RaboResearch - Economic Research

Turkey: financing growth

Economic Report


Turkey’s growth performance over the past decade has been impressive. Nonetheless, the past years clearly show that the economy cannot continue to grow at a rate above 5% without the current account deficit reaching dangerous levels. In previous reports, we already looked at the various reforms needed to stimulate exports and reduce the depen­dence on imports. However, we have so far neglected the other side of the coin: Turkey’s low propensity to save. Keep in mind that a current account deficit is little more than an expression of the fact that (on aggregate level) a country consumes more than it saves. Logically, increasing aggregate savings would reduce the current account deficit. And, equally important, it would reduce Turkey’s dependen­cy on foreign capital flows to finance its growth, which, in turn, would lower Turkey’s exposure to sudden changes in investor senti­ment. This Special Report looks at mechanisms to improve Turkey’s domestic savings rate, as well as the country’s efforts to guarantee long-term investments from abroad.

Domestic savings

Between 2001 and 2010, Turkey’s saving rate dropped from 17.1% in 2001, to 12.7% in 2010 (see graph 1). This is low, not just com­pared to the country’s own historic perfor­mance, but also as compared to the rest of the world. Globally, only Sub-Saharan Africa scores lower, although the average savings rate for many Latin American countries come close to that of Turkey. Turkey also falls behind most fast growing countries, such as China, India, Indonesia and Chile (see graph 2).

Figure 1: Savings rate 2000-2010
Figure 1: Savings rate 2000-2010Source: IMF
Figure 2: Compared savings
Figure 2: Compared savingsSource: IMF 

The most notable cause for the falling savings rate was a drop in household savings, while the corporate savings rate remained largely constant. In one decade, the household savings rate fell from 24.3% to 11.7%, enough to offset the increase in the public savings rate (from -7.2% to 1% in the same period). There are three main explanations for this outcome. 

Firstly, Turkish households mainly save out of precaution. As Turkey’s economic environment has become less risky, the need for savings has been reduced. Secondly, Turkey boasts a young population, meaning that the average young age dependency ratio is high. Studies show that as the ratio of children to adults per household increases, savings fall. The reason being that young households have a greater need for immediate consumption. Thirdly, falling interest rates further demotivate saving. 

Aside from explanations for the fall in the savings rate, there are also structural issues that explain the low level of saving in Turkey. The most notable is the fact that roughly 19 million Turks do not have a bank account. Meaning that, even if they do save, their savings will never show up in any official data, nor can they be employed to fuel growth. Closely related is the fact that especially in poorer regions, financial literacy is low. 

Increasing the savings rate

In a highly globalized world, where capital is allowed to move relatively freely across bor­ders, one could wonder whether domestic savings are still necessary. Countries could simply attract foreign investments to fuel growth. And, indeed, the correlation between domestic savings and domestic investments has decreased over the past two decades. However, notwithstanding the importance of foreign investments, domestic savings are still deemed a vital element in any, and specifically Turkey’s, growth strategy. Firstly, especially in more risky markets, foreign investors often require a local company to co-invest, so as to ensure that the interests of both companies are aligned. Hence, domestic savings allow a local company to attract foreign investments. Secondly, as mentioned above, low levels of domestic savings make a country more dependent on foreign capital flows and thus more vulnerable to external shocks. This is clearly the case in Turkey, which saw its economy contract by 6% in 2009, when the global crisis increased risk aversion among investors, causing them to cut maturities. 

In light of the structural issues noted above, efforts to raise the savings rate should focus on enhancing financial literacy. Given the fact that a relatively large share of the Turkish popu­lation is still unbanked, increasing finan­cial literacy should not only increase house­hold’s propensity to save, but could also moti­vate them to bring their savings to the bank, rather than storing them under the matrass. The government appears to be aware of the importance of financial literacy and some educational programs are currently being developed. Their effectiveness is, of course, still unproven. 

Next to these demand-side policies, it is also important to increase the supply of saving products, while simultaneously increasing their attractiveness. The fact that only 30% of all Turkish households hold savings in the form of financial assets, suggests that there is room for improvement. Indeed, instead of placing their money in saving accounts, most house­holds store their wealth in real estate and consumer durables. In addition, the most popular financial asset remains gold, while only a small share of all gold savings make their way into a bank account. New saving products that allow households to save for special events (e.g. weddings), emergencies, the edu­ca­tion of their children, or retirement, could improve the propensity to save. The attractive­ness of these products could be enhanced by, for instance, reducing taxes on the return on savings. 

At the start of 2013, the government imple­mented a pension reform that should go a long way in making retirement savings more popu­lar. As a part of the reform, the government will match contributions to a voluntary pension fund. Depending on the amount saved and the number of years an individual has contributed to the system, the government will match up to 25% of all contributions, or up 25% of the minimum wage (which currently stands at roughly USD 500 per month). In addition, con­tri­butors are entitled to a tax reduction (up to 15%). As a result of this and other measures we expect overall domestic savings to increase to 14% over the coming five years. 

Finally, increasing the savings rate could also be accomplished by raising public savings. Over the last decade, the government made great strides in cutting unnecessary expendi­tures and raising its savings. However, a further increase in public savings should be achieved by increasing public revenues (i.e. increasing the tax base). As already pointed out in our earlier Special Reports, roughly half of all economic activity in Turkey takes place in the informal economy. Formalizing the eco­nomy could therefore significantly improve public revenues and, subsequently, public savings. Realizing this goal, however, will take time and we do not expect much progress in the coming years.

Increasing long-term foreign direct invest¬ments

Given that we do not expect the savings rate to increase greatly in the short-term, foreign investors are destined to remain the main financiers of growth.  

Therefore, in order for Turkey to reduce its exposure to changes in investor sentiment it should focus on raising the maturities of foreign inward investments, by increasing the share of inward foreign direct investments (IFDI). Over the last decade, Turkey saw its IFDI surge, peaking at USD 22bn in 2007. In fact, between 2005 and 2007, IFDI averaged 14% of total capital formation, slight­ly above the average for developing countries. Nonetheless, the outbreak of the global crisis made investors more risk averse and, as a result, IFDI dropped, increasing Turkey’s dependence on short-term capital inflows (see graph 3). In 2011, IFDI started to recover, increasing by 76% to USD 15.9bn. Early estimates indicate that this trend conti­nued in 2012 as well. Nonetheless, despite this recent improvement, further improvements are needed to bring IFDI flows to their pre-crisis levels and beyond.

Figure 3: Financing the CAD
Figure 3: Financing the CADSource: CBRT
Figure 4: FDI since 2001
Figure 4: FDI since 2001Source: EIU

Recognizing the importance of IFDI to Turkey’s economic development, the government has made great strides in improving regulations, as well as the overall business environment. As a result, Turkey now ranks 27th out of 55 countries on the OECD’s regulatory restrictions index. A more recent reform that makes it easier for foreign investors to acquire land in Turkey should further improve this ranking. In addition to these regulatory improvements, the government also improved the attractiveness of Turkey to foreign investors, by granting tax exemptions, custom duty exemptions and other perks. Especially investors in Turkey’s least developed regions stand to benefit from a number of special arrangements.

However, despite these improvements, much remains to be done. Especially increasing the flexibility of the Turkish labour market, redu­cing the minimum wage and increasing the skill level of Turkey’s labour force should go a long way in attracting investments. Furthermore, Turkey’s durable energy sector holds enormous potential and could attract substantial investments. But, in order to appeal to investors, the sector should be liberalized. Unfortunately, as observed in previous Special Reports, reforms in both the labour and energy markets have so far been slow and we do not expect this process to speed up in the medium-term. Finally, the government should step up efforts to increase transparency of especially the judicial system, as well as to increase the speed with which lawsuits are processed. 

From savings to growth

The above focused extensively on savings and foreign funds as a source of growth. Nonetheless, one link is missing: for capital to fuel growth, a financial system needs to be in place that allocates resources to their most efficient use. Turkey’s performance in this area improved considerably. Over the past decade, a series of reforms changed Turkey’s financial system from one that mostly serviced the government, to a system that focuses on public and private sectors alike. Yet, notwith­standing the enormous improvements in this area, Turkey’s financial system is still mainly geared towards tier-one firms, while especially Turkey’s small and medium-sized enterprises (SME) find it difficult to gain access to finan­cing. In fact, even though SMEs together produce 57% of Turkey’s GDP, they only receive 20% of all bank loans. In addition, the loans extended to SMEs often have short maturities, with 66% of the loans holding maturities of less than a year. 

There are a number of reasons why SMEs find it hard to obtain bank loans. For one, the informal nature of Turkey’s economy also means that many SMEs operate at least partly in the informal economy. This reduces the transparency of their operations. In addition, tax evasion is widespread in Turkey, meaning that many enterprises understate their earnings. Although this reduces taxes, it also reduces the likelihood of obtaining a loan. 

A second reason banks are hesitant to extend loans to SMEs is that, in contrast to most multi­nationals, they are not rated by credit bureaus. Although Turkey has a credit bureau that gives credit ratings for consumers, pro­gress on establishing a credit bureau for SMEs has been stalled. The main explanation for this lack of progress is that banks are unwilling to share information on their corporate clients, fearing that this will make it easier for other banks to steal their clients. Clearly, this matter needs to be resolved. 

Next to resolving the problem of information asymmetry, access to credit would also benefit from an improvement in Turkey’s bankruptcy laws. At this moment, several loopholes make it possible for Turkish businesses to postpone bankruptcy by multiple years, while their credi­tors wait to get paid. Closing these loopholes is vital. 

Finally, although bank loans are an important source of capital they need not be the only source. The establishment of a vibrant corporate bond market could provide a second way for SMEs to gain access to financing. Unfortunately, Turkey’s corporate bond market is largely dormant and we do not expect it to gain much importance in the short- or medium-term. Even though Turkey’s macroeconomic conditions and institutional quality would allow for the creation of a more vibrant bond market, there are several regulatory and taxation obstacles that we do not expect to be resolved in the near future.


In order to finance growth and stabilize the economy, increasing Turkey’s domestic saving rate is vital. This means enhancing financial literacy, increasing the types of saving pro­ducts available to households and promoting saving by providing tax incentives. A new pension scheme in which the government partially matches contributions should go a long way in spurring the private sector’s propensity to save. However, for the medium term, Turkey will remain dependent on foreign investments to finance growth. During this time, in order to reduce its vulnerability to external shocks, Turkey should seek to in­crease the share of IFDIs, which usually have longer maturities.

Finally, coming from abroad or from domestic savings, in order for capital flows to fuel growth, a financial system needs to be in place that efficiently allocates resources.

Unfortunately, Turkey’s financial system is heavily geared towards tier-one companies, largely neglecting SMEs. In order to enhance SMEs access to finance, Turkey’s government needs to improve the bankruptcy law, forma­lize the economy and create a credit bureau charged with rating SMEs. In addition, a corporate bond market would create further opportunities for SMEs. Unfortunately, we expect progress to be slow in all of these areas. 

Anouk Ruhaak
Rabobank KEO

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