Ladies and Gentlemen, Distinguished Guests, it is truly a pleasure and honor for me to address such a distinguished audience. So many guests from a lot of countries around the world and the IIF membership is very strongly represented in this room. At the outset of my remarks, on behalf of Turkish G20 Presidency, I would like to welcome you all to Istanbul, a city where continents meet, a city where seas meet and a city where actually civilizations meet. I hope you have productive two days of conference here in Istanbul and also I hope that you have time to enjoy the beauties of this splendid city.
I would like to also express my appreciation to IIF for organizing this event jointly with us. I have to mention that as the policy makers, we highly value IIF’s input to strengthen the efficiency, transparency and stability of the global financial system. As the world’s only global association of financial institutions, IIF assumes very distinctive and critical role to support the financial industry in prudently managing risks and developing best practices and standards. The institution and its events also have a unique role in conveying private sector perspectives to the policy makers and bringing an opportunity for dialogue between officials and private sector leaders in the international financial community on a wide range of key topics.
In recognition of this aspect, since I took office in Turkish government in 2002, I had the chance to attend and share my views at many IIF events organized on various occasions. We co-hosted several events, but I think the most important of all we benefited a lot from what IIF has discussed, consulted and suggested to the regulators and the policy makers. This interaction has been a very valuable one, not only around the G20 table, but for many international organizations that financial sector is discussed.
Looking at the agenda of the conference, there are many important topics to be discussed on a range of key G20 agenda items such as growth and inequality, private sector support for infrastructure investments, financial inclusion, SME funding, financial globalization, the regulatory reform agenda and the B20 agenda. These are all very relevant to what we are going to be discussing around the G20 table, starting from tomorrow leading to Tuesday evening and when my good old friend Tim discussed the three Is of Turkish Presidency, our priorities so to say. Three Is of Turkish priorities and the priorities of IIF are actually very overlapping. So he actually told already what I was planning to say when we talk about Inclusiveness or when we talk about Implementation or when we talk about Investments.
We are going to be discussing all these extensively, starting from tomorrow. The first G20 meeting which I attended was in November 2002. That was in New Delhi. That was during a time when we had only ministerial meetings but no summits. That was the time during which G7 was the prominent setup to talk about global economy and financial issues. We actually asked quite a few times to our colleagues, other governments; why don’t we have a summit of G20? Every G20 ministerial meeting we were talking about global imbalances, growing risks but without the Leaders’ close attention and without the Leaders’ political decision to do the right, correct but difficult things, the global economy didn’t go in a good direction. At only when the 2007-2008 crisis hit, then there was a decision to have a G20 summit. So for the first time, G20 Leaders met in 2008 and since then the summits have become a tradition.
When we look around the world, we don’t really have another setup like G20, which enables the countries to have a thorough discussion. Because with 20 people around the table you can have actually an interactive dialogue. If you have 40 – 60 or more -in many international meetings which I attended and also observed personally-, if the number is too big, then people just make three minutes statements and there is no more time than three minutes. There is no really interactive dialogue around the table. But on the other hand, when the number is too small like 7, then it is not really a representative group. It doesn’t really represent a big part of the world economy, so the number 20 seems to be the right number to be represented enough so that you will have the geographical representation and you have the developing and developed countries and also 85 percent of the global GDP around that table of 20 people. So high representation power and the ability to really discuss the issues in an instructive way is I think something which makes G20 quite a special one. It is a voluntary platform, it is informal but it works on consensus basis and when all the 19 countries plus the EU reach a consensus on any topic that becomes a very strong commitment and a highly representative decision.
I have observed many times that a G20 communique would be just cut and paste into an IMF or World Bank communique where almost 190 countries are represented. So if 20 countries agree on anything, it is highly likely that 190 countries will just subscribe to it and that has been the case in many subjects. So that’s why as Turkish Presidency, we are putting a lot of value on the work of G20. And when we look at the agenda, it is very comprehensive. There are 11 agenda items. It is about growth, it is about employment, it is about international taxation, international trade, investments and so forth. But all the agenda items are very important to work on. We have taken over from our Australian colleagues and will pass to our Chinese colleagues at the end of this year. But then, as Turkish Presidency, we have announced some key areas which we are going to be emphasizing, which we are going to be putting more effort so to say. This falls into three categories, the three Is, which I’ve mentioned.
When we look at the first I, the Inclusiveness, there are two important subjects which we are going to be working on. The first one is SMEs, small to medium sized enterprises and the second one is LIDCs, low income developing countries. The first one, SME, is more of a national inclusiveness agenda. So we would like to ask throughout the year of 2015 under every agenda item of G20; are we doing enough for SMEs? Are we really putting all the effort that we can? SMEs mean entrepreneurship. SMEs mean innovation. SMEs mean employment. In many countries, at least 50, sometimes 60 – 70 percent of the employment actually comes from SMEs. We’ve realized that the G20 has a good interaction with B20, Business-20, but B20 is mostly composed of large corporations and there is L20, which is mostly composed of the unions of workers working for those large organizations. We highly value the contribution of corporates, large sized corporations to the global growth and it is very important for them to be motivated, it is very important for them to have the trust for future, invest, trade and so forth. We have our full respect for that but we should not just overlook the other half, which is composed of many small to medium sized enterprises. In our experience in Turkey, SMEs are the backbone of our economy, which is the case in many developing countries as well. But even in some developed countries, in advanced economies, whether this is Germany or Italy, SMEs are still the very important part of the economic structure. So putting a special emphasis on them; how to make them more part of the global value chain, how to make them easier to access finance. I know that 2008 – 2009 crisis brought a trauma to the financial system about risks. Yes, well- defined and well-managed SME risk is highly rewarding. Turkish banks experienced this.
Last one year, our total credit volume in Turkey increased by on average 16 percent, but SME credits increased by 25 percent and when we look at the NPLs and other recent indicators, it is very well managed. So by some targeted action, we believe that a lot can be achieved.
The second subject under Inclusion is low income developing countries. We didn’t use the UN terminology LDC, least developed countries, which is about 50 countries. We thought that that terminology is also a little bit depressing. But IMF has a definition of ‘low income developing countries’, a group of about 70 (countries) which does include LDCs. And we thought that that would be a wider group of countries to look at.
Under many different agenda items of G20, we are going to be asking the questions; are we taking into account low-income developing countries’ needs, their potential, their opportunities and are the decisions we are taking around the G20 table really taking care of the rest of the world? We are working very closely with the UN, with World Bank as well as regional organizations like African Union or regional development banks like Asian Development Bank, African Development Bank to come up with a strong agenda for LIDCs.
The second I, Implementation, we believe that a lot of good decisions have been taken. We believe that a lot of good programs have been made in many countries. I think the definition of the problem; the diagnosis is there in many countries. But I think the recipe on how to solve the problems are more or less known in many countries. But then, doing what is necessary becomes a key issue and it has a lot to do with domestic politics. It has a lot to do with leadership. I think we had a huge discussion about budget deficits in many countries, but then the deficit of leadership is also very important. Doing the difficult but necessary things, leading the change, convincing people so that this is needed for the country, then we just have to go ahead and do it. Just following the public opinion and just following populist ideas and sometimes falling into the trap of populist movements in quite a few countries around the world, it just brings more and more problems for the economic outlook. So, implementing good reforms is something which is urgently needed. G20 countries committed a total of more than 1,000 reforms. These have been all reported to the G20 presidency and what we would like to do this year is to come up with a monitoring framework about the reform commitments versus how the implementation is going on.
Another important aspect is that the fiscal policy and monetary policy is now exercised to the limits in many countries. So more fiscal stimulus, more monetary stimulus seems to be not really working anymore. So reforms, structural reforms are the key to come out of the difficult situation in many countries and again, implementation.
For financial sector, I think one of the most concrete outcomes of G20 is FSB, Financial Stability Board. Under the leadership of Mario Draghi first, and now under Mark Carney, I think FSB has contributed a lot. I think this year FSB is going to be completing whatever is left in terms of the regulation framework. And implementation is again going to be very important. Implementation of the financial regulation framework. But of course here we also have to be very careful. In Turkey, in terms of financial regulation, we have been following a countercyclical approach. So during the good times, tighten the regulation and ask the financial sector to accumulate reserves, and during bad times loosen a little bit so that those reserves are used for bad days. This approach for us has been very useful. But of course during the good times it is not very easy to step in and make some regulation.
Governments most of the time would like to play a happiness game. When the economic growth is strong, when the consumption is strong, when the investments are going on very well and when the financial sector is very upbeat to lend, it is not very easy for policy makers to step in and say ‘people okay, just slow down a little bit, just think about the bad times which could come, just be careful about the imbalances, the growing bubbles or whatsoever’ and then when those are not done timely, then the accumulated risks simply one day brings really big difficulties.
So, again, implementation is going to be important this year and we hope that the implementation call that we are going to be making gives some good results in some countries.
The third I, Investments. Overall investments, private sector investments are very important but especially infrastructure investments, public infrastructure investments are very badly needed in many countries. Even in developed countries, the need to invest is very obvious. But then, there are not too many countries which have the fiscal space to do it by public funds. In many countries, because of the fiscal consolidation efforts or because of just simply too high public debt and the need to bring it down to reasonable levels, public sources are not adequate. For those who have the fiscal space, as the G20, we are already making calls to spend more on investment. But for those who don’t, how to channel more private sources into public infrastructure investments is something which needs specific attention. Sovereign wealth funds, pension funds around the world in an era of negative interest rates, there is abundant amount of private resources to be channeled into infrastructure projects, only if we can come up with the right models. Models like PPPs, public private partnerships; how to create a predictable legal framework for the private sector to get into long term projects? Predictability is a key. A strong legal framework is a key. Continuity, how to make sure that during the lifespan of a project, a sizeable project, starting from the blueprints to the investment phase all the way to the life of the project -sometimes there are three governments, sometimes five, sometimes ten- how to make sure that the private sector will trust and get into these projects knowing that they are going to be seeing probably 10 different Prime Ministers, 10 different Ministers and all the other bureaucracy and so forth, during the life of the project. How to standardize the public private partnership projects so that they will be easier to understand, they will be easier to structure. Then moving on, how to securitize them? How to make them easier to understand and trade in capital markets in forms of different instruments, different financial instruments? These are all going to be very important and very worthwhile to work on and we have already asked the World Bank to work on the standardization part of the project, but I think also IIF could have a very interesting role to play about how to do it. This is also something that we are going to be putting a lot of effort during our G20 Presidency.
Ladies and Gentlemen, Distinguished Guests, when we look at the global economy, the growth is still far from being strong or balanced or even and unemployment is still a big problem around the world. Recently, a pick-up in growth and employment has been observed in some advanced economies, only a few like US or UK, but the recovery in the Euro area and Japan remains still somewhat weak. I think again looking at all the countries, which are still performing a weak growth, when we look at the details, again we find structural reforms at the roots of many problems or solutions.
When we look at the developing world, the growth rates on average have dropped. We are talking about lower figures compared to last 10 years. So in the developing countries, growth figures of the next 10 years are going to be somewhat lower than the growth figures of the last 10 years but still even those low figures are still much higher than the growth expectation for the advanced economies. Still a big part of the global growth will come from developing countries. So for those who are looking for dynamism, growth, developing countries are still the place to do business. Especially last one and a half years, since the tapering talks started in 2013 May, some negativity around the developing countries have been talked about. There was a comparison between the Asian crisis of 1990s and today, but the world has changed, and changed dramatically compared to 1990s. Compared to 1990s, the developing countries have now much lower public debt, much lower budget deficit. They have much more flexible exchange rates, much higher reserves and much stronger banking systems compared to 1990s and also still good memories of crisis which plays a key role. For those countries where the memory of a crisis has diminished, the management of risky situation or the management of crisis is not always done in the best way. But for those countries which does have the experience of a recent crisis, like the Asian crisis, then we actually see more of an experienced approach so to say, about how to manage a crisis and I think that is also playing a key role. A year ago, for example versus today, the overall perception about developing countries have changed. For about half a year or so, we had really a bad time, but then things changed quite fast and many countries have taken very serious steps to take maneuvers and just do whatever is right.
So I think it is very important to follow closely of course developing countries, emerging economies and of course, looking at the low income developing countries. When we look at the growth rates in many low income countries and Africa, we are seeing, observing figures like 5% – 6%. Our experience in Africa has been tremendous. In 2008, Turkey had only 12 embassies in Africa. Today, we have 39 embassies. Turkish Airlines now have daily flights to more than 40 cities in Africa from Istanbul. So, paying adequate amount of attention and doing the hard-work, especially on the side of the private sector, pays back and pays back nicely.
Ladies and Gentlemen, Distinguished Guests, maybe just a few more words on Turkey and then I will close my remarks. Turkey has been going through a really important transformation process over the last 12 years. The economic transformation has been very important. In 2002, our total GDP was 230 billion dollars. Now we are about 800. Our exports were 36 billion, now it is about 160. We are now 16th largest economy by PPP adjusted GDP figures. In terms of the agricultural GDP, we are number 7 globally. In terms of the number of tourists arriving, we are number 6 globally.
Istanbul has become an important hub for business. Many international or regional financial organizations have now their Istanbul office for an entire region like IFC, the World Bank’s private sector arm, they opened their first office outside of Washington D.C. in Istanbul and serving all Eastern Europe, North Africa, Middle East, Central Asia from here. EBRD, EIB they are doing the same thing. EBRD opened its third office in Turkey just a month ago. Corporates; Microsoft, Intel they have their Istanbul office for 70-80 countries. Coca-Cola’s Istanbul office serves more than 90 countries, including Russia, India and all the continent of Africa, Eastern Europe, Central Asia, Middle East and so forth.
So I think many companies are observing a very strong merit by being placed in Istanbul, serving the region from here. Turkish Airlines now flies to 106 countries, that ranks now number 1 globally in that parameter. There is no other airline which flies to that many countries. So I think this hub function of Istanbul is growing and especially for the financial sector, it is going to be more and more of an important factor for many years to come.
Of course we are putting a lot of emphasis on the political reforms as well. Because ultimately, it is the political stability which guarantees the economic and financial stability in a country. Our political reforms have been very important especially within our EU accession process. Even after the Euro-zone crisis, even during the times when the solidarity in the EU is weakening, we still believe that EU is a very important peace project. European Union is a union of values and ideals embracing the differences but joining around commonalities is a good thing for the world, not just for Europe.
So, we are signing up to all the EU criteria when we talk about democracy, freedoms, fundamental rights, rule of law and so forth. We are not perfect, since 2002 we have made a lot, we have reformed a lot in those areas, but there is still a long to-do list for Turkey to improve our democracy, to improve our freedoms, rule of law, our judicial system, which is at the essence of trust.
We have prepared a very comprehensive reform agenda, a structural reform agenda for the next 4 years. Our new Prime Minister Ahmet Davutoglu, has announced these important reforms. Because our fiscal stance is very strong. Last year, 1.3% budget deficit, 32% debt to GDP ratio, public debt is no longer a risk area for Turkey. But then, structural reforms; badly needed and urgently needed. Under 25 subjects, we have announced more than 1,200 specific actions with deadlines and responsible bodies to deliver. And we make sure that these are announced in a transparent way and we have already announced the monitoring mechanism. Our Prime Minister personally committed to report to public every three months the progress. What has been promised, what has been delivered? Every quarter, the more we implement into that program, the more confidence and trust it will build into our structural reform agenda. We firmly believe in that and the agenda is very comprehensive.
All the international organizations; OECD, World Bank, they embraced what we have promised but on the other hand, everybody is asking us these are great but just do it, so we have to just deliver, implement to really reach the level of advancement in our economic system overall.
Turkey has to create more value-added, we have to move higher ranks of technology. We have to do more R&D, innovation. We have to do more with our labor markets to bring more element of flexibility. We have to make Turkey an easier place to invest and easier place to do business. We have to put a lot of emphasis on human resources, we have a young generation, a young population, growing population; but only with a much better education system we can create higher value added in the country. Judicial reform, unfortunately especially last couple of years, all the domestic events that we went through brought some credibility issue to our judicial system. So we need to upgrade, we need to restore confidence brick by brick and make Turkey truly a state of law. We know what is needed and I think we have the good amount of public support behind us as tested last year by two elections; local elections, presidential elections, to be tested again this year in general elections. And with strong public support and with a very clear mind of what the country needs, we believe that we have the ability to deliver and move from being an upper-middle income country to a high-income country. Of course only if we do the right things.
Ladies and Gentlemen, Distinguished Guests, again my appreciation to IIF for organizing this event in Istanbul and also thanks to all of our guests coming from many countries around the world representing the financial sector and beyond, and I will be following very curiously all the discussions that is going to be done here in the panels, in the discussions and looking forward to getting a good feedback from Tim Adams and his friends so that the valuable input and the suggestions that we are going to receive from IIF is going to be very valuable for our G20 work. Thank you for being here and my best wishes for today and tomorrow’s conferences.
