Turkish Economy in Global Competition

All the views mentioned in this presentation represent those of Merrill Lynch except where noted otherwiseRefer to important disclosures at the end of this report

Turkish Economy in Global Competition

Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Refer to important disclosures at the end of this report. Analyst Certification on page 18. Global Securities Research & Economics Group. Global Fundamental Equity Research Department.

Turker HamzaogluEconomist & Strategist,

Turkey, MENA Tel: +44 207 996 2417

[email protected]

28 June 2007

2All the views mentioned in this presentation represent those of Merrill Lynch except where noted otherwise

Refer to important disclosures at the end of this report

28 June 2007

Turkish Economy in Global Competition

A window of opportunity has been opened for Turkey to tap its huge potential:

– Political stability

– EU accession

– Economic Program

– Tailwinds from global macro backdrop

Period ahead is more challenging

– Smaller margins for policy errors

– Turning back to headwinds from tailwinds

– Turkey lags EM in addressing its macro imbalances

– Budget as a fiscal tool for medium term policy making

Infrastructure investments are the next big theme



28 June 2007

Competitiveness and sustainable growthWhat is the magic formula?

R &D

division of labour

human capital

ICT

good governance

macroeconomic stability

macroeconomic stability

innovation

geographic location

labour market

demographics

education health

Competitiveness : “ability to create welfare”

FDI

natural resources

entrepreneurship investments

infrastructure

openness

market economy

market economy

technological progress

rule of law

institutions

democratic rights

freedom of expression



28 June 2007

Global Competitiveness Index 2006-2007- The world’s most competitive 50 economies

GEM & Select Developed Region Non-Life Penetration: Premiums/Capita - 2003 (USD)

Global Competitiveness Index covers 125 countries and based on nine main pillars:Source: Global Competitiveness Index

Global Competitiveness IndexA Comprehensive Approximation

4.04.34.54.85.05.35.55.86.0

Switz

erla

ndFi

nlan

dSw

eden

Den

mar

kSi

ngap

ore

Uni

ted

Stat

esJa

pan

Ger

man

yN

ethe

rland

sU

nite

d Ki

ngdo

mH

ong

Kong

SAR

Nor

way

Taiw

an, C

hina

Icel

and

Isra

elC

anad

aAu

stria

Fran

ceAu

stra

liaBe

lgiu

mIre

land

Luxe

mbo

urg

New

Zea

land

Kore

a, R

ep.

Esto

nia

Mal

aysia

Chi

leSp

ain

Cze

ch R

epub

licTu

nisia

Barb

ados

Uni

ted

Arab

Slov

enia

Portu

gal

Thai

land

Latv

iaSl

ovak

Rep

ublic

Qat

arM

alta

Lith

uani

aH

unga

ryIta

lyIn

dia

Kuw

ait

Sout

h Af

rica

Cyp

rus

Gre

ece

Pola

ndBa

hrai

nIn

done

sia

Institutions

Infrastructure

Macroeconomy

Health, primary education

Higher education, training

Market efficiency

Technological readiness

Business sophistication

Innovation



28 June 2007

Global Competitiveness Index – Top movers


Global Competitiveness IndexTurkey: Catching up?

Source: Global Competitiveness Index

-20

-15

-10

-5

0

5

10

15

20

Guat

emala

Indo

nesia

Croa

tia

Turk

ey

Qata

r

Pana

ma

Israe

l

Dom

inica

n Re

publi

c

Cam

bodia

Tunis

ia

Gam

bia

Mor

occo

Alge

ria

Norw

ay

Malt

a

Kuwa

it

Swed

en

Lithu

ania

Hung

ary

China

Zim

babw

e

Tim

or-L

este

Russ

ian F

eder

ation

Moz

ambiq

ue

Cam

eroo

n

Braz

il

Botsw

ana

Ukra

ine

Ugan

da

Jord

an

Egpy

t

Bulga

ria

Arge

ntina

Nige

ria



28 June 2007

Global Competitiveness Index A peer comparison

A well functioning market economy with business sophistication


Lagging in human and physical infrastructure


Macroeconomy is the soft spot


3

4

5Market Efficiency

InstitutionsBusiness

sophisticationNew Entrants* Turkey

2.5

3.75

5

Technological

readiness

MacroeconomyInnov ation

New Entrants* Turkey

3.5

5.3

7.0Infrastructure

Health / P.

EducationHigher education

New Entrants* Turkey



28 June 2007

Turkish Economy in Global CompetitionDiagnosis

EU membership: The single most important long-term anchor. A panacea?

– Real convergence

– Nominal convergence

– Driver of social development and institutional reforms

– Democratisation

Economy: Structural weaknesses need to be addressed

– Current account deficit

– Inflation

– Structural reforms

Human capital: Lack of social policies caps demographic window of opportunity

Business sector: Highly competitive despite major setbacks



28 June 2007

Sources of GDP Growth (%) Openness (Trade volume, % of GDP)

Source: Merrill Lynch estimates, State Planning Organisation Source: Turkstat

Turkish EconomyTowards a new growth paradigm

30

35

40

45

50

55

60

65

1990 1993 1996 1999 2002 2005

-2

0

2

4

6

8

10

90-00 2003 2004 2005 2006E

GDP Capital Stock Labour TFP



28 June 2007

Net FDI Inflows (US$ bn) Privatization Receipts (US$ bn)

Source: Ministry of Finance, Treasury Source: Privatisation Administration

Turkish EconomyCompeting for FDI

0

4

8

12

16

20

1990 1993 1996 1999 2002 2005 2008E

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

85-90 1994 1998 2002 2006



28 June 2007

Consolidated Public Sector Primary Balance (% of GDP)

Public Sector Borrowing Requirement (% of GDP)

Source: Ministry of Finance, Treasury Source: Privatisation Administration

Turkish EconomyFiscal performance – the bright spot

-8.0-6.0-4.0

-2.00.02.04.0

6.08.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

E20

07E

-4

-1

2

5

8

11

14

17

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

E



28 June 2007

CPI and WPI Inflation (YoY) Real interest rates (%)

Source: Turkstat Source: Central Bank of Turkey

Turkish EconomyInflation getting sticky?

0%

25%

50%

75%

100%

125%

150%

1990 1993 1996 1999 2002 2005CPI WPI

-40

-20

0

20

40

60

80

100

1995 1997 1999 2001 2003 2005 2007

Ex-ante



28 June 2007

Trade Balance (% of GDP) Real effective exchange rate (1995=100)

Source: Turkstat Source: Privatisation Administration

Turkish EconomyDeficit has stabilised?

-15%

-13%

-11%

-9%

-7%

-5%

-3%

-1%

2000 2002 2004 2006

Ov erall Trade BalanceEx cluding Energy Imports

75

100

125

150

175

1981 1986 1991 1996 2001 2006

CPI-based PPI-based

`



28 June 2007

Current account deficit vs. FX volatility (%) Real rates vs. FX volatility (%)

Source: Merrill Lynch, Bloomberg Source: Merrill Lynch, Bloomberg

Turkish EconomyCurrent account is the soft spot

Turkey

ThailandTaiwan

S Korea South Africa

Slovak RepRussia Poland

Philippines

Mexico

Malays

Israel

IndonesiaIndia

HungaryCzech Rep

Colombia

China

ChileCanada

Brazil

Australia

Argentina-2

0

2

4

6

8

10

2 4 6 8 10 12 14 16

Thailand

Taiwan

South Korea

South AfricaSlovak Republic

Russia

Poland

Philippines

New Zealand

Mexico

Malaysia

IsraelIndonesia

India

Iceland

HungaryCzech Republic

Colombia

China

Canada

Brazil

Australia

Argentina

Chile

Turkey

-12

-7

-2

3

8

13

18

2 4 6 8 10 12 14 16

1-year implied exchange rate volatility (vs USD, %)

Curre

nt ac

coun

t bala

nce/G

DP (%

, 200

7F)



28 June 2007

Emerging economies as a percentage of total world


Source: EmergingPortfolio.com

Emerging MarketsBackgrounder

0 10 20 30 40 50 60 70 80 90 100

Market cap

GDP at market rates

Ex ports

GDP at PPP

Energy consumption

Foreign ex change reserv es

Land mass

Population

Emerging Dev eloped



28 June 2007

Emerging MarketsSurfing the liquidity wave… …with stronger fundamentals

Global USD Liquidity EM Credit Quality

Source: Merrill Lynch Source: Merrill Lynch

1,000

1,250

1,500

1,750

2,000

2,250

2,500

98 99 00 01 02 03 04 05 06 07

USD

Bill

ion

-5%

0%

5%

10%

15%

20%

25%

YoY

Liquidity USD Billion YoY %, rhs 96 97 98 99 00 01 02 03 04 05 06 07

Ba1/BB+

Ba2/BB

Ba3/BB-

B1/B+

Jul '07Dec '07



28 June 2007

Emerging MarketsImproving Fundamentals

Current Account as % GDP Total External Debt to Exports (G&S) - Ratio


(3.5)

(2.5)

(1.5)

(0.5)

0.5

1.5

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

80

100

120

140

160

180

200

220

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007



28 June 2007

Emerging MarketsImproving Fundamentals

External Debt as % GDP FX Reserves as % of Total Debt


30

35

40

45

50

55

60

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 200720

30

40

50

60

70

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007



28 June 2007

Emerging MarketsTime to spend!

Current account balance (US$ bn) Basic Balances in GCC (% of GDP)

Source: Merrill Lynch Source: IMF, Merrill Lynch estimates

-800

-600

-400

-200

0

200

400

600

800

1996 1998 2000 2002 2004 2006e

Emerging Dev eloped

-10%

0%

10%

20%

30%

1997 1999 2001 2003 2005

0

10

20

30

40

50

60

70

C/A BalanceGeneral Gov ernment BalanceOil Prices (RHS)



28 June 2007

Key Drivers:

Underinvestment in infrastructure

Need to improve quality

Easing inflationary bottlenecks

Rising urbanization

Improved funding

Key sectors:

Telecom

Power and energy

Transportation

Natural resources

Water, sanitation & environmental services

Infrastructure spending in the EM to exceed US$ 1tn in the next 3 years

Emerging marketsInvesting in infrastructure

Source: Text

CEE2%

Turkey4%

S. Africa5%

MENA/GCC16%

India9%

Indonesia4%

China32%

Mexico5%

Russia15%

Brazil8%



28 June 2007

Turkish Economy in Global CompetitionRecap

Turkey has been riding the global liquidity wave but…

…has no commodity driven revenue windfalls to spend

The fuel of the strong growth-lower inflation momentum so far pumped by the outstanding improvement in public finances

With a current account deficit above 7 % of GDP and inflation at 9%, Turkey is not out of the woods yet

There’s a growing pent-up demand for infrastructure investments and social projects

Spending out the primary surplus is not a good idea for now, in our view

Privatization, liberalisation of natural monopolies and regaining momentum in structural reforms seems like a more sustainable way

EU accession process not only anchors the expectations but also supplies a valuable know-how for free

A short term trade-off between macroeconomic stability and using the budget as a fiscal policy tool.



28 June 2007

Important Disclosures & Analyst Certification

Analyst Certification

I,Turker Hamzaoglu, hereby certify that the views each of us has expressed in this research report accurately reflect each of our respective personal views about the subject securities and issuers. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.



28 June 2007

Important Disclosures

Price charts for the equity securities referenced in this research report are available at http://www.ml.com/research/pricecharts.asp, or call 1-888-ML-CHART to have them mailed.

OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium, and C - High.INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk Securities -20% or more for High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High Volatility Risk securities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS,indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividend not considered to be secure); and 9 - pays no cash dividend.

Price charts for the equity securities referenced in this research report are available at http://www.ml.com/research/pricecharts.asp, or call 1-888-ML-CHART to have them mailed.

MLPF&S or one or more of its affiliates acts as a market maker for the recommended securities to the extent that MLPF&S or such affiliate is willing to buy and sell such securities for its own account on a regular andcontinuous basis: Unibanco -A; Banco Itau-A; Bradesco -A.

The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Itausa; Banco Itau; Banco Itau-A; Bradesco; Bradesco -A.MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: Unibanco; Unibanco -A; Itausa; Banco Itau; Banco Itau-A; Bradesco;

Bradesco -A.The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Unibanco; Unibanco -A; Itausa; Banco Itau; Banco Itau-A; Bradesco;

Bradesco -A.The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Unibanco; Unibanco -A; Itausa; Banco Itau; Banco Itau-A; Bradesco; Bradesco -A.In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale: Unibanco; Itausa; Banco Itau; Bradesco.MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: Itausa; Banco Itau; Banco Itau-A; Bradesco; Bradesco -A.MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company within the next three months: Unibanco; Unibanco -A; Itausa; Banco Itau; Banco Itau-A;

Bradesco; Bradesco -A.Customers of Merrill Lynch in the US can receive independent, third-party research on companies covered in this report, at no cost to them, if such research is available. Customers can access this independent research

at http://www.ml.com/independentresearch or can call 1-800-637-7455 to request a copy of this research: Unibanco; Unibanco -A; Banco Itau; Banco Itau-A; Bradesco; Bradesco -A.The country in which this company is organized has certain laws or regulations that limit or restrict ownership of the company's shares by nationals of other countries: Unibanco; Banco Itau; Banco Itau-A; Bradesco.MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: Unibanco -A; Banco Itau-A; Bradesco -A.The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill Lynch, including profits derived from investment banking

revenues.

Copyright 2004 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All rights reserved. Any unauthorized use or disclosure is prohibited. This report has been prepared and issued by MLPF&S and/or one of its affiliates andhas been approved for publication in the United Kingdom by Merrill Lynch Pierce, Fenner & Smith Limited, which is regulated by the FSA; has been considered and distributed in Australia by Merrill Lynch Equities (Australia) Limited (ABN 65006 276 795), licensed under the Australian Corporations Act, AFSL No 235132; has been considered and distributed in Japan by Merrill Lynch Japan Securities Co, Ltd, a registered securities dealer under the Securities and Exchange Lawin Japan; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC; and is distributed in Singapore by Merrill Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore) PteLtd, which are regulated by the Monetary Authority of Singapore. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness.

Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). Officers ofMLPF&S or one of its affiliates may have a financial interest in securities of the issuer(s) or in related investments.

This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person whomay receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regardingfuture prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested.Past performance is not necessarily a guide to future performance.

Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by thecurrency of the underlying security, effectively assume currency risk.

Turkish Economy in Global Competition

Documents

Transcript of Turkish Economy in Global Competition