research. The creation of “teknoparks” will attract investment. Meanwhile, the commercialization of research output remains weaker in Turkey than in other developing economies, notably the BRICS nations. The country’s weak enforcement of its IPR laws is considered a major challenge to technological growth. Turkey has a moderately friendly business environment. However, judicial inefficiencies, such as political bias and the time taken to complete trials, continue to impede the legal machinery. The level of corruption is also a cause for concern in Turkey. Turkey’s product market is highly regulated compared to its European counterparts. It affects the competition in the market. According to the Global Competitiveness Index, Turkey’s product market is less competitive than Greece and Hungary. Turkey has strong environmental policies and is a signatory to most regional and global environmental accords. The country is also a participant in many environmental programs. Despite these initiatives, it performed poorly in the 2020 Environmental Performance Index (EPI) carried out by Yale and Columbia. Against the backdrop of growing concerns for the environment, the government is planning to leverage its large, but underutilized, potential in renewable energy. In addition, air and water pollution needs to be addressed. Increasing levels of pollution in the Black Sea are a concern for Turkey.

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3.2. Political analysis 3.2.1.

Overview

Turkey is a member of NATO, the EU, and OECD, which has substantially strengthened its international standing. Turkey’s relationships with the EU and the US are in disarray after a series of challenges have caused tensions. The concern over the risk of Turkey leaving NATO has been growing since early 2017, as Turkey has gravitated closer to Russia due to converging mutual interests. In August 2020, Greece and Turkey were involved in a spat over gas reserves and maritime rights, which has prompted fears of tension escalating further. In early 2021, Turkey has set its sight on creating a new constitution that will focus on establishing rule of law in the country.

Table 3: Turkey – Political Landscape, 2020

Current Strengths • Membership of international organizations

Current Challenges • Foreign policy tensions • Political instability

Future Prospects • Improving ties with Russia and Iran • New proposed constitution

Future Risks • Relations with NATO • Anti-immigration sentiment on the rise

Source: MarketLine

3.2.2.

©MARKETLINE

Current strengths

Membership of international organizations Turkey is a member of numerous international organizations, which has substantially enhanced its international standing. It has been a member of NATO since 1952 and serves as the organization’s chief eastern anchor, controlling the straits linking the Black Sea and the Mediterranean Sea. In 2011, the country played an important role in the organization’s Operation Unified Protector to help protect civilians in Libya. In the same year, it agreed to host a radar system as a part of the organization’s missile defense architecture. Since 1999, Turkey has been an EU candidate country, and its political, economic, and defense relations are primarily directed towards the West. In addition to its relationships with NATO and the EU, Turkey is also a member of the OECD, the Organization for Security and Cooperation in Europe (OSCE), and the Council of Europe. The country is also a member of the UN, the World Trade Organization (WTO), the Euro-Atlantic Partnership Council, the Group of 20 (G-20), the International Monetary Fund (IMF), the World Bank, and the Organization of Islamic Cooperation (OIC). Turkey was also a founding member of the Black Sea Economic Cooperation (BSEC) Council, a 12-member inter-governmental organization promoting regional alliances. It observes the Organization of American States (OAS) and is a dialogue partner of the Shanghai Cooperation Organization.

3.2.3.

Current challenges

Foreign policy tensions Turkey’s relationship with the EU and the US has encountered a series of challenges and continues to deteriorate. Historically, the country’s relationship with the US has been complicated, despite both nations supporting each

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other’s interests in vital ways. Two specific points of bilateral contention stand out. The differences between Turkey and the US on security policies over Syria and Turkey’s growing relationship with Russia are both contentious issues. The main reason behind the tension is US support for Kurds in Syria. Turkey's accession negotiations to the EU have practically been frozen as the 28-nation bloc has mixed feelings about Turkey’s potential membership. In October 2020, the country’s relations with the EU took a turn for the worse when Turkey’s capital Ankara voiced dissatisfaction with the result of the EU summit and the country’s bid for membership looked bleak. Recently, in August 2020, the country witnessed spats with Greece on two occasions. First, when Turkey converted Hagia Sophia from a museum into a mosque and then over hydrocarbons in the Eastern Mediterranean. The longstanding rivalry with Greece is also expected to brew further political tension. Turkey’s relations with the US have been worsening over migrant issues. In August 2021, the US government announced the ‘U.S. Refugee Admissions Program Priority 2 Designation’, which will aim to provide US citizenship to Afghan nationals previously associated with the US government, US-based nongovernmental organizations (NGOs) and press organizations. According to the Turkish government, the program will encourage higher migration into Turkey to obtain US citizenship.

Political instability 2019 proved to be challenging year for the Turkish economy, with unrest within President Erdogan’s party, as well as heightened tensions between Turkey and the EU. In April 2019, the Turkish president demanded a re-run of the Istanbul mayoral election over claims of irregularities and fraud. The danger of a worsening economy as a result of the COVID-19 outbreak and the already existing economic slump is compounding political instability, threatening the economic gains made by the Erdogan government. According to the Worldwide Governance Indicators for 2020, published by the World Bank, the country’s percentile rank in terms of political stability and absence of violence/ terrorism deteriorated from 15.64 in 2009 to 10.00 in 2019.

3.2.4. Future prospects Improvement of ties with Russia and Iran Turkey and Iran have never had a straightforward alliance, although relations are seemingly improving, with both parties working towards a political settlement to end the war in Syria via the Sochi process. The two countries are working to boost trade, especially in the area of natural gas, as Turkey’s pipeline deal with Israel has been jeopardized amid growing discord. Previously bitter relations with Russia have improved since early 2016 as the two countries have found a mutual enemy in IS. Russia carried out air strikes in coordination with Turkish forces on Syrian territory. In December 2016, both Russia and Turkey pledged to cooperate with Iran to fight IS in Syria. In December 2017, Turkey and Russia signed a deal worth US$2.5bn for Russia to supply Turkey with S-400 surface-toair missile batteries. In April 2018, the leaders of Iran, Russia, and Turkey pledged to end the Syrian war. In January 2019, the countries also shared foreign policy on the Venezuelan presidential crisis. The relationship between Iran and Turkey has also proved useful in solving local problems and the Turkish president believes a high-level of cooperation between the countries will help Turkey return to pre-pandemic levels. To mitigate the negative effects of the US’s sanctions and the COVID-19 pandemic, the Iranian president proposed the advancement of economic and trade cooperation with Turkey in October 2020.

New constitution In early 2021, President Recep Tayyip Erdoğan called for a new civilian constitution. The government has stated that the new constitution will aim to prioritize fundamental rights and freedoms, the rule of law and democracy. The present constitution of Turkey was written in the 1980’s by military leaders. As a result, the present government has termed it a coup-era artifact. In the new constitution, citizens and politicians are expected to contribute towards writing it.

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3.2.5.

Future risks

Relations with NATO The country has been a member of North Atlantic Treaty Organization (NATO) since 1952. Moreover, it serves as the organization’s chief eastern anchor, controlling the straits linking the Black Sea and the Mediterranean Sea. Turkey has pursued many hostile military policies not in sync with NATO. Its growing relationship with Russia has also been frowned upon by other NATO members. In April 2018, NATO’s Secretary General Jens Stoltenberg met with Turkey’s Foreign Minister Mevlüt Çavuşoğlu to prepare for the Brussels Summit in July 2018 and discuss security challenges. NATO’s Secretary General stressed that NATO stands with Turkey in solidarity, and it supports Turkey with assurance measures. However, concerns over the risk of Turkey leaving NATO have been growing as Turkey is losing patience with the US and moving closer to Russia and Iran. Turkey, Russia, and Iran serve as guarantor states of the Astana Peace process, which aims to facilitate a peaceful solution to the ongoing Syrian crisis. In 2020, relations between Turkey and France, also a NATO member, have taken a turn for the worse following the strong secular stance of the French government. The Turkish president has called for a ban on French products in 2021. The two countries have also clashed over Turkey violating an arms embargo against Libya in 2020.

Anti-immigration sentiment is on the rise On August 12, 2021, a brawl broke out in Ankara among local Turks and Syrian immigrants, leading to the death of a Turkish citizen. Since July 2021, the Turkish military has reinforced border security to keep out the incoming Afghanistan refugees fleeing the country as Taliban forces capture their country. President Erdogan has stated, “Turkey has no duty, responsibility or obligation to be Europe’s refugee warehouse”. In such a situation, the refugee crisis is expected to intensify the geopolitical tensions among Turkey, the EU and the US.

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3.3. Economic analysis 3.3.1.

Overview

The Turkish economy has been on a growth path since 2000. The Turkish economy is characterized by a stable banking sector and sound public finances. However, a perennially high current account deficit could be a major source of vulnerability if investors’ risk appetite shifts, as the economy is dependent on volatile short-term flows and short-term external debt to fulfill its external financing requirements. The Turkish economy has been overheating since 2017. This situation, along with the tight monetary policy of the US, has pushed Turkey’s economy towards stagflation. In 2020, the economy recorded a rise in GDP growth on the back of strong fiscal and monetary stimulus. In September 2020, the country’s debt rating was downgraded by Moody’s, warning of a balance-of-payments crisis. The collapse of the tourism industry in 2020, along with prolonged restrictions on international travel in 2021, is fueling pressure on the country’s currency.

Table 4: Turkey – Economic Landscape, 2020

Current Strengths • Stable banking sector • Resilient economic growth during the pandemic

Current Challenges • Increasing level of foreign currency debt • Depreciating lira and overheating economy

Future Prospects • Trade agreements to support external sector

Future Risks • High stimulus packages leading to rising government debt

Source: MarketLine

3.3.2.

©MARKETLINE

Current strengths

Stable banking sector The country has a stable banking sector and has endured several financial crises. After the global financial crisis, the Central Bank of Republic of Turkey (CBRT) adopted a policy mix where reserve requirements and the interest rate were used to reduce the negative effects of volatility in capital flows. This helped the country to maintain a resilient Turkish financial system. During the COVID-19 pandemic, the rapid worsening of the economic outlook and the complete change of risk perception affected both the banks' lending appetite and demand for loans; however, with a stable banking sector, the CBRT was able to announce various measures to ensure the uninterrupted continuation of loan flows and to support the consumers affected by the outbreak. The Central Bank lowered the benchmark interest rate to 8.25% in April 2020. The aim was to stimulate the economy with cheaper and larger amounts of credit. However, by March 2021, the central bank had increased the interest rate to 19% to arrest rising inflation. According to the ‘Financial Stability report May 2021’, the non-performing loans (NPL) ratio of the banking sector stood at 3.8% as of March 2021, compared to 5.4% at the end of 2019.

Resilient economic growth during the pandemic Turkey is among the few countries of the world that recorded growth in real GDP in 2020, as opposed to the sharp contraction in other major economies. The economic growth in Turkey was driven mostly by large quasi-fiscal support in the form of concessional loans to corporates and households, among other measures. The loans have helped support expenditure trends in 2020. PESTLE Country Analysis Report: Turkey © MarketLine. This report is a licensed product and is not to be photocopied

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3.3.3.

Current challenges

Increasing level of foreign currency debt Turkey’s exposure to foreign currency debt is increasing. According to the World Bank, Turkey’s exposure to foreign currency debt increased from 39.3% of GNI in 2010 to 59.41% of GNI in 2019. This high level of external debt makes Turkey vulnerable to external shocks. This trend will also cause negative pressure on the Turkish lira and will lead to the widening of the current account deficit. Most of this foreign currency exposure comes from the private sector of the economy. According to the Treasury and Finance Ministry in Turkey, total gross external debt stock reached US$431bn at the end of March 2020. By Q1 2021, the total external debt stock had increased to US$448bn, out of which the private sector accounted for US$253bn. Such a rapidly rising debt burden has added to Turkey’s gross external debt stock to GDP ratio, which stood at 61.5% in Q1 2021.

Figure 2: Turkey – External Debt Stock (% of GDP), Q1 2016 – Q1 2021 65.0

External Debt Stock as a % of GDP

60.0

55.0

50.0

45.0

Q1 2021

Q4 2020

Q3 2020

Q2 2020

Q1 2020

Q4 2019

Q3 2019

Q2 2019

Q1 2019

Q4 2018

Q3 2018

Q2 2018

Q1 2018

Q4 2017

Q3 2017

Q2 2017

Q1 2017

Q4 2016

Q3 2016

Q2 2016

Q1 2016

40.0

Year SOURCE: The World Bank

©MARKETLINE

Depreciating lira and overheating economy The US’s monetary policy tightening measures and Turkey’s increasing level of foreign currency debt are putting downward pressure on the Turkish lira. The depreciating lira is one of the major threats to the economy. The country’s economy started overheating in 2017, due to the high level of inflation, coupled with the depreciating lira. Policymakers should seek to rebalance the economy by increasing export competitiveness, encouraging savings, and lowering inflation. Turkey is required to address the problems associated with its increasing level of external debt, which makes the economy vulnerable to external events. The Turkish lira has hit an all-time low against the US dollar amid mounting geopolitical risks in the region. Apart from ongoing clashes between Armenia and Azerbaijan, there is a risk that the US may impose sanctions on Turkey for purchasing S-400s from Russia in October 2020. Another reason for the free fall of the lira was that the informal measures proposed by the Central Bank did not suffice to stabilize the lira and proved to be temporary amid the global pandemic. In 2021, the lira has continued to depreciate

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steadily. Instability in the economic management of the country originating from the unexpected removal of top officials has led to lower investor confidence. A steep rise in the interest rate, which aims to attract foreign investments, has also been unable to translate into an appreciation of the lira in 2021.

3.3.4. Future prospects Trade agreements to support external sector Turkey has always encouraged the liberalization of trade in goods and services, which can be seen by its participation and membership of various organizations, including the Economic Cooperation Organization (ECO) and the United Nations Conference on Trade and Development (UNCTAD). In addition to the Euro-Mediterranean Partnership, Turkey has entered into free-trade agreements (FTAs) with Singapore, South Korea, and Georgia. In October 2017, Turkey and Indonesia signed the eighth Joint Commission for Economic and Technical Cooperation, which aims to strengthen investment and trade between the two countries. In July 2020, Turkey and Venezuela signed a trade development agreement, which became effective starting August 21, 2020. In October 2020, a free trade agreement (FTA) between Ukraine and Turkey was signed. The UK Turkey Free Trade agreement came into effect from April 2021. The agreement includes goods trade, customs and trade facilitation, intellectual property, government procurement, technical barriers to trade, competition, trade remedies, and dispute settlement. The trade agreement will play a major role in supporting Turkey’s external sector given the UK’s significant share in Turkey’s total trade.

3.3.5.

Future risks

High stimulus packages leading to rising government debt According to MarketLine, the country introduced US$73.56bn (equivalent to 9.80% of GDP) of stimulus packages to keep the economy afloat during the calamitous effects of the COVID-19 crisis. The country has announced additional state payments to the personnel working in health facilities affiliated with the Health Ministry; they were extended by three months as of August 1. In June 2020, the short-work allowance system that provides income support to employees of fully or partially closed businesses due to forced closure was extended by one month. According to the IMF, the country’s gross government debt is expected to increase from 36.8% of GDP in 2020 to 37.1% of GDP in 2021 because of the continued borrowing by the government. In absolute terms, the government’s gross debt is forecast to rise from US$264.5bn in 2020 to US$294.8bn in 2021. The debt incurred on COVID-19 relief will lead to a large government debt account in terms of GDP.

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Figure 3: Turkey – Gross Government Debt (% of GDP), 2016–2025f 45.0 43.0 41.0

39.0

Percentage

37.0

35.0 33.0 31.0 29.0 27.0 25.0 2016

2017

2018

2019

2020

2021f

2022f

2023f

2024f

2025f

Year

SOURCE: IMF

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©MARKETLINE

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3.4. Social analysis 3.4.1.

Overview

Turkey has one of the youngest populations in Europe. With the rest of the region facing the problem of an aging population, the country has an opportunity to increase its employment rate by capitalizing on its young labor force. However, to enjoy the advantages associated with a young population, the government must improve its tertiary education outcomes and strengthen its labor laws, both of which can hinder labor market efficiency. The government is already making efforts to eliminate child labor and is taking up initiatives to develop the rural economy. The Turkish government’s New Economic Program (NEP) for 2021–2023 is set to install policies not only to support economic growth but also to promote sustainable growth to facilitate youth employment and short-term flexible work models, as announced by the Treasury and Finance Ministry on September 24, 2020. In 2020, recent amendments to labor laws were also introduced amid the COVID-19 pandemic. The New Amendment Law introduced significant changes, which entered into force on March 25, 2020.

Table 5: Turkey – Social Landscape, 2020

Current Strengths • Young population

Current Challenges • Disparity among socioeconomic groups and gender • Weak labor laws • Youth unemployment

Future Prospects • Overhaul of social policies • Eliminating child labor

Future Risks • Weak tertiary education

Source: MarketLine

3.4.2.

©MARKETLINE

Current strengths

Young population According to the CIA World Factbook, Turkey has one of the youngest populations in Europe, with a median age of 32.2 years as of 2020. According to MarketLine, in 2020, the age structure showed that 23.3% of the population belonged to the 0–14 age group, 68.3% to the 15–64 age group, and 8.4% to the 65+ age group. With the rest of Europe facing an increase in the average age of its population, Turkey has an opportunity to increase its employment rate by capitalizing on its young labor force.

3.4.3. Current challenges Large disparity among socioeconomic groups and gender Despite progress in terms of social development, there are considerable regional disparities, with some demographic groups faring considerably better than others. The female labor force participation rate is low in comparison to other

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OECD countries. In 2020, the female labor force participation rate in Turkey was 37.6%, compared to 63.6% in the US and 72.9% in Germany, according to MarketLine. In September 2020, ILO and TURKSTAT jointly published a report named ‘Measuring the Gender Wage Gap: Turkey Case’ which stated the headline gender wage gap measure stood at 15.6% in 2018. The highest disparity in wages among men and women are mostly prevalent in workers with elementary or high school education. On the other hand, workers with tertiary education had the lowest wage disparity. One of the major fallouts from the COVID-19 pandemic has been a rising gender wage gap in 2020 and 2021.

76.1

Denmark

79.7

79.8

Sweden

75.4

Switzerland

75.4

Latvia

72.9

75.2

Finland

71.6

Germany

68.0

The UK

63.6

66.2

France

70.0

Spain

80.0

The Netherlands

90.0

60.0

50.0 40.0

37.6

30.0 20.0 10.0

The US

0.0

Turkey

Female Labor Force Participation (% of Female Population Aged 15-64)

Figure 4: Turkey – Female Labor Force Participation (% of Female Population Aged 15–64), 2020

SOURCE: The World Bank

©MARKETLINE

Weak labor laws Weak labor laws, which hinder the formation of unions, have considerably restricted workers’ rights in Turkey. According to the European Commission, around two-fifths of the workforce is not fully protected under the labor laws and are open to exploitation in the form of long working hours without payment for overtime, unjustified terminations, and limitations on the usage of annual leave. Due to repressive labor union policies, Turkey had one of the lowest union densities in the OECD at 9.2%, compared to 13.6% in Spain in 2018. Although the government approved an action plan for 2017–2019 as part of the National Employment Strategy, to improve flexibility in the labor market, the country must improve its labor laws to create a more efficient labor market. In November 2020, the Turkish worker’s unions opposed the new omnibus labor bill passed in the parliament. According to them, the bill will hamper job security, severance and notice pays for workers working under fixed-term contracts. According to the ‘2021 ITUC Global Rights Index’, Turkey was among the top 10 worst countries in terms of labor rights, out of a total 149 countries.

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Youth unemployment The youth unemployment rate (percentage of the total labor force aged between 15 and 24) is very high in Turkey. The unemployment rate in the EU increased after the 2008 financial crisis, but in most countries, the unemployment rate has decreased in recent years. In Turkey, the youth unemployment rate is still increasing. This increasing youth unemployment can badly affect the economy, which is already showing a stagflation trend. Amid harsh COVID-19 outbreak conditions, youth unemployment stood at 26.1% in June 2020, according to the Turkish Statistical Institute. The rate peaked in February 2021 when it reached 27.1%. Since then, the youth unemployment rate has declined steadily and reached 20.7% by June 2021.

Figure 5: Turkey – Youth Unemployment as a Percentage of the Total Labor Force Aged 15–24, 2012– 2020

20.0

10.0

SOURCE: MarketLine

2020

2019

2018

2017

2016

2015

2014

2013

0.0

2012

As a Percentage of the Total Labor Force Aged 15-24

30.0

©MARKETLINE

3.4.4. Future prospects Overhaul of social policies The Turkish government has undertaken initiatives to implement policies to improve the social benefits it provides. The country initiated the Instrument for Pre-Accession Assistance on Rural Development (IPARD) to improve social conditions in settlements and regional centers. The program, which will run until 2020, aims to improve the social conditions of people living in rural areas by building hospitals, cultural centers, apartment buildings, roads, power transmission lines and schools. The program's objectives include the modernization of the agricultural sector. The government intends to allocate funds to improve agricultural holdings, the overall performance and competitiveness of the food processing industry, and the role of manufacturer groups in agricultural markets. This initiative will contribute to the development of the rural economy and promote the formation of micro-enterprises, creating PESTLE Country Analysis Report: Turkey © MarketLine. This report is a licensed product and is not to be photocopied

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employment opportunities in rural areas. According to the OECD, public social expenditure by Turkey increased from 7.5% of GDP in 2000 to 12.0% of GDP by 2019. In December 2019, the Turkish government introduced a social housing project to provide homes to 100,000 families, with low-income families to be able to purchase houses to be built by the government at cheaper prices. The houses are to be built in 81 provinces. In July 2021, the Project to Install Efficient Observation, Evaluation and Coordination Mechanism for Roma was introduced in Ankara. The project is being implemented by the Ministry of Family and Social Services and funded by the EU. The project aims to enable better integration into society, through increased schooling of Roma children, improving their employment through lifelong learning classes, incentives for self-employment, as well as increased social aid for impoverished Roma families.

Figure 6: Turkey – Public Social Expenditure (% of GDP), 2000–2019 14.0 13.0 12.0

% of GDP

11.0 10.0 9.0 8.0 7.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

SOURCE: Eurostat

©MARKETLINE

3.4.5. Future risks Low levels of tertiary education Turkey has one of the lowest tertiary education rates among OECD nations, which is a serious challenge for the government in the long run. The low level of tertiary education reduces the availability of skilled employees to the wider economy. According to the OECD, only 35.3% of the population aged 25–34 had attained tertiary education as of 2019, well below the OECD average of 44.9%. Additionally, only 10.97% of the population aged 55–64 had attained tertiary education as of 2019, lower than the OECD average of 28.4%. Turkey needs a high level of investment in the tertiary level of education, otherwise its young demographic resource could become a demographic burden for the country.

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Figure 7: OECD – Population with Tertiary Education (%), 2019

50.0

40.0

30.0

20.0

10.0

25–34

The UK

The US

The Netherlands

France

Denmark

Israel

Spain

OECD Average

Slovenia

Latvia

New Zealand

Poland

Estonia

Greece

Finland

Austria

Slovakia

Turkey

Germany

The Czech Republic

Costa Rica

Colombia

Italy

0.0 Mexico

Population with Tertiary Education (% in the Same Age Group)

60.0

55–64

SOURCE: OECD

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3.5. Technological analysis 3.5.1.

Overview

Turkey’s technological landscape is characterized by a strong ICT sector, which represents investment opportunities for domestic and foreign investors. The government is playing its part by encouraging foreign entities, prominent universities and organizations to perform research. The creation of “technoparks” aims to attract investment. Despite these measures, the commercialization of research output remains weaker in Turkey than in other developing economies – notably the BRICS nations. The country’s weak enforcement of its IPR laws is considered a major challenge. The work of developing different units of 5G continues uninterrupted despite the COVID-19 pandemic, according to Ulak Communications. The TÜBİTAK 5G Industrial Innovation Network Mechanism project, which is planned to start in 2021, is also being carried out under Ulak Communications.

Table 6: Turkey – Technological Landscape, 2020

Current Strengths • Strong ICT infrastructure

Current Challenges • Poor IPR environment

Future Prospects • Government encouragement to improve R&D

Future Risks • Weak innovation and low volume of patents

Source: MarketLine

3.5.2.

©MARKETLINE

Current strengths

Strong ICT Sector Turkey’s ICT sector has improved significantly over the last decade. According to MarketLine, the number of internet users increased from 29.13 million in 2010 to 63.9 million in 2020, and the broadband penetration rate (per 100 people) increased from 9.81 in 2010 to 17.9 in 2020. Mobile subscribers in Turkey also increased from 62.5 million in 2010 to 81.8 million in 2020. According to TUBISAD (Turkish Informatics Industry Association), the ICT sector reached a value of TRY152.7bn (US$18.42bn) in June 2020. The ICT sector's progress has partly been due to the privatization of the Turkish telecommunications sector, which has expanded the scope for employment and attracted foreign investment. Under the government’s “Vision 2023” strategy, the country aims to reach 30 million broadband subscribers, supply 50% of the ICT sector with domestic products and services, increase the ICT sector’s share to 8% of GDP, increase R&D expenditure to 3% of GDP, and increase computer literacy to 80% of the population.

3.5.3.

Current challenges

Poor IPR environment Turkey is recognized as a country where IPR protection and enforcement is a key challenge. According to the ‘International Property Rights Index 2020’, Turkey ranked 66th out of 129 countries, with a low score in terms of copyright protection, citing high levels of copyright piracy. Software piracy rates continue to be high, due to the

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widespread use of unlicensed software by enterprise end users. According to the BSA ‘Global Software Survey 2018’, the country’s software piracy rate was 56%, representing a commercial value of US$208m. The global average was 37% during the same year.

Figure 8: IPR Performance Scores Comparison (Low Scores Correspond to Lower Efficiency), 2020 Intellectual Property Rights 10 8

6 4 2 0

Copyright Protection

Patent Protection

Turkey

Poland

The UK

SOURCE: International Property Right Index, 2019

©MARKETLINE

3.5.4. Future prospects Government encouragement to improve R&D The government is developing the country’s technological landscape and it has given considerable encouragement to foreign entities, prominent universities, and organizations in order to foster a culture of innovation. To this end, it initiated a science and technology project called “Vision 2023” under the coordination of the Scientific and Technical Research Council and the Supreme Council of Science and Technology. The aim of this project is to formulate new national science and technology policies to promote innovation and build an S&T vision for Turkey for the next 20 years. According to TURKSTAT, the highest appropriation for R&D (44%) is set to be allocated to universities for the general advancement of knowledge in 2021. Defense ranked second among the socio-economic objectives, with a 28.4% share of total R&D outlay.

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3.5.5.

Future risks

Poor innovation and low number of patents Low levels of innovation have been reflected by the limited volume of patents registered. According to data from the United States Patent and Trademark office (USPTO), the number of patents granted was 223 in 2020 for Turkey. Turkey has performed worse than European counterparts, such as Poland, which secured 439 patents in 2020. The country’s innovation potential is seriously impacted by the poor commercialization of research findings from universities, low private sector innovation performance, and the poor availability of early-stage funding for research.

Figure 9: Number of Patents Granted, 2020 8,834

9,000.0

Number of Patents Granted

7,981

6,000.0

3,000.0

137

223

439

Greece

Turkey

Poland

1,187

SOURCE: USPTO

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The UK

France

Spain

0.0

©MARKETLINE

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3.6. Legal analysis 3.6.1.

Overview

Turkey has adopted a series of reforms to bolster its robust business environment, including the creation of the Investment Support and Promotion Agency of Turkey (ISPAT). However, judicial inefficiencies, such as political bias and the time taken to complete trials, continue to impede the nation’s legal machinery. According to the ‘Rule of Law Index 2020’, by the World Justice Project, which measures how the rule of law is experienced in practical, everyday situations by ordinary people in different countries around the world, Turkey’s overall global rank was 107th out of 128 countries, rising three positions in its global rank from the 2019 index. Turkish parliament approved a law in July 2020 that gives the authority to government to regulate social media, despite concerns of growing censorship. In 2020, Turkey made paying taxes easier by amending the value added tax code to exempt certain capital investments from value added tax.

Table 7: Turkey – Legal Landscape, 2020

Current Strengths • Business-friendly environment

Current Challenges • Judicial inefficiencies

Future Prospects • Pro-business reforms

Future Risks • High product market regulations

Source: MarketLine

3.6.2.

©MARKETLINE

Current strengths

Business-friendly environment Turkey’s robust framework for business entities creates a successful commercial environment and drives growth. The country was ranked 76th out of 180 countries evaluated in the ‘2021 Index of Economic Freedom’, by the Heritage Foundation and the Wall Street Journal, compared to Greece’s rank of 96th. In 2021, the country scored 75.8 out of 100 in terms of the ‘business freedom’ parameter. In the World Bank’s 2020 Doing Business report, Turkey was ranked 33rd out of 190 countries, compared to Greece’s rank of 72nd. To start a business in Turkey, it takes seven days, which is much lower than the Europe and Central Asian average of 11.9 days, and the OECD high income average of 9.2 days. The time taken to deal with construction permits in Turkey (100 days) is lower than the Europe and Central Asian average of 170.1 days and the OECD high income average of 152.3 days.

3.6.3.

Current challenges

Judicial inefficiencies Delays in the Turkish judicial system are a serious concern and have been the subject of much debate. The political bias of judges has affected legal outcomes. The High Council of Judges and Prosecutors controls the careers of prosecutors and judges and can sway their decisions. Long pretrial detention and excessively protracted trials are also major concerns. Turkish commercial courts are overloaded with cases, and on an average, it takes over a year to resolve each case. Criminal trials are slow due to the backlog of cases and decisions are often arbitrary and subject to political interference, especially in high profile cases. According to the International Property Rights Index (IPRI) 2020, Turkey’s score on judicial independence is 3.316, which is lower than Greece’s score of 4.137.

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Figure 10: Legal Component’s Score Comparison, 2020

Scores (Zero Means Less Efficient)

10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0

2.0 1.0 0.0 Judicial independence Greece

Rule of law Hungary

Poland

The UK

SOURCE: International Property Right Index 2020

Control of corruption Turkey

©MARKETLINE

3.6.4. Future prospects Pro-business reforms The government adopted a number of reforms to introduce European business regulations and standards and established the Investment Support and Promotion Agency (ISPAT) to promote business opportunities. Turkey’s business environment has improved significantly, and according to the World Bank’s Doing Business report in 2020, the country’s improved rank (33rd) is indicative of its better investment environment. Turkey has improved its credit information system in recent years, established a unified collateral registry and allowed out of court enforcement of collateral. These initiatives have improved access to credit in Turkey. In 2019, Turkey removed the minimum paid-in capital requirement to start a business. The improvements in the online portal for tax payment have made tax payment and filing easier.

3.6.5.

Future risks

High product market regulations In terms of market regulation, Turkey is overly cautious. Product market indicators are a set of metrics that measure the extent to which policies are framed by the government to promote or inhibit competition in areas where competition is possible. Many sectors are more regulated in Turkey than in its European counterparts, especially communications, transportations and professional services. In fact, Turkey has some of the most stringent professional services regulations in the OECD. Regulatory laws concerning market entry, advertising, price and fees, and restrictions on incorporations are hindering the creation of efficient and competitive markets for these

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professions. The government needs to reduce professional services restrictions to foster competition and improve productivity. According to the OECD’s Economy-wide Product Market Regulation Indicator 2018, Turkey scored 2.28 out of six (value range from 0–6, from most to least competition friendly regulatory regime), lower than the OECD average of 1.43, and Greece at 1.56. This is indicative of a less competition-friendly market and monopolies in various sectors. Extensive regulation decreases the purchasing power of households and increases business expenses through higher production costs, discouraging investments, and restricting new avenues of employment.

Figure 11: Product Market Competitiveness, 2018

2.0 1.5 1.0 0.5

SOURCE: World Economic Forum, Global Competitiveness Index

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Turkey

The US

Belgium

France

Luxembourg

Greece

Switzerland

Poland

Slovak Republic

Austria

Iceland

Chile

Ireland

Finland

Portugal

Italy

Hungary

Slovenia

The Czech Republic

Latvia

Estonia

Norway

Sweden

The Netherlands

Spain

Germany

The UK

0.0

Denmark

Product Market Competitiveness Score

2.5

©MARKETLINE

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3.7.

Environmental analysis

3.7.1.

Overview

Turkey has strong environmental policies. It is a signatory to most regional and global environmental accords and is a participant in many environmental programs. Despite these initiatives, the country performed poorly in the 2020 EPI carried out by Yale and Columbia, with a rank of 99th out of 180 countries. Against a backdrop of growing environmental concerns, the government is planning to use its underutilized renewable energy potential. There is also an urgent requirement to address air and water pollution. A high level of pollution in the Black Sea is a serious concern for Turkey. The deadly forest fires that broke out in Turkey in July 2021 has brought the issue of climate change and pollution control measures adopted by the government to the forefront.

Table 8: Turkey – Environmental Landscape, 2020

Current Strengths • Strong environmental policies • International cooperation

Current Challenges • High pollution levels • Loss of forest cover

Future Prospects • Progress towards renewable energy

Future Risks • Distortionary policies • Rapidly increasing greenhouse gas emission

Source: MarketLine

3.7.2.

©MARKETLINE

Current strengths

Strong environmental policies The country has strong environmental policies and has been modernizing its environmental laws as part of its EU accession initiatives. Local municipalities have important roles in recycling, waste sewage treatment, water purification, solid waste management, and environmental remediation. The country’s environmental policies emphasize energy efficiency and most EU laws in this area have been implemented. The Energy Efficiency Law and the Law on Utilization of Renewable Energy Resources form the backbone of the nation’s environmental policy. In July 2020, the Environment Ministry signed a new circular “Maritime Waste Practice”, envisaging stricter measures for waste originating from ships, along with the monitoring of waste from ships using online applications.

International cooperation Turkey is a signatory to most regional and global environmental accords and environmental programs. The country is a signatory to the United Nations Convention to Combat Desertification, the Convention on the Protection of the Black Sea Against Pollution (Bucharest Convention), the United Nations Framework Convention on Climate Change, the Kyoto Protocol, the Convention on International Trade in Endangered Species, the Convention on Biological Diversity, the Convention for the Protection of the Marine Environment and the Coastal Region of the Mediterranean (Barcelona Convention), and the Basel Convention on the Control of Trans-boundary Movements of Hazardous Wastes and their Disposal. The country has made successful use of international methods to acquire technical and financial assistance to maintain national environmental priorities.

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3.7.3.

Current challenges

High pollution levels There is an urgent requirement for water treatment plants, wastewater treatment equipment, and solid waste management facilities in Turkey. The main reasons for high levels of environmental pollution are the increase in chemical and detergent effluents and the rise in air pollution in urban areas. The discharge of pollutants by neighboring countries has contaminated the Black Sea. Air pollution has increased significantly since the mid-1990s, and is especially severe in Istanbul, Ankara, Erzurum, and Bursa. In Istanbul, the increasing volume of cars in urban areas is resulting in extensive smog. Turkey lacks an efficient legal framework for the protection of wetlands, forests and natural sites.

Figure 12: Environmental Performance Score Comparison, 2020

SOURCE: EPI report by Yale and Columbia University

©MARKETLINE

According to the United Nations Convention to Combat Desertification’s (UNCCD) 2018 statistics, Turkey loses 154 million tons of topsoil annually. According to BP’s Statistical Review 2021, CO2 emissions increased from 276.3 million tons in 2010 to 369.5 million tons in 2020.

Loss of forest cover According to the Global Forest Watch, from 2001 to 2020, Turkey lost 545kha of tree cover, equivalent to a 5.4% decrease in tree cover since 2000. In July and August 2021, forest wildfires engulfed hundreds of acres of land in Turkey, leading to significant destruction of property.

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3.7.4.

Future prospects

Progress towards renewable energy Environmental protection has become an important issue. Turkey’s under-utilized potential in solar and onshore wind power is substantial. Turkey’s high dependence on energy imports contributes to its current account deficit, so the country has set the ambitious goal of renewing its energy sector. The country secured an investment worth US$325m from the World Bank to implement its Renewable Energy Integration Project (REIP) and integrate wind energy using smart grid technologies. According to the International Energy Agency (IEA), the country is anticipated to rank fifth in Europe for increasing its renewable power capacity, which is projected to add 22.2 GW by 2025 to reach a total of 66.8 GW. One of the key priorities has been energy security and it is one of the pillars of Turkey’s energy strategy. Under the Renewable Energy Support Mechanism (YEKDEM), Turkey offers feed-in tariffs for renewable power plants, including wind, solar, biomass, hydro and geothermal.

Figure 13: Turkey – Renewable Electricity, Installed Capacity (Billion Watts), 2010–2019 50.0 45.0

Billion Watts

40.0 35.0 30.0 25.0 20.0 15.0

2010

2011

2012

2013

2014

2015

2016

SOURCE: Eurostat

3.7.5.

2017

2018

2019

©MARKETLINE

Future risks

Distortionary policies Turkey charges relatively low transport fuel taxes, which indirectly encourages consumers to expend more carbonrich fuels, leading to more pollution. The price of scarce energy resources should take into account the environmental and social costs, and introducing a tax is an effective way to curb the reckless use of non-renewable natural resources. Moreover, a distortive pricing mechanism is inhibiting the development of green technology and related entrepreneurship.

Rapidly increasing greenhouse gas emissions According to OECD statistics, Turkey’s greenhouse gas emissions increased by 49% during 2005–2016, which is the largest increase among the OECD nations. Turkey’s dependence on fossil fuel is the main reason for this increased level of GHG emissions. Turkey should invest more in the development of sustainable energy sources. The GHG emission intensity in Turkey is much higher than the OECD average emission intensity.

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Figure 14: Turkey – GHG Emission, Million Metric Tons, 2010–2019 550.0

Million Metric Tons

500.0

450.0

400.0

350.0

300.0 2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Year SOURCE: OECD Environmental Performance Reviews 2019

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©MARKETLINE

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4.

Political Landscape

4.1.

Summary

In April 2017, through a referendum, Turkey opted for a presidential system to replace the existing parliamentary system. This change grants enormous powers to President Erdogan. In July 2018, Erdogan won the presidential election, and the 95-year-old parliamentary democracy was completely transformed into a presidential democracy. Concerns over the risk of Turkey leaving NATO have been growing, due to Turkey’s increasing disagreements with the US on the Syria issue, and Turkey’s improving relationships with Russia and Iran. In October 2020, Poland and Turkey underlined the importance of national security and brought together Warsaw and Ankara to discuss defense security, along with their strong alliance within NATO. Turkey has consistently expressed its interest in joining the EU and in April 2021, the leaders of EU stated they are interested in supporting a concrete and positive agenda with Turkey.

4.2. Evolution 4.2.1.

Pre-1975

Turkey was dominated by the Ottoman Empire from the Middle Ages to the 20th century. The imperial reign began to deteriorate in the 19th century when the Ottoman Empire, under pressure from the West, implemented a series of reforms called Tanzimat from 1839–1876. The dissatisfaction created by the resulting bureaucratic absolutism led the Young Ottoman movement to turn towards the creation of a more liberal Western-style secular government and improve the country's relations with Europe, although these changes were later stifled by Sultan Abdulhamid II in the 1870s. In 1876, Turkey formed a parliamentary constitution under the leadership of Abdulhamid, who was forced by the Young Turks movement to summon a parliament in 1908. He planned a counter-revolution in 1909, but following its failure, was banished to Salonika. Abdulhamid was succeeded by Enver Pasha. During 1909–1912, European powers took advantage of the weak Ottoman government to occupy most of the empire’s remaining territory in Southeast Europe. During World War I, Enver Pasha’s alliance with Germany caused Britain, France, and Russia to declare war on the Ottoman Empire. The country’s economic and political conditions worsened during World War II, and in early 1945, Turkey declared war on Germany. In 1952, Turkey became a member of NATO. During the 1950s, conflicts between different political parties increased, as Prime Minister Adnan Menderes' government was perceived as too rigid by his opponents. The economy suffered due to inflation and heavy debt during this period. In 1960, Menderes responded to mounting protests by implementing martial law and suspending political activities. Following this, under the leadership of Suleyman Demirel of the Justice Party – which gained a majority of seats in the 1965 election – a single party government was formed. Turkey experienced a series of weak coalition governments during the 1970s.

4.2.2.

1975–2000

During 1978–1979, the military took over the administration due to an increase in political violence, which had started to affect Turkey’s fragile economic structure. This improved economic conditions, and in the early 1980s, civil order began to be restored, albeit at the cost of a flawed human rights environment. A new constitution was approved in 1982 to curtail mounting international pressure. In the 1980s, the government of General Kenan Evren, PESTLE Country Analysis Report: Turkey © MarketLine. This report is a licensed product and is not to be photocopied

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the seventh president of Turkey, provided political stability. Evren was succeeded by his former minister of state, Turgut Ozal, in 1989. However, political instability returned to Turkey during the mid-1990s, when the Kurdistan Workers’ Party (Partiya Karkeren Kurdistan) intensified the violence, with the aim of gaining Kurdish autonomy in Southeast Turkey. With the social and political power of Islamic institutions increasing, the military forced the resignation of then Prime Minister Necmettin Erbakan in 1997. Political instability continued to increase with the development of policies that secularized education, while several political leaders were charged with corruption. During 1998, the Welfare Party was suspended by the Constitutional Court following alleged anti-secular activities. In 1999, PKK leader Abdullah Ocalan was arrested with the aim of suppressing the Kurdish revolution in Southeast Turkey. In the late 1990s, Turkey’s troubled relations with Greece – caused by issues related to oil drilling rights and the air space over the Aegean Sea – improved. Following the 1999 elections, Bulent Ecevit established a new coalition government, which achieved stability in 2000.

4.2.3. 2001 onwards In 2001, Turkey underwent a series of cabinet changes and ended the year in an acute economic crisis. In the 2002 parliamentary elections, the AKP gained a majority in parliament with a landslide victory, and following a constitutional reform, party leader Recep Tayyip Erdogan was elected prime minister in 2003. During 2002–2004, parliament implemented a series of human rights reforms, with the aim of solidifying Turkey’s association with the EU. In 2007, the AKP won the parliamentary elections again, and Abdullah Gul was elected president. In the same year, parliament permitted military operations in Iraq in pursuit of Kurdish rebels, and towards the end of 2007, launched a series of air strikes on fighters from the Kurdish PKK movement in Iraq. In 2008, the government began the five-year long trial of several military officers accused of plotting to overthrow the AKP government through a secular secret organization called Ergenekon. Most of the defendants received hefty jail sentences. Since 2009, the AKP government and PKK rebels have made efforts to resolve the three-decade conflict. In July 2009, Prime Minister Erdogan held a meeting with the leader of the pro-Kurdish Democratic Society Party (Demokratik Toplum Partisi), Ahmet Türk, as part of efforts to solve the Kurdish problem. In December 2009, the government introduced measures in parliament to increase Kurdish language rights and reduce the military presence in the Kurdish southeast, as part of its Kurdish initiative. Although fighting between the Turkish military and PKK rebels continued, the rebels indicated their willingness for a truce in 2010. Subsequently, Abdullah Ocalan, the jailed leader of the rebel group, ordered his troops to cease attacks in Turkey, with the military leader of the rebel group, Murat Karayilan, declaring a ceasefire and announcing that its rebels would begin withdrawing from Turkey to northern Iraq from May 2013 onwards in exchange for political reforms. However, the process hit several roadblocks, with differences creeping in between the two sides. In the 2011 general elections, the AKP were victorious and Recep Tayyip Erdogan was re-elected as the prime minister for a third time. Erdogan, the former prime minister, won the presidential elections held in August 2014 and became the president, while Ahmet Davutoglu became the prime minister. In the November 2015 general election, the AKP gained a landslide victory by regaining a majority in parliament. After the inconclusive June 2015 poll, the November result ended months of uncertainty about the formation of a government. Ahmet Davutoglu reassumed his position as the prime minister. In May 2016, Binali Yildirim became the 27th prime minister of Turkey, following the resignation of Ahmet Davutoglu. A failed coup d'état attempt took place in Turkey on July 15, 2016 by a fraction of the Turkish Army. On April 16, 2017, the Turkish people validated a change from a parliamentary to presidential system, which granted President Erdogan expansive powers. Erdogan secured a narrow victory in the historic constitutional referendum with a margin of less than 3%. In July 2018, Erdogan won the presidential election and Turkey completely changed to a presidential republic. In April 2021, in a mass trial, 497 defendants were sentenced to jail for life for their role in the failed coup of 2016.

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Figure 15: Turkey – Key Political Events Timeline

SOURCE: MarketLine

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4.3. Structure and policies 4.3.1.

Key political figures

Key political figures in Turkey include: ▪

President Recep Tayyip Erdogan (since August 2014)

Figure 16: Turkey – Key Political Figures

Recep Tayyib Erdogan is the current president of Turkey, in office since 2014. He is the founder of the Justice Development Party (AKP) and previously served as prime minister of the country and Mayor of Istanbul.

SOURCE: MarketLine

4.3.2.

©MARKETLINE

Structure of government

In April 2017, the Turkish people validated the change of government type from parliamentary to presidential in a referendum. Currently, Turkey is a presidential democracy.

4.3.3. Structure of legislature Legislative power is enshrined in the 600-seat unicameral Grand National Assembly of Turkey, comprising members of parliament elected for a five-year term. Turkey has a multi-party system, with several different political ideologies represented across the various factions.

4.3.4. Executive branch The president is the head of state and is directly elected every five years by the people. Executive power lies with the president.

Key political parties The AKP is the ruling political party of Turkey and is a moderate pro-Western party that promotes a liberal market economy. During the elections conducted in July 2007, the AKP won 46.6% of the votes and gained 341 seats in parliament. In the June 2011 parliamentary elections, the party's share dropped slightly to 326 seats. In the June 2015 general election, the party lost its majority in the parliament, winning only 258 seats. The AKP was unable to form a ruling coalition with any other party, which led to a hung parliament. However, the party reemerged stronger in the snap election held in November 2015 and attained a majority with 317 seats in parliament. The AKP won 49.5% of the votes in the November 2015 general election. In June 2018 legislative elections, the AKP won 295 seats.

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The Republican People's Party (Cumhuriyet Halk Partisi) was formed during the Congress of Sivas, an assembly of the Turkish National Movement held in 1919 in the city of Sivas. The current structure of the party was introduced during the period when the Republic of Turkey was moving toward a multi-party system. The CHP has ties with the middle and upper-middle class constituency of Turkey. During the 2007 general elections, it entered into an alliance with the Democratic Left Party and suffered a heavy defeat, gaining just 7.3 million votes, only attaining a majority in Thrace and two other provinces on the Aegean coast. In the June 2011 parliamentary elections, the CHP won 135 seats, which fell to 132 seats in the June 2015 general election. In the November 2015 snap election, the party won 25.3% of the votes and a total of 134 seats in parliament, retaining its position as the main opposition. In the June 2018 legislative elections, the CHP won 146 seats. The Nationalist Movement Party (Milliyetci Hareket Partisi or MHP) is a conservative party. In the 2007 legislative elections, it won over 14% of the national vote and more than 70 seats in parliament. In the June 2011 parliamentary elections, the party won 53 seats. In the June 2015 general election, the party won 80 seats. However, the party lost half of its share in the following November 2015 election, where it won only 40 seats. In the June 2018 election, the party won 49 seats in the legislative assembly. The People’s Democratic party (Halkların Demokratik Partisi or HDP) is the pro-minority party in the country. It was founded in 2012 with an emphasis on feminism, minority rights, and participatory democracy. In the 2015 general election, the party won 59 seats and a vote share of 10.8%. In the June 2018 election, the party won 67 seats in the legislative assembly.

Composition of government In June 2018, a legislative election was held, which saw the AKP win 295 seats, followed by the CHP (146 seats), the HDP (67 seats), the MHP (49 seats) and other (43 seats).

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Figure 17: Turkey – Distribution of Seats by Political Parties, 2018

IYI, 43

MHP, 49

HDP, 67 AKP, 295

CHP, 146

Source: The CIA World Factbook

©MARKETLINE

4.3.5. Key policies Economic The country has followed sound macroeconomic strategies in combination with strong fiscal and monetary policies to manage economic progress and attract more foreign direct investment. However, the country remains vulnerable to external shocks, mainly due to its high current account deficit, which is financed by volatile short-term portfolio flows and rapid credit growth in the domestic economy. President Erdoğan has been widely criticized for keeping the interest rate at record low levels, which has led to double digit inflation, and forced the lira to a record low. The government’s privatization program of state assets has recorded progress. The government also plans to promote domestic savings, boost the output of intermediate goods to improve the economy’s exportcompetitiveness, and reduce the country’s energy dependence by promoting the development of alternative energy sources. According to “Vision 2023”, Turkey aims to achieve US$500bn of goods exports. In March 2020, Turkey launched a 21 point stimulus package (Economic Stability Shield) worth US$15.4bn to deal with the COVID-19 pandemic, including various measures such as: three month deferral of loan payments, social security premiums deferred by six months, and the Credit Guarantee Fund limit increased from TRY25bn (US$2.98bn) to TRY50bn (US$5.95bn), among others. The country announced a total of US$73.56bn (equivalent to 11.5% of GDP) of stimulus packages to keep the economy afloat amid the COVID-19 pandemic. In December 2020, the government passed the budget for 2021. In the budget for the year, a majority share has been allocated to education expenditure.

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Social Turkey’s social welfare system provides health, welfare and pension payments. The ministries of education, youth, family and health, regional planning and urban development, and labor and social affairs are responsible for the range of public services. Since April 1, 2010, the country has been using an improved Hospital Information Management System, which aims to improve healthcare delivery through better institutional reporting and statistics systems, as well as the proper management of health payments in the database. The country is also expanding its egovernance initiatives to eliminate bureaucratic hurdles and improve the delivery of social services. The country provides pensions to thousands of old aged and disabled people. Social security payments can also be made through post offices, and insurance premium payments, and receipts can be carried out online. According to “Vision 2023”, the Turkish government aims to train 400,000 unemployed citizens annually to equip them with the skills needed for the industry. In the 21-point stimulus package, the Ministry of Family, Labor, and Social Services provided financial support of TRY2.0bn (US$0.24bn) for needy families, along with flexible and remote working models utilized to allow operations to continue efficiently. In December 2019, the country unveiled a new social housing project providing housing to 100,000 families at cheaper prices. The country also introduced additional state payments to the personnel working in the health facilities affiliated with the Health Ministry, which were extended by three months as of August 1, 2020.

Foreign Turkey faces foreign policy challenges, mainly due to turmoil in the Middle East, which has severely affected the country’s international standing, and strained its ties with Syria, Egypt, Israel, and Iraq, and traditional allies in the West. Tensions with Syria have been high since 2011, with the Turkish government pressing for the resignation of President Bashar al-Assad. Turkey has been sheltering over 2.5 million refugees from the conflict in camps in the southeast of its territory. Turkey joined the US-led air campaign against IS in August 2015. However, it opposed US support for Syrian Kurdish forces fighting IS, out of fear that such an act might lead to the establishment of an autonomous, Kurdish-controlled area, which would fuel instability in Turkey's own predominantly Kurdish southeast. Turkey’s relations with Russia and Iran have improved since the end of 2016 after decades of conflict. Cooperation is based on their common stance on Syria and their respective counterterrorism campaigns. EU relations have taken a new course due to the migrant crisis. Turkey has offered its cooperation in the form of curtailing the movement of Syrian refugees to Europe in return for financial support and the liberalization of visas for Turks wanting to travel to the EU. Turkey’s affiliation with NATO is also under pressure because of its growing tension with the US and the growing relations with Russia and Iran. In June 2019, Turkey and Canada signed a MoU to increase cooperation in the areas of trade, investment, industry, and services. In July 2019, Turkey and Indonesia signed a MoU to increase their cooperation in the areas of social security, disaster management, and welfare programs. In August 2019, Turkey and Iran signed a MoU to increase border cooperation. In February 2020, Pakistan and Turkey signed two MoUs to increase the level of economic engagement between the countries and mobilize unexploited potential to grow trade and investments. In August 2020, Libya and Turkey signed a MoU to boost trade and economic ties and development projects in Libya. In November 2020, Turkey and Russia signed a MoU to set up a joint Turkish-Russian center to monitor the Karabakh peace deal, which has led to the end of the conflict between Azerbaijan and Armenia. In April 2021, the US formally removed Turkey from the new F-35 memorandum of understanding. The F-35 program is a deal among non-NATO members or Israel, Australia, Japan, South Korea or New Zealand and the US, under which the US will supply sophisticated military technology. The removal of Turkey comes after its purchase of the S-400 ground-to-air missile systems from Russia.

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4.4. Performance 4.4.1.

Governance indicators

The World Bank report on governance uses voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption as indicators for 215 countries and territories over 1996–2019. Daniel Kaufmann of Brookings Institution, Massimo Mastruzzi of the World Bank Institute, and Aart Kraay of the World Bank Development Economics Research Group conducted the study. For any country, a percentile rank of zero corresponds to the lowest possible score, and a percentile rank of 100 corresponds to the highest. Turkey was ranked in the 24.63 percentile in terms of voice and accountability in 2019, much lower than Greece's score of 77.34 during the same year. Voice and accountability measures the extent to which a country's citizens are able to participate in selecting their government, alongside freedom of expression, freedom of association, and freedom of the media. Turkey was ranked in the 10.00 percentile in terms of the political stability and absence of violence indicator in 2019, much lower than Greece, which scored 57.14 during the same year. Political stability and absence of violence measures perceptions of the likelihood of destabilization of the government by unconstitutional or violent means, including domestic violence and terrorism. Turkey was ranked in the 54.33 percentile in terms of the government effectiveness indicator in 2019. Turkey’s rank was lower than Greece, which was ranked in the 66.83 percentile. Government effectiveness measures the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. Turkey was ranked in the 54.81 percentile in terms of regulatory quality in 2019. By comparison, Greece had a score of 70.67 during the same year. Regulatory quality measures the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. Turkey was ranked in the 44.71 percentile in terms of the rule of law indicator in 2019. Turkey’s rank was lower than Greece, which had a percentile rank of 60.58 during the same year. Rule of law measures the extent to which agents have confidence in and abide by the rules of society. It also looks at the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence. Turkey was ranked in the 44.71 percentile in terms of control of corruption in 2019, lower than Greece, which had a percentile rank of 56.25. Control of corruption measures the extent to which elites and private interests exercise public power for private gain, including both petty and grand forms of corruption, as well as the appropriation of the state.

4.5. Outlook In July 2018, Erdogan won the presidential elections. The US has imposed sanctions on Turkey in 2020, as a reaction to Turkey’s purchase of S-400 missiles from Russia. Greece and Turkey are also in a tense standoff, with Ankara currently facing off against Greece and Cyprus over oil-and-gas exploration rights in the eastern Mediterranean, as of August 2021. Both the countries deployed naval and air forces to assert their claim over the region in August 2020. The palpable tension in the region indicates the potential for political instability in the near-term. In early 2021, Turkey has also indicated it expects to introduce a new constitution, where fundamental rights and liberties, the rule of law, and democracy will be a priority.

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5.

Economic Landscape

5.1.

Summary

According to MarketLine, Turkey is a middle-income economy which had a nominal GDP per capita of US$8,553.8 as of 2020. The country is currently transitioning from a high degree of reliance on the primary and secondary sectors towards the tertiary sector. Prudent policymaking since the turn of the millennium has helped the country to record high economic growth and maintain the sustainability of public finances. However, economic growth has also contributed to Turkey experiencing a current account deficit, which has become a source of vulnerability for the economy and its national currency. In 2019, the country witnessed a current account surplus due to improvements in exports, although it fell into deficit in 2020 amid the COVID-19 pandemic. However, overall GDP growth witnessed a rise in 2020, mainly due to heavy emphasis on expanding credit channels and loose monetary policy.

5.2. Evolution 5.2.1.

1923–1990

The Turkish economy suffered during World War I, primarily due to the underdeveloped agricultural sector and poor-quality livestock that the country possessed. Turkey was dependent on a few factories under foreign control for certain provisions, such as sugar and flour. Prior to 1923, the economy was in disarray, with agricultural output at a low point. During 1923–1985, the economy’s growth rate accelerated due to the implementation of proactive government policies that gave rise to more sustainable agricultural, industrial, and service production. After 1950, the country experienced economic disruptions, and in the 1970s, witnessed a balance of payments crisis. Following inadequate structural reforms, Turkey was left with current account deficits, which it financed through international borrowings, that led to an increase in the country's external debt. The government failed to take sufficient measures to tackle the increase in world oil prices during the 1970s and accepted short-term loans from foreign lenders. With the rise in inflation and unemployment, it found it difficult to repay the interest on these loans. During the 1980s, the government initiated a liberalization program that helped Turkey to overcome its balance of payments crisis.

5.2.2.

1991 onwards

The Turkish economy faced a crisis in the 1990s, primarily due to a significant increase in inflation. This surge was followed by a rise in imports and a slowdown in the expansion of exports. Annual inflation stood at 54.4% during 2001 as the lira continued to suffer at the hands of international investors. With little social protection and the presence of a large informal sector that absorbed millions of workers into marginal and low paid jobs, the real rate of unemployment was probably far higher. As falling domestic demand helped to contain import growth, the current account balance surged from a deficit equivalent to 3.63% of gross national product in 2000, to a surplus of more than 1.88% in 2001, according to the IMF. Public finances recorded an improvement during 2000–2004, as the IMFsupported program of fiscal and structural reforms began to bear fruit. During 2002, real output growth stood at 6.45%, according to MarketLine. Turkey's economic performance improved significantly in 2004 and in 2005, with growth averaging 9.39%. The country registered strong economic growth, averaging 7.17% during 2002–2007, according to MarketLine. This period was observed following a contraction of 5.75% in 2001, after which the country adopted an IMF-supported fiscal and financial reform program until 2008. GDP growth fell to 0.82% in 2008, followed by a 4.8% contraction in 2009, due to the global economic crisis.

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However, the resilience of the Turkish financial market and positive economic developments enabled the country to report growth rates of 8.4% in 2010 and 11.2% in 2011. The monetary tightening that began in the second half of 2011 resulted in the growth rate falling to 4.79% in 2012, due to a contraction in domestic demand. Growth recovered to 8.49% in 2013 before slowing to 4.9% in 2014 and showing a marginal improvement at 6.08% in 2015. The economy grew by 3.32% in 2016 and recovered to 7.5% in 2017, due to a recovery in the export market. According to MarketLine, economic growth slowed down to 2.96% in 2018. The main reason for this slowdown was the Central Bank’s policy rate hike by 625 basis points, from the previous rate of 17.75% to 24% in September 2018, to tackle high levels of inflation and the depreciating Turkish lira. The effect of this hike reduced lending and consumer spending. In 2019, the country witnessed a slowdown in economic growth of 0.92% as a result of dragged down consumer demand, financial market volatility and political uncertainty, with high inflation leading to a currency crisis and the lira’s value depreciating against the US dollar. In 2020, due to the COVID-19 pandemic, the government introduced various fiscal stimulus measures to support businesses operation and consumption expenditure by households. Monetary policy was significantly relaxed to allow greater liquidity in the economy. As a result, GDP grew by 1.79% in 2020. According to MarketLine, GDP growth is expected to pick up further by 5.7% in 2021.

Figure 18: Turkey – Evolution of GDP Growth (%), 2011–2020 12.0

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SOURCE: Country Statistics, MarketLine

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5.3. Structure and policies 5.3.1.

Financial system

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Financial authorities and regulators The Central Bank of the Republic of Turkey (CBRT) issues banknotes and is responsible for the implementation of monetary policy, with the aim of achieving and maintaining price stability. It follows the directives of the CBRT Law framed on January 14, 1970. According to the law, the objective of the bank is to support economic development by regulating the money markets, implementing treasury operations, and safeguarding the value of Turkish currency. Among other things, the bank determines reserve and liquidity requirements, handles gold and foreign exchange reserves, regulates the volume and circulation of the Turkish lira, ensures stability in the financial system, and monitors the financial markets. The securities and institutional markets are regulated and supervised by the Capital Markets Board (CMB). The market primarily consists of organized market participants and institutions, such as public and listed companies; exchanges; financial intermediaries; mutual, closed-ended, and pension funds; the Settlement and Custody Bank (Takasbank); and the Central Registry Agency. Other market participants and institutions include the Association of Capital Market Intermediary Institutions of Turkey, and organizations operating in the capital markets under the CMB's regulations. The Association of Insurance and Reinsurance Companies of Turkey regulate domestic and foreign insurance and reinsurance companies.

5.3.2.

Istanbul Stock Exchange

The Istanbul Stock Exchange (ISE) is the primary securities exchange in Turkey, formed to provide trading in equities, bonds, and bills, as well as foreign securities and real estate certificates (among other international securities), to all domestic and foreign participants. Securities are traded through three exchanges: equities and fixed-income securities are traded on the ISE; futures contracts are traded on the Turkish Derivative Exchange; and precious metals on the Istanbul Gold Exchange. The ISE, founded in 1985, is the only official market for shares, rights, global depositary receipts, derivatives, and bonds trading in Turkey for retail and institutional investors. The securities traded on the ISE markets include equities, exchange-traded funds, government bonds and treasury bills, corporate bonds, and repo and reverse repo. The securities traded on the equity market include rights coupons. Government bonds and treasury bills are traded on the bonds and bills market. There are two sub-markets within the bonds and bills sector: purchases and sales, and repo/reverse repo markets.

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Figure 19: Turkey – Stock Index, January 2020 – July 2021 160000 150000 140000

Index

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5.4. Performance 5.4.1.

GDP and GDP growth rate

Overview Turkey's economic performance was robust in 2004 and in 2005, with growth averaging 9.39% and inflation falling to single digits. The country recorded strong economic growth averaging 7.17% during 2002–2007. This period was observed after a contraction of 5.75% in 2001, after which the country adopted an IMF-supported fiscal and financial reform program until 2008. GDP growth fell to 0.82% in 2008, followed by a contraction of 4.82% in 2009, due to the global economic crisis. However, the resilience of the Turkish financial market and positive developments in the economy enabled the country to report growth of 8.43% in 2010 and 11.2% in 2011. Monetary tightening, that began in the second half of 2011, resulted in growth declining to 4.79% in 2012, due to a shrinkage in domestic demand. Growth recovered to 8.49% in 2013 before slowing to 4.94% in 2014. However, it stood at 6.08% in 2015 on the back of a slowing global economy. The economy then grew by 3.32% in 2016 and 7.5% in 2017 because of stronger domestic demand. In 2018, monetary tightening in the US put decreasing pressure on the Turkish lira. The high current account deficit aggravated the situation, and the Turkish lira witnessed a large depreciation. This situation, along with a high level of inflation, dampened economic growth to 2.96% in 2018 and 0.92% in 2019. In 2020, due to the COVID-19 pandemic, the government introduced various fiscal stimulus measures to support business operations and consumption expenditure by households. Monetary policy was significantly relaxed to allow greater liquidity in the economy. As a result, GDP grew by 1.79% in 2020. According to MarketLine, GDP growth is expected to pick up further by 5.7% in 2021.

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Figure 20: Turkey – Real GDP and Real GDP Growth Rate (US$ Trillion/%), 2016–2025f 1.8

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SOURCE: Country Statistics, MarketLine

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5.4.2.

GDP composition by sector

According to MarketLine, the services sector was the largest contributor to the Turkish economy in 2020, accounting for 62.14% of GDP. The industrial sector generated 30.76% of GDP, and the agricultural sector generated the remaining 7.1%.

Figure 21: Turkey – GDP Composition by Sector (%), 2020

Agriculture, 7.10%

Industry, 30.76%

Services, 62.14%

SOURCE: Country Statistics, MarketLine

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Agriculture Agricultural output in Turkey has grown significantly since 1990 and remains one of the fastest growing sectors across the OECD countries in terms of the production and use of purchased variable inputs. According to MarketLine, output grew by 7.9% in 2020 compared to 26.95% growth in 2019, in nominal terms. Agricultural output growth is expected to slow down to 5% in 2021, according to MarketLine.

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Figure 22: Turkey – Agricultural Output (TRY Billion/%), 2016–2021f

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SOURCE: Country Statistics, MarketLine

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Industry According to MarketLine, the industrial sector accounted for 30.1% of GDP in 2020 and output growth stood at 8.4% in 2020, compared to 8.0% in 2019.

Figure 23: Turkey – Industrial Output (TRY Trillion/%), 2016–2021f 1.6

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Services According to MarketLine, the services segment accounted for 62.1% of GDP in 2020. Turkey’s increase in per capita income, coupled with a large, young and growing population, led to the development of the business services sector, including engineering and architectural consulting and knowledge-based services. According to MarketLine, the sector’s output growth stood at 9.9% in 2020, compared to 16.9% in 2019. It is expected to grow by 14.3% in 2021.

Figure 24: Turkey – Services Output (TRY Trillion/%), 2016–2021f 3.5

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SOURCE: Country Statistics, MarketLine

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5.4.3. Fiscal situation According to the IMF, the country recorded general government net borrowing of 5.4% of GDP in 2020, narrowing from 5.6% in 2019. However, this is forecast to expand to 5.7% in 2021.

5.4.4. Exports and imports According to MarketLine, Turkey’s exports and imports amounted to US$193.3bn and US$238.4bn in 2020, respectively. According to the UN Comtrade Database in 2020, Germany was Turkey’s largest export market with a share of 9.4%. Among the other leading export partners were the UK (6.6%), the US (6.0%), Iraq (5.4%), and Italy (4.8%). In 2020, Turkey’s key import partner was China, which accounted for 10.5% of the market, followed by Germany (9.9%), Russia (8.1%), and the US (5.3%).

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Figure 25: Turkey – External Trade (US$ Billion), 2016–2020

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272.3 276.6

233.4 246.5

245.0 237.2

235.4 258.0

193.3 238.4

200.0

217.2 264.8

300.0

194.7 226.7

US$ Bn

400.0

2022f

2023f

2024f

2025f

100.0

0.0 2016

2017

2018

2019 Exports

2020 2021f Year Imports

Total Trade

SOURCE: Country Statistics, MarketLine

©MARKETLINE

Current account A high level of current account deficit is one of the major problems for the Turkish economy. However, in 2019, the country moved to a current account surplus of 0.89% of GDP, compared to a deficit of 2.8% of GDP in 2018, according to the IMF. According to the IMF, Turkey’s current account deficit in 2020 rose to 5.1% of GDP amid the COVID-19 pandemic.

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Foreign direct and portfolio investments The country’s FDI policy places more importance on sector-specific strategies, especially in high technology-oriented projects. According to UNCTAD’s ‘World Investment Report 2021’, FDI inflows amounted to US$7.9bn in 2020, down from US$9.3bn in 2019.

Credit rating In August 2020, the credit rating agency Fitch Ratings downgraded Turkey’s Long Term Issuer Default Ratings (LDRs) to BB-, changing the outlook to negative from stable, as a result of depleting foreign exchange reserves and a deepened current account deficit due to of heavy stimulus packages announced by the government to combat the COVID-19 pandemic.

5.4.5. Monetary situation Key monetary indicators Regulation The CBRT is responsible for the implementation of monetary policy. One of the main objectives of the current policy is to maintain price stability.

Inflation Turkey has traditionally witnessed high inflation, although it has gradually come under control over the past few years. In the 1990s, the annual inflation rate averaged 77.2%, and then 43.9% during 2000–2003. However, restrictive monetary policies and high interest rates helped lower inflation to 8.59% in 2004. During 2005–2019, the country’s inflation rate stood at 9.4%. According to MarketLine, the inflation rate declined to 12.3% in 2020, but is expected to be 16.1% in 2021.

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500.0

17.0

450.0

16.0

400.0

15.0

350.0

14.0

300.0

13.0

250.0

12.0

200.0

11.0

150.0

10.0

100.0

9.0

50.0

8.0

0.0

Percentage (%)

Consumer Price Index

Figure 26: Turkey – Consumer Price Index and CPI-based Inflation, 2016–2025f

7.0 2016

2017

2018

2019

2020

2021f

2022f

2023f

2024f

2025f

Year Consumer Price Index (LHS)

Inflation (%)

SOURCE: Country Statistics, MarketLine

©MARKETLINE

5.4.6. Unemployment According to MarketLine, the unemployment rate averaged 10.25% during 2007–2018. In 2019, the unemployment rate stood at 13.7%. According to MarketLine, the unemployment rate decreased to 13.1% in 2020. The unemployment rate among the country’s youth (percentage of the total labor force between 15 and 24 years old) is very high in Turkey. MarketLine expects the unemployment rate to decline further to 12.4% in 2021 as economic activity picks up pace.

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Figure 27: Turkey – Total Unemployment and Rate of Unemployment (Millions/%), 2016– 2025f 5.5

14.0 13.5

5.0

4.5

12.5 12.0

4.0

11.5

3.5

11.0 10.5

3.0

Unemployment Rate (%)

Total Unemployment (Millions)

13.0

10.0

2.5 9.5 2.0

9.0 2016

2017

2018

2019

2020

2021f

2022f

2023f

2024f

2025f

Year SOURCE: Country Statistics, MarketLine

©MARKETLINE

5.5. Outlook Although the Turkish economy has public finances in place, and its banking sector is well-capitalized and profitable, risks stemming from its vulnerability to external shocks are high. The main reason for this vulnerability is the private sector’s dependence on foreign currency debt and the large current account deficit. Although the country posted a current account surplus in 2019, its depreciating currency and subdued international demand due to the COVID-19 pandemic pushed the current account to deficit during 2020. The economy is heavily dependent on volatile portfolio capital inflows to meet its large external financing needs. This makes the country susceptible to financial market speculation about the effects of tighter global liquidity caused by a rise in expected US interest rates. The geopolitical stress caused by the regional conflict and rising tensions with the US are expected to weigh on the country’s economic performance over the medium-term.

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6.

Social Landscape

6.1.

Summary

Turkey has a relatively young population when compared to its European peers. A significant proportion of healthcare services are provided by the public sector. Nevertheless, the government must continue to improve the country's healthcare and education services to tackle its high infant mortality rate and poor learning outcomes. However, the COVID-19 pandemic has taken a toll on the country’s healthcare sector. According to the ‘World Press Freedom Index 2021’, Turkey was ranked 153rd out of 180 nations.

6.2. Evolution Turkey’s social landscape has undergone various alterations in keeping with the changing political, economic, and social order. In the post-war years, the priority for the government was the resettlement of its population. Turkey recorded an increase in emigrants to Western Europe after World War II due to excess demand for labor, while after the fall of the Berlin Wall it became a target for immigrants, who migrated from the former Soviet Union countries and other Muslim states. Healthcare was run by the Ministry of Health through a centralized state system until 2003, after which the AKP introduced reforms aimed at increasing the ratio of private-to-public healthcare provisions, in order to fulfill the ultimate goal of providing universal healthcare. The Turkish education system, which dates back to the passage of the Law of Integration of Education No. 430 in 1924, mandated compulsory education for five years until 1997. The 1997 reforms increased the duration of compulsory education to eight years, while the 2012 reforms extended compulsory education to 12 years.

6.3. Structure and policies 6.3.1.

Demographic composition

Composition by age and gender According to MarketLine, in 2020, the age structure showed that 23.3% of the population belonged to the 0–14 age group, 68.3% to the 15–64 age group, and 8.4% to the 65+ age group. According to MarketLine, the gender ratio at birth was 94.5 males per 100 females in 2020.

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Table 9: Turkey – Mid-Year Population by Age (as a Percentage of the Total Population), 2020 Age

Female

Male

0–4

7.29

7.53

5–9

7.68

7.95

10–14

7.94

8.23

15–19

7.85

8.14

20–24

7.55

7.79

25–29

7.41

7.57

30–34

7.63

7.78

35–39

8.12

8.28

40–44

7.43

7.51

45–49

6.66

6.70

50–54

5.79

5.85

55–59

5.20

5.10

60–64

4.23

4.09

65–69

3.38

3.12

70–74

2.40

2.10

75–79

1.62

1.22

80+

1.83

1.04

Source: Country Statistics, MarketLine

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6.3.2.

Religious composition

The majority of the population is Muslim. According to the CIA World Factbook, in 2018, 99.8% of the Turkish population was Muslim, while the remaining 0.2% was Christian and Jewish.

Figure 28: Turkey – Major Religions, 2018

Others, 0.20%

Muslim, 99.80%

SOURCE: The CIA World Factbook

6.3.3.

©MARKETLINE

Education

Turkey’s educational system consists of two categories: formal education and non-formal education. Formal education refers to the standard tuition provided within schools for individuals of a certain age group; these schools are divided into pre-primary, primary, secondary, and higher education institutions. Non-formal education refers to training sponsored by the Ministry of Education outside the formal education system. Pre-primary education is voluntary and is provided for children that are not yet old enough for compulsory primary education, generally those between the ages of 36 and 72 months. The intention behind the pre-primary system is to ensure the physical, mental, and emotional development of the children, and to train them for primary education.

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Following the passage of a new education law in 2012, 12 years of education was made compulsory in Turkey. This comprises four years of elementary education, four years of secondary education, and four years of high school education. Primary education is provided to children in the six to 14 age group, with the aim of teaching them basic knowledge, skills and habits. The government supports the primary and middle school education of poorer students residing in rural areas, villages and sub-village settlements by encouraging them to attend a Regional Primary Education Boarding School or a Primary School with Pension; all expenses of which are borne by the government. Secondary education is provided in general, vocational, and technical high schools and runs for a minimum of four years. In October 2018, the Education Minister of Turkey announced a new educational reform program, which aims to introduce design and skill workshops for all students. According to this reform program, the grading of students will be based on different criteria instead of just one criterion. The Ministry of National Education introduced a new education model to reform high schools from academic year 2020–2021. Amid the COVID-19 pandemic, the country also launched a national program of online education via the EBA platform. Online learning in the country was supplemented by a program of educational broadcasting across six national public television channels, with content for children up to upper secondary level in March 2020. The ‘Digital Transformation Project at Universities’, started by Turkish Council of Higher Education (YÖK/CoHE) before the pandemic, has been a roadmap for Turkey’s educational institutes. The CoHE established an ‘online educational commission’, which prepared a roadmap for the 2021 academic year.

6.3.4. Healthcare services In 2003, with the help of the International Bank for Reconstruction and Development, the Turkish government began the Health Transformation Program (HTP), a 10-year initiative. The program improved health utilization rates and access to Universal Health Coverage (UHC). A new pay-for-performance program was also introduced to all 850 government hospitals. In January 2010, the government launched Health-NET, an integrated information system to improve the efficiency and quality of health services in the country. As a result, public health centers were converted into family health centers to harmonize the country’s healthcare system with the EU system. To further improve healthcare coverage in Turkey, the government has assigned new staff to areas with a low density of doctors. The increasing level of Syrian refugees is causing a risk to the health sector as well. Healthcare tourism in Turkey has increased in recent years. According to the Turkish Travel Agencies Association, the number of health tourists visiting Turkey increased by 27.35% in 2018. The foreigners spent on average US$2,000 per head on health tourism in 2018. On September 7, 2020, the country announced additional state payments to the personnel working in the health facilities affiliated with the Health Ministry, which were extended by three months as of August 1, 2020. In August 2021, Libya and Turkey signed a memorandum of understanding (MoU) on cooperation on hospital management, short-term training of medical staff, development of medical services, and combating the COVID-19 pandemic.

6.4. Performance 6.4.1.

Healthcare

Turkey has improved the healthcare services provided by hospitals by importing medical equipment, and the government is encouraging foreign companies to invest in the healthcare industry. Turkish private hospitals, which have been improving their medical facilities, charge less than those in other European countries and consequently have admitted an increasing number of patients from European and Middle Eastern countries. Nevertheless, the healthcare system in general lags behind other countries. According to MarketLine, total healthcare expenditure stood at 6.1% of GDP in 2020, compared to 4.4% of GDP in 2019.

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Figure 29: Turkey – Healthcare Expenditure (US$ Billion/%), 2011–2020 44.0

6.5

42.0 6.0 40.0

US$ Bn

36.0

5.0

Percentage (%)

5.5

38.0

34.0 4.5 32.0

30.0

4.0 2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Year Total Healthcare Expenditure (LHS)

Total Healthcare Expenditure as a % of GDP

SOURCE: Country Statistics, MarketLine

©MARKETLINE

6.4.2. Income distribution Turkey has a very inequitable society, with disparities in household income and a high concentration of poverty. The absence of economic growth in the east could encourage migration to the large cities of the west, leading to urban congestion. There are wide income discrepancies in Turkish society, with income per family varying widely between major urban areas, such as Istanbul, Ankara, and Izmir, and the provincial towns and rural communities. Turkey has not been successful in limiting disparities of income and wealth and restricting poverty. The country’s Gini coefficient (a measure of income disparity, with zero corresponding to complete equity and 100 to extreme inequity) was 41.7 for 2019, according to EuroStat. It is an improvement from a Gini coefficient score of 43.3 in 2011.

6.4.3. Education Literacy According to MarketLine, Turkey had a literacy rate (15 years and above) of 96.4% in 2020. While the male literacy rate was 99.2%, the female literacy rate was lower at 93.2%. The relatively low literacy rate for women is the result of the feudal mindset that prevails in rural areas of the country.

Expenditure The government’s educational expenditure amounted to 1.21% of GDP in 2020, down from 2.4% of GDP in 2011. Turkey has a more centralized and less flexible system of education than most EU countries. The government intends

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to provide education for children of primary school age living in less populated and sparsely settled areas. It provides free textbooks to primary education students from lower income groups and rural families.

21.0

2.6

19.0

2.4

17.0

2.2

15.0

2.0

13.0

1.8

11.0

1.6

9.0

1.4

7.0

1.2

5.0

Percentage (%)

US$ Bn

Figure 30: Turkey – Public Expenditure on Education (US$ Billion/%), 2011–2020

1.0

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Year Public Expenditure on Education (LHS)

Public Expenditure as a % of GDP

SOURCE: Country Statistics, MarketLine

©MARKETLINE

6.5. Outlook The Turkish government has implemented policies to improve social benefits and quality of life. However, a large number of structural changes are required to improve the quality of healthcare and education and reduce the prevailing inequality. The social impact of the COVID-19 pandemic has exacerbated the already existing labor market challenges that were already in place prior to it. The shock from the COVID-19 outbreak aggravated declining trends in terms of labor force participation, accompanied by rising levels of unemployment.

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7.

Technological Landscape

7.1.

Summary

Turkey aims to implement radical changes in the public service sector by introducing advanced technology, and is also focusing on increasing productivity in the long run by allocating more resources to R&D. In December 2010, the government approved the National Science, Technology and Innovation Strategy 2011–2016 to develop innovative products, processes and services. According to MarketLine, R&D expenditure in terms of GDP stood at 0.98% in 2018, compared to 0.96% in 2017. On October 26, 2020, the Industry and Technology Minister announced that the country will support investments in R&D and double the R&D budget of the Scientific and Technological Research Council of Turkey in 2021. According to TurkStat, the government’s budget outlays on R&D activities stood at TRY14.3bn (US$2.0bn) in 2020, most of which was directed towards universities for the general advancement of knowledge.

7.2.

Evolution

In 1994, several initiatives were undertaken with the aim of liberalizing the telecoms market through the enactment of laws. Turkey formed Turk Telekom (a state economic enterprise) by implementing a new law, with the intention of removing the government from the telecommunications services industry. Its implementation enabled it to privatize telecoms companies. Internet service providers have also entered into service contracts with Turk Telekom. The 1991 decree of state support for funding of industry R&D activity became effective in 1995, following the adaptation of state incentives to conform with the requirements of the General Agreement on Tariffs and Trade (GATT). Legislation on state support for R&D investments was implemented in 2000, with a view to provide loans for the procurement of equipment for R&D activities by industrial companies. The following year witnessed the introduction of the Technology Development Law to encourage the establishment of teknoparks by universities, to promote industrial R&D among universities and research centers. Telecom operators Ericsson and Huawei are driving the 5G rollout in Turkey. In 2020, Turkey published the National Smart Cities Strategy and Action Plan for 2020–2023.

7.3.

Structure and policies

7.3.1.

R&D

Turkey has generated significant growth in R&D over the years by implementing several related policies, which include a national innovation strategy that emphasizes products of high value and the development of employment levels through increased competitiveness, as well as various programs to encourage foreign participants, prominent universities, and research organizations to promote a culture of innovation. The country entered into an agreement with the Joint Research Centre, the EU's scientific and technical research laboratory, focusing on cooperation in the key areas of environment and health, security, energy, agriculture, and chemicals. It also initiated a science and technology project called “Vision 2023” during 2003–2023, under the coordination of the Scientific and Technical Research Council and the Supreme Council of Science and Technology. A new law supporting R&D activities was passed in parliament in mid-2008. It introduced incentives for investors that intend to make R&D investments until

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2024. The main goal is to increase exports of high technology products and attract the attention of the R&D departments of foreign companies. In December 2010, the government approved the National Science, Technology, and Innovation Strategy 2011–2016 to develop innovative technologies and improve products, processes, and services. According to European Innovation Scoreboard 2021, Turkey is an emerging innovator.

7.4.

Performance

7.4.1.

Telecoms and internet

The telecoms sector recorded increasing growth due to the expansion of the mobile market – the driving force behind the development of telecommunications services in Turkey. According to MarketLine, the total number of mobile users stood at 81.7 million in 2020, with a penetration rate of 98 per 100 people. Internet users stood at 76.6% of the total population, with a user base of 63.9 million in 2020.

70.0

14.0

60.0

12.0

50.0

10.0

40.0

8.0

30.0

6.0

20.0

4.0

10.0

2.0

0.0

Percentage (%)

Internet Users in Million

Figure 31: Turkey – Internet Subscribers (Millions/%), 2016–2020

0.0 2016

2017

2018

2019

2020

Year Number of Users (LHS)

Percentage of Population

SOURCE: Country Statistics, MarketLine

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7.5.

Outlook

The sector recorded impressive growth due to the expansion of the mobile market. The country aims to increase its R&D allocation to 3% of GDP by 2023. Turkey is one of the key mobile markets in the Middle East, with growing revenues. The nation also needs to progress its competitiveness through developments in R&D and innovations and through cooperation between private and public players in order to remain laudable in a global economy that is mostly driven by innovations and technological advancements.

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8.

Legal Landscape

8.1.

Summary

Turkey’s judicial system is tripartite at the levels of the first instance courts, district courts, and supreme courts. The judiciary is decisively separated into civil and military jurisdictions. Both are split into two categories: ordinary and administrative judiciaries. The judiciary is subject to influence and political interference in high-profile cases, and there is a need to revise judicial reforms in order to introduce qualified judges and improve the infrastructure of the legal system. Employment regulations are rigid and have been a cause of declining overall productivity growth. According to the ‘Global Competitiveness Report 2019’, Turkey ranked 60th and 111th out of 141 nations in terms of the burden of government regulations and the efficiency of the legal framework in challenging regulations, respectively.

8.2. Evolution In 1926, the Islamic law of the Ottoman Empire was substituted with a secular system similar to that of Italy. Since 2002, Turkey has recorded significant developments in the area of judicial reforms. In 2002, Turkey abolished the death penalty and modified sections of its legal system. This was primarily achieved by the implementation of laws related to criminal procedural and civil legal systems, as well as the establishment of regional courts of appeal and the Justice Academy. With these revisions, several specialized courts were introduced to resolve disputes in the areas of family, intellectual property rights, and consumer protection. The Ministry of Justice implemented an advanced information technology system, the National Judicial Informatics System (UYAP), which focuses on improving the judiciary’s ability to collect information and communicate with other governmental institutions.

8.3. Structure and policies 8.3.1.

Judicial system

Structure of the system The judicial system in Turkey is tripartite at the levels of first instance courts, district courts and supreme courts. The main jurisdiction is separated into the civilian judiciary and military judiciary. Both fields are further split into two categories: ordinary and administrative judiciaries. The supreme courts in Turkey include the Constitutional Court, the Court of Cassation, the Council of State, the Court of Jurisdictional Conflicts, the High Military Administrative Court, and the Military Court of Cassation. The jurisdiction of the latter two supreme courts is only limited to military personnel. The Constitutional Court was established in the 1961 constitution and is the highest court in Turkey. It solves cases that involve the president, members of the Council of Ministers, or presidents and members of the high courts. Military courts have the authority to charge members of the armed forces for crimes committed against other military personnel or for offenses committed in military settings. The Military Court of Cassation gives the final verdict on military criminal jurisdiction. The High Military Administrative Court has authority over military personnel in administrative cases and has functions similar to the Military Court of Cassation.

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Cases handled in the general law courts include civil, administrative, and criminal cases. Penal courts handle cases related to offenses that can result in more than five years of imprisonment. These courts are in most cities and involve only one judge for minor cases. The high court handles criminal cases, and the Council of State is invoked to resolve disputes between government entities or administrative cases.

8.3.2. Tax regulations Income tax Personal income tax is generally levied by the central government. The base rate on wages is 15% and can increase to a marginal rate of 40%. An individual who resides in Turkey for more than six months pays taxes based on their worldwide income for that fiscal year. However, an emigrant who is on an assignment in Turkey for a business trip and individuals who are in Turkey for holiday or educational purposes are not regarded as citizens, even if their stay exceeds the stipulated six months.

Corporate tax Corporate tax is charged on income and earnings derived by public and private limited companies, including foreign and other joint venture companies. Turkey has increased the tax rate to 25% for 2021, then it will drop again to 23% in 2022, compared to the previous 20% tax rate in 2020.

VAT Goods that are imported into Turkey are subject to VAT. The VAT rate in Turkey is 18% for most goods and services and 8% for foodstuffs and pharmaceuticals products as of 2021.

8.3.3. Labor laws Turkey has introduced several reforms over the years and has formulated measures to combat unemployment. In 2003, the country implemented provisions for unemployment insurance and a new labor code (Act 4857) aimed at providing social security for workers. Unemployment insurance was further strengthened through the improvement of the employment opportunities offered by the Turkish Employment Agency (ISKUR), public employment institutions, and other private providers. A government initiative to improve incentives for employment creation that will widen the coverage of formal social protection for workers has been introduced. Labor market regulations have been implemented in Turkey to encourage job opportunities and increase the productivity of employees. Flexible working hours – which make it easier to arrange work schedules in accordance with company needs – are common, and organizations have encouraged part-time employment. Employment organizations in Turkey, such as the ISKUR, have initiated reforms to encourage and promote employment. These include job brokering (matching job seekers with vacancies), improving the employment prospects of the disabled, and monitoring the unemployment insurance program and private employment agencies.

8.4. Performance 8.4.1.

Effectiveness of the legal system

The country has performed moderately well on international indicators which analyze the effectiveness of legal processes. Turkey was ranked 76th out of 186 countries evaluated in the ‘2021 Index of Economic Freedom’, published by the Heritage Foundation and the Wall Street Journal. In the World Bank’s ‘Doing Business Report 2020’,

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Turkey was ranked 33rd out of 190 countries. The country was ranked 77th out of 190 countries in terms of starting a business. Although setting up a new enterprise has become less time-consuming over the years, bureaucratic red-tape and ineffective enforcement of regulations persist. Rule of law is weak, as the judiciary is subject to influence and political interference in high profile cases, and there is a need to revise judicial reforms in order to introduce qualified judges and improve the infrastructure of the legal system. The commercial courts are overloaded with cases, and on average, it takes over a year to resolve each case. Rigid employment regulations have resulted in the creation of a large informal sector. This has been a major cause of declining productivity growth.

8.5. Outlook Turkey does not require any lengthy business registration processes to establish a company. The overall freedom to start, operate, and close a business is protected by Turkey’s regulatory environment. Moreover, business taxes are low compared to other developed countries. The country has also introduced electronic bookkeeping and invoicing, which make paying taxes easier. However, some sectors are inaccessible or only partially accessible to foreign investment such as broadcasting, and real estate. The government must open these sectors to allow FDI and business expansion. The judiciary is subject to influence and political interference. Therefore, judicial reforms must handle key structural issues in the system and resolve them through specialized courts or different appeal structures.

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9.

Environmental Landscape

9.1.

Summary

Turkey has been at the forefront of meeting various environmental challenges and has introduced policies to increase the production of renewable power by compelling national transmission companies to provide grid connection to all renewable projects. It has linked its development aid to environmental objectives and policies to focus on air pollution, biodiversity, chemical substances, environmental health, and climate change. Nevertheless, the country suffers from high levels of air pollution, as well as the depletion of water resources. The discharge of chemicals and detergents into the water has led to an increase in environmental pollution, mainly in urban areas. In the 2020 EPI, the country was ranked in 99th place out of 180 economies, with poor performances in terms of environmental health and conservation of biodiversity. The country underperformed compared to its neighbors, such as Greece and Bulgaria.

9.2. Evolution Since the 1990s, ecological policies in Turkey have been undergoing reforms driven by EU environmental legislation. The Ministry of Environment was formed in 1991, with a view to monitoring environmental issues, such as urban air pollution, which poses a major threat to Turkey. In 2003, the merger of the Ministry of Environment with the Ministry of Forestry reduced the authority of environmental officials in policymaking and enforcement procedures. Because of Turkey’s impressive afforestation efforts, the National Afforestation and Erosion Control Action Plan (2008–2012) improved 2.3 million hectors of degraded land.

9.3. Structure and policies 9.3.1.

Environmental regulations

Policy In 2008, the government launched an annual environmental performance review to identify issues and subsequently address them. In 2011, the Ministry of Environment and Forestry was split into the Ministry of Environment and Urbanization, and the Ministry of Forest and Water Affairs. As part of its “Vision 2023” program, the country has developed strategies on renewable energy, waste management, water treatment, and hydrogen technologies. In October 2020, Istanbul became the first Turkish airport to receive a Zero Waste Certificate as a result of its efforts to prevent waste and use resources efficiently. In 2005, Turkey initiated a law that emphasized the use of renewable energy resources for electricity generation by introducing tariff support for electricity produced by renewable sources. Turkey also introduced several policies to increase the production of renewable energy by compelling national transmission companies to provide a grid connection to all renewable power projects. Furthermore, it has undertaken initiatives to improve transmission links with the EU to stabilize its power system and has removed the ban on several restrictions that could hamper foreign investment in the power sector. Energy policies in Turkey aim to encourage private capital and the development of international cooperation; several projects have been implemented to increase energy efficiencies in the industry, transport, and residential sectors.

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In January 2021, Turkey introduced a decree on the Yenilenebilir Enerji Kaynakları Destekleme Mekanizması, commonly referred to as "YEKDEM". It introduced a feed-in tariff scheme that will apply to renewable energy power plants becoming operational between July 1, 2021 and December 25, 2025.

9.4. Performance 9.4.1.

Environmental impact

Strong economic growth in Turkey has increased environmental pressures, especially from the energy, industry, agriculture, transport, and tourism sectors. Environmental challenges include air quality, water, waste management, soil erosion, nature protection, and marine ecology. The country is faced with increasing levels of pollution due to chemicals and detergents released into water sources and an increase in air pollution in urban areas. Water quality is under severe pressure in coastal areas, predominantly due to the discharge of untreated or semi-treated municipal and industrial wastewater into the sea. Furthermore, the discharge of pollutants by neighboring countries has polluted the Black Sea. The country also faces the problem of air pollution, which is acute in areas such as Istanbul, Ankara, Erzurum, and Bursa. Increased car ownership and the slow growth of public transportation has significantly increased urban pollution in Istanbul, while further air pollution is caused by energy plants and fertilizer facilities, as the majority of these lack filtration equipment. According to BP’s Statistical Review 2021, CO2 emissions increased from 276.3 million tons in 2010 to 369.5 million tons in 2020.

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450.0

12.0

400.0

10.0

350.0

8.0

300.0

6.0

250.0

4.0

200.0

2.0

150.0

0.0

100.0

-2.0

50.0

-4.0

0.0

Percentage (%)

Tons (Million)

Figure 32: Turkey – Carbon Dioxide Emissions (Million Tons/%), 2010–2020

-6.0 2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Year Volume (LHS)

Growth Rate (%)

SOURCE: BP Statistical Review 2020

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At the same time, Turkey also faces land degradation due to the inappropriate use of agricultural land, overgrazing, and deforestation, along with soil erosion on more than half of its land surface. According to the United Nations Convention to Combat Desertification’s (UNCCD) 2018 statistics, Turkey loses 154 million tons of topsoil annually. The low tax regime for fossil fuels is one of the main reasons for Turkey’s high level of air pollution and the low level of investment in renewable energy sources. In July 2021, forest fires broke out in Turkey that devoured huge swaths of land and brought about the large-scale destruction of environmental resources.

9.5. Outlook At the 2015 United Nations Climate Change Conference, the country’s Intended Nationally Determined Contribution (INDC) stood at a 21% reduction in GHG gases by 2030. Other measures with regards to industry, transport, infrastructure, waste management, and forestry are expected to be implemented. These will be effective in reducing Turkey’s carbon footprint and reaching its stated targets. Turkey’s first integrated solar panel manufacturing facility opened in August 2020 in Ankara’s Organized Industrial Zone. The facility will be operated through an investment of US$400m at a 25-acre closed area. It is a big step towards the reduction of Turkey’s carbon footprint. With the commissioning of the plant, solar energy’s share of electricity production in Turkey is expected to increase by 25%.

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