Sunset on Turkey’s boom?

EXPORTERS heeding the call to look beyond the troubled markets of Europe might easily find their gaze falling on Turkey. Just across the EU border and a powerhouse economy, the country that straddles both Europe and Asia has logged stellar levels of economic growth and demonstrated a voracious hunger for overseas goods.

Indeed, its economic performance has done much to assuage fears prompted by the clash between protestors and brutal policing tactics in the wake of demonstrations at Istanbul’s Taksim Square in May and June of this year. But in recent weeks, the economy has again become the story, with warnings that all may not be as it seems and speculation whether the country can continue on the path it has forged from the economic gloom of 2009.

According to Fadi Hakura, an associate fellow at think tank Chatham House, “the short answer is no”.

The party’s over
Turkey has proved remarkably resilient since its mauling in the post-crisis fallout of 2009 which saw the economy shrink by a withering 4.7%, plunging the country into recession for a year. But the bounce-back was impressive, leaving many to hail, once again, a Turkish economic phenomenon. In the year after, GDP leapt back into life with growth of 8.2%, followed by 8.5% in 2011. Prior to the crisis slump, rates of expansion were equally striking, reaching a peak in 2004 that topped 8%.

However, last year was not so impressive. In fact, GDP nosedived to 2.2%, good by European standards, but uncomfortable when compared to recent Turkish experience. But the government expects a recovery and predicts a healthy 4% for 2013, while others are even anticipating a little more at 6%.

Along with prosperity has come an appetite for overseas goods. Indeed, imports have been on an upward trend. Turkish consumers and companies imported 31.7% more foreign goods and services in 2010, and 29.8% in 2011. If nothing else, Turkey looked like a good place for UK enterprises to do business. And they have been doing so. The UK is the fourth-largest destination for Turkish exports, accounting for about 5.7% of goods leaving the country. That said, Britain ranked only the tenth-largest exporter to Turkey, according to 2011 figures.

Turkey imports mainly machinery, chemicals, semi-finished goods and transport equipment, but it has also taken a shine to UK fashion, which is treated as premium product, even when it comes to mid-market stalwarts like M&S. UK electronics and software have been on the Turkish shopping list too, while we also send automotive parts for assembling, as well as materials for a resurgent ship building industry.

Step carefully
With such growth and a hunger for goods, Turkey seems like a good bet. However, experts caution against rushing in without the right preparation. According to Semiha Unal, of the consultants Business Support Turkey, top of the check list is market research to ensure that demand exists and that there are distribution channels in place. She stresses that UK companies need to conduct due diligence for local contacts when they identify business partners. “It’s very important that you start to explore what their reputation is,” says Unal.

Lawyers at Mehmet Gün extend that advice a little further, advising UK companies to take measures to establish frameworks for supervising their business agents. Serra Ba?o?lu Gürkaynak, a partner with the firm, suggests clients put in place a regime of joint signatures and an approval process for transactions on a company’s behalf. Gürkaynak’s concern is that the performance of fiduciary duties in some cases is not what would be expected in the UK: “We advise British exporters to exercise some sort of control over a representative or local director.”

Business practice can differ in Turkey when it comes to payments. With a business culture built on “trust”, buyers of goods and services often ask to pay in instalments and with post-dated cheques. According to Mutlu Manyas, the founder of Istanbul law firm Manyas, who has counselled British exporters, this means parts of the economy used to be a merry-go-round of post-dated cheques. A supplier might receive a cheque dated six months from purchase and simply pay next-tier suppliers with a cheque dated a month later than that, and so on. She advises exporters to seek letters of credit and bank guarantees as the most secure means of undertaking transactions.

The culture of trust extends further than transactions between private businesses. According to Manyas, “trust” and personal relationships can crop up as a factor in customs transactions too. Turkish customs procedures can mean that delivery deadlines are sometimes missed, a problem for goods with short-term shelf lives. Manyas says this means a good relationship with customs officers is essential and often only achieved through the use of local agents. “If you are known, you get priority or privilege,” she says.

Trust and personal relationships matter more, the further business goes from the urban centres. This means a gentleman’s agreement can be the preferred way of doing business. That said, it is not advised, even by local lawyers. Serra Ba?o?lu Gürkaynak insists the “most important” issue for an exporter entering the Turkish market should be robust contracts stating precisely terms and responsibilities. This not only saves on conflict, but also protects exporters against the possibility of court action. Turkish businesses can initiate court action almost reflexively when faced with a problem. Experts agree that the environment is notoriously litigious, a circumstance attributed to the fact that there is no requirement of “full disclosure” by parties entering into a court battle in Turkish law.

“People initiate law suits as a matter of strategy, to push the counter party to do a certain thing, because they don’t have to fully disclose all the facts, all the evidence, all the paperwork,” says Gürkaynak. “It’s very unprofessional when you look at it. It’s loss of time, loss of money. But litigation is not that expensive when compared to the US and the UK. So money is not a deterrent factor.”

Warning
The risk of litigation aside, there is perhaps a bigger issue hanging over the prospects of exports to Turkey – the economy itself.

October saw the International Monetary Fund issue warnings about the Turkish economy, and it highlighted growing imports as a problem, insisting they were exacerbating a current account deficit that could reach 7% this year. So serious is the issue, according to the IMF, that it has called for the Turkish government to “tighten” monetary and fiscal policy in a bid to stop consumers spending – especially since this is mostly built on the expansion of household credit.

The IMF says that “it will be difficult for Turkey to sustain an average growth of 4% to 5% per year while continuing to accumulate large external liabilities year after year. Without structural reforms, growth would have to be below the historical trend to avoid increases in external imbalances and accompanying bouts of instability.”

The position is overshadowed by a coming development in the US – the Federal Reserve’s expected tapering of quantitative easing (QE). QE pushed down the yields on bonds in advanced economies persuading investors to place their money in emerging markets. Now that the end of QE is nigh, money is leaving those markets for what are expected to be higher returns in the US. The Turkish lira has already devalued, with the country’s central bank spending 15% of foreign currency reserves to unsuccessfully prop it up. And if money does leave, it will be increasingly difficult for the government to finance its external debt, which in turn could mean dramatic spending cuts, higher interest rates and, as a consequence, recession.

However, with significant elections in the next three years (national as well as local), observers expect little effort from prime minister Recep Tayyip Erdo?an to ease consumer spending, or undermine hopes of 4%, or more, growth in GDP this year. Some commentators have described Turkey’s position as precarious and the country as one of the most vulnerable among emerging economies. For its part, the government has claimed the economy is robust, with a solid fiscal position, and point to an improved economic environment in the EU and elsewhere, like Japan. Ministers also criticise the IMF for “generalisation” and say that plans are being made to reduce current account spending. Turkey has also gone some way to recalibrate its relationships. Having failed to be admitted to the EU, it has looked east and has high hopes for making Istanbul the hub for the regional energy market.

According to Fadi Hakura, the delicate position is amply illustrated by a simple statistic. Household debt, he says, was 4.7% as a proportion of disposable income in 2002. In 2012 that figure had risen alarmingly to 50.4%. He says the precipitous rise explains the expanding economy and calls it, unsurprisingly, “an unsustainable consumer boom”.

Hakura points the finger of blame at the current government, its recent policies, and its brushing aside of IMF warnings.

“They are being reckless gamblers. They think that the impact of the Federal Reserve tapering is overblown. They feel that global liquidity will continue and grow. This is basically their bet. It’s a very reckless decision. It’s based on hope and faith, rather than hard data,” he says.

This means UK exporters need to take care. While the feel on streets of Istanbul may still be buoyant, and companies continue to push ahead with their plans, Hakura says what matters is what lies beneath: “I would be careful. I would be conservative in estimating the level of sales and exports to Turkey at a time of serious vulnerability, a growing external debt and unsustainably high household credit.”

Key facts: Turkey
Population: 74 million
GDP: $789bn (£495bn)
Finding a customer or partner: Attend trade shows and exhibitions; take part in a UK Trade & Investment-supported trade mission; advertise in professional newspapers, magazines and journals.
Due diligence: It is not possible to carry out a UK-type fully comprehensive due diligence check on a Turkish company. If your sole interest is in exporting, the best proof of a Turkish company’s ability to pay is whether it is able to raise a letter of credit from the bank.
Getting paid: If you are a first-time exporter to Turkey, the standard method of receiving payment for your goods is by documentary letter of credit. Regulations regarding exchange control and remittance of currency have to be strictly adhered to by the Turkish importer, so UK exporters will have to ensure that correct documentation is supplied to their customer.