EXHIBIT R
RECENT DEVELOPMENTS
The information included in this section supplements the information about the Republic contained in the Republic’s Annual Report for 2006 on Form 18-K filed with the SEC on October 1, 2007, as amended from time to time. To the extent the information in this section is inconsistent with the information contained in the Annual Report for 2006, the information in this section supersedes and replaces such information. Initially capitalized terms not defined in this section have the meanings ascribed to them in the Annual Report for 2006.
GENERAL
On March 1, 2007, an IMF mission arrived in the Republic for consultations under Article IV of the IMF Articles of Agreement (“2007 Article IV Consultation”) and to commence the sixth review under the Republic’s Stand-By Arrangement. On March 9, 2007, the IMF announced that it had concluded its discussions related to the 2007 Article IV Consultation. Discussions on the sixth review were adjourned on March 20, 2007, as more technical work was needed to develop further measures to secure the contribution of state enterprises to the program’s fiscal targets. Once the Republic identified necessary additional spending measures and structural policies to strengthen the financial performance of state enterprises, the IMF announced on April 12, 2007 that it had concluded its discussions on the sixth review under the Republic’s Stand-By Arrangement and an agreement on the draft Letter of Intent was reached. The new Letter of Intent was signed and sent to the IMF on May 1, 2007. The sixth review was approved by the IMF Executive Board on May 18, 2007 and on May 22, 2007, an amount equivalent to SDR1 749.5 million (approximately $1.1 billion, at the time of the release) was made available for release to the Republic. On April 14, 2008, discussions on the seventh review under the Republic’s Stand-by Arrangement were concluded and an agreement was reached with the authorities on a package of policies aimed at completing the seventh and final review under the Stand-By Arrangement. On May 9, 2008, the seventh review and disbursement of the remaining balance of SDR 2.25 billion (approximately $3.65 billion at the time of the release) was approved by the IMF Executive Board, which completed the 19th Stand-By-Arrangement. The Republic has not yet made a final decision on the framework for future relations with the IMF after the expiration of the Stand-By-Arrangement on May 10, 2008.
The Undersecretariat of the Turkish Treasury together with the World Bank launched
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| 1 | | The Special Drawing Right, or SDR, serves as the unit of account of the IMF. The value of the SDR in terms of U.S. dollars was
SDR 1 = $1.6138 on June 17, 2008. |
the Country Partnership Strategy (“CPS”) of Turkey on February 28, 2008. The CPS covers the period between 2008 and 2011 and will provide Turkey with financial and technical support. The CPS package, which envisages total financial support of $6.2 billion, will consist of both investment and program loans
On April 3, 2008, Standard & Poor’s revised the outlook for the Republic’s BB- foreign currency rating from stable to negative. As of June 19, 2008, the Republic’s foreign currency rating from Fitch Ratings is BB- with a stable outlook and its foreign currency rating from Moody’s is Ba3 with a stable outlook.
On April 17, 2008, the assembly approved a revised social security reform law (Law No 5754), which addresses the objections raised by the Constitutional Court to the Social Insurance and General Health Insurance Law (Law No. 5510) while retaining most of its savings. The reform is expected to make a significant contribution to securing fiscal sustainability over the medium and long term. Law No 5754 also establishes a new universal health insurance framework. To promote efficiency in this area, Law No 5754 authorizes the Social Security Institution to set copayment rates for outpatient services that are differentiated between primary, secondary, and tertiary levels. The social security reform law was approved by President Gül and published in the Official Gazette on May 8, 2008 (No. 26870).
The Turkish social security system has recorded an increasing deficit in recent years. Social Security Institutions (“SSIs”) realized a deficit of 2.27% of GDP in 2002, 2.95% of GDP in 2003, 2.85% of GDP in 2004, 2.88% of GDP in 2005, 2.46% of GDP in 2006 and 2.92% of GDP in 2007. For 2008, the estimated deficit is 2.94% of GDP. The low premium collection rates and the increasing rate of health and insurance expenditures are the main factors for the increasing deficit of the social security system.
On October 17, 2007, the Council of Ministers submitted the draft budget law for 2008 to the Assembly. The draft 2008 budget includes targets of approximately YTL222.6 billion for central government budget expenditures, YTL204.6 billion for central government budget revenues and approximately YTL18 billion for central government budget deficit as compared to the targets of YTL204.9 billion for central government budget expenditures, YTL188.2 billion for central government budget revenues and YTL16.7 billion for central government budget deficit in the 2007 budget. The primary surplus target for 2008 is 5.5% of GNP compared to the 6.5% of GNP target in the 2007 budget. On November 22, 2007, the draft 2008 budget was approved by the Planning and Budget Commission. On December 14, 2007, the Assembly approved the budget law and on December 19, 2007, the President approved the budget law and published the approval in the Official Gazette dated December 28, 2007 (No. 26740).
On November 27, 2007, the Assembly approved the Act on International Private Law and Procedural Law (Law No. 5718), which was published in the Official Gazette dated December 12, 2007 (No. 26728). Law No. 5718 primarily dictates the regulations that will be implemented for private law procedures and relationships, including foreign
elements (e.g., place of residency, locale of performance), the international authority of the Turkish courts and the recognition of the foreign decisions.
On February 20, 2008, the Assembly re-approved the Foundations Law (Law No. 5555) that was originally vetoed by former President Sezer and returned to the Assembly for review of the ninth article. The new law (Law No. 5737) allows foreigners to establish new foundations in Turkey on the principle of legal and actual reciprocity. Foundations will also be able to establish economic enterprises and companies on the condition that they notify Turkey’s foundations authority. Law No. 5737 was approved by President Gül and published in the Official Gazette on February 27, 2008 (No. 26800).
On February 20, 2008, the Assembly approved the law on collection of certain past-due public receivables by reconciliation (Law No. 5736). These receivables include tax arrears, duties and accrued interest and penalties. The Law was approved by President Gül and published in the Official Gazette on February 27, 2008 (No. 26800).
On April 30, 2008, the Assembly approved a law amending the Turkish Penal Code (Law No. 5759) which changed Article 301 of the Turkish Penal Code. Pursuant to Law No. 5759, the phrase “denigrating the Turkish identity” was replaced with “denigrating the Turkish nation” in an effort to eliminate the elusive definition of “Turkish identity”. Law No. 5754 also replaced the word “Republic,” with the “Republic of Turkish State,” in a similar context. The Law was approved by President Gül and published in the Official Gazette on May 8, 2008 (No. 26870).
On May 15, 2008, a new Employment Package was approved by the Assembly (Law No. 5763). The Employment Package would increase the budget allocated to the Active Labor Programs and enhance the functions of the Private Labor Offices while potentially decreasing the financial burden of employment. Law No. 5763 was published in the Official Gazette on May 26, 2008 (No. 26887).
Currently a new Commercial Code is being discussed in Parliament. With the proposed Commercial Code, among other things, companies would be required to prepare financial statements in accordance with International Financial Reporting Standards.
As of May 15, 2008, at least 21 people have tested positive for the deadly H5N1 strain of the bird flu virus (12 of which have been confirmed by the World Health Organization (the “WHO”), including 4 children who died from the disease). The most recent human case of the H5N1 strain of the bird flu virus was reported on January 30, 2006. On January 22, 2008, a new H5N1 case in poultry was reported in the northern Black Sea region.
POLITICAL CONDITIONS
On July 22, 2007, a general election was held in the Republic. Based on the final election results and subsequent moves by Assembly deputies, the following table sets forth the composition of the Assembly by total number of seats as of June 17, 2008:
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| Political Party | | Number of Seats |
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| Justice and Development Party (AKP) | | 340 |
| Republican People’s Party (CHP) | | 98 |
| Nationalist Action Party (MHP) | | 70 |
| Democratic Society Party (DTP) | | 20 |
| Democratic Socialist Party (DSP) | | 13 |
| Independents | | 5 |
| Great Union Party (BBP) | | 1 |
| Freedom and Solidarity Party (ODP) | | 1 |
| Vacant | | 22 |
Source: The Grand National Assembly of Turkey
On February 9, 2008, the Assembly approved a constitutional amendments package that includes a statement in the constitution to outlaw restrictions on rights to receive higher education for a reason not clearly stated by the law. The constitutional amendments package was submitted to the President for approval on February 12, 2008. Law No. 5735 was approved by President Gül and published in the Official Gazette on February 23, 2008 (No. 26796). On June 5, 2008, it was announced that the Constitutional Court annulled Law No 5735.
On March 14, 2008, a lawsuit was filed in the Constitutional Court to close down the ruling Justice and Development Party (“AKP”) for allegedly participating in anti-secular activities and to ban 71 AKP officials, including Prime Minister Tayyip Erdogan and President Gül from politics for five years. On March 31, 2008, it was announced that the Constitutional Court agreed to hear the petition on whether to close down the ruling AKP and legal proceedings have begun on this matter. The AKP submitted its written defense to the Constitutional Court on June 16, 2008. The Constitutional Court is scheduled to hear the testimony of the Chief Prosecutor on July 1, 2008 and that of the AKP on July 3, 2008.
KEY ECONOMIC INDICATORS
| • | | On March 8, 2008 the Turkish Statistical Institute (“TURKSTAT”) announced a revision to the national accounts. Revised national accounts represent major improvements in methodology, coverage, consistency and international comparability of Turkey’s macro-economic statistics. The primary reason for the revision is the extension of coverage and improvement in the methodology. The revision to national accounts is a step toward convergence to the European System of Accounts (“ESA- |
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| 2 | | The two vacant seats were held by a recently deceased member of the Assembly and President Gül who resigned from his parliamentary seat. |
| | | 95”) which is a more comprehensive methodology and includes an integrated set of national accounts. |
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| • | | As a result of the revision, TURKSTAT picked 1998 as the new base year for national income calculations, replacing the former base of 1987, and included new areas of the economy (including a broader range of manufacturing companies, participation banks and internet service providers) in its national income calculations. The GDP series by production approach increased by 31.6% in current prices compared to GDP series with a 1987 base year for the year 2006. According to the new calculations, the number of companies employing 10 people or more rose to 27,813 from a previous number of 11,293. Following the revision to the national accounts, the GNP figures will no longer be published as of the third quarter of 2007. |
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| • | | In the fourth quarter of 2007, GDP grew by an estimated 3.4% compared to the same period in 2006. Annual GDP in 2007 increased by 4.5% in constant prices. In the third quarter of 2007, GDP grew by an estimated 3.4% compared to the same period in 2006. In the second quarter of 2007, GDP grew by an estimated 4.0% compared to the same period in 2006. In the first quarter of 2007, GDP grew by an estimated 7.6% compared to the same period in 2006. |
Gross Domestic Product Results
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| | | | | | | | | | | | | | | GDP | | |
| | | GDP Current | | | | | | | | Constant | | |
| | | prices | | | | GDP | | | | prices | | |
| | | (Million New | | Growth | | Current | | Growth | | (Million New | | Growth |
| | | Turkish | | rate | | prices | | rate | | Turkish | | rate |
| Years | | Liras) | | % | | (Million $) | | % | | Liras) | | % |
| |
1998 | | 70 203 | | | — | | | 270 947 | | | — | | | 70 203 | | | — | |
1999 | | 104 596 | | | 49.0 | | | 247 544 | | | -8.6 | | | 67 841 | | | -3.4 | |
2000 | | 166 658 | | | 59.3 | | | 265 384 | | | 7.2 | | | 72 436 | | | 6.8 | |
2001 | | 240 224 | | | 44.1 | | | 196 736 | | | -25.9 | | | 68 309 | | | -5.7 | |
2002 | | 350 476 | | | 45.9 | | | 230 494 | | | 17.2 | | | 72 520 | | | 6.2 | |
2003 | | 454 781 | | | 29.8 | | | 304 901 | | | 32.3 | | | 76 338 | | | 5.3 | |
2004 | | 559 033 | | | 22.9 | | | 390 387 | | | 28.0 | | | 83 486 | | | 9.4 | |
2005 | | 648 932 | | | 16.1 | | | 481 497 | | | 23.3 | | | 90 500 | | | 8.4 | |
2006 | | 758 391 | | | 16.9 | | | 526 429 | | | 9.3 | | | 96 738 | | | 6.9 | |
2007 | | 856 387 | | | 12.9 | | | 658 786 | | | 25.1 | | | 101 046 | | | 4.5 | |
Source: TURKSTAT
| • | | For the month of May 2008, CPI increased by 1.49% and PPI increased by 2.12%. |
| • | | The Republic’s CPI and PPI for the May 2007 — May 2008 period was 10.74% and 16.53%, respectively. The official CPI year-end target for 2007 was 4%. The official CPI year-end target for 2008 is 4%. Annual inflation remained at high levels in 2007 due to the rise in unprocessed food prices and an increase in the price of tobacco |
| | | products. In the first quarter of 2008, owing to factors mainly beyond the control of monetary policy, such as increases in food, energy and administered prices, annual CPI which was recorded as 9.15%. This exceeded the upper limit of the uncertainty band for the first quarter of 2008 which was 5.1-9.1%. The Central Bank expects to respond with adjustments in monetary policy in order to be able to achieve and maintain price stability in the medium term. |
| • | | On June 18, 2008, the Central Bank foreign exchange buying rate for U.S. dollars was YTL1.2185 per U.S. dollar, compared to an exchange buying rate of YTL1.2977 per U.S. dollar on June 18, 2007. |
| • | | On June 11, 2008, the Government offered an interest rate of 21.54% for the 581-day Government Bond, compared to an interest rate of 18.43% for the 588-day Government Bond on June 26, 2007. |
| • | | The industrial production index increased by 6.3% in April 2008 compared to April 2007 (year on year). The industrial production index increased 2.8% in April 2007 compared to April 2006 (year on year). |
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| • | | The following table indicates unemployment figures for 2007-2008: |
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| 2007 | | Unemployment rate | | Number of unemployed |
January | | 11 | % | | 2,675,000 |
February | | 11.4 | % | | 2,760,000 |
March | | 10.4 | % | | 2,562,000 |
April | | 9.8 | % | | 2,450,000 |
May | | 8.9 | % | | 2,265,000 |
June | | 8.8 | % | | 2,285,000 |
July | | 8.8 | % | | 2,296,000 |
August | | 9.2 | % | | 2,383,000 |
September | | 9.3 | % | | 2,405,000 |
October | | 9.7 | % | | 2,458,000 |
November | | 10.1 | % | | 2,350,000 |
December | | 10.6 | % | | 2,436,000, |
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| 2008 | | Unemployment rate | | Number of unemployed |
January | | 11.3% | | 2,567,000 |
February | | 11.6% | | 2,642,000 |
March | | 10.7% | | 2,496,000 |
Source: TURKSTAT
| • | | On May 30, 2007, it was announced that wage increases for public sector workers would be based on the actual inflation rate instead of a targeted inflation rate of 4%. On June 26, 2007, it was announced that the wages of public sector workers would be increased by 10% for 2007 and would be increased by 3% for each six-month period in 2008. As a result of the negotiations among civil servants’ unions, union confederations and the government regarding wage increases for civil servants, on October 18, 2007, it was announced that wages for civil servants would be increased by an average of 7.46% for the year 2008. |
| • | | On December 18, 2007, the Central Bank announced its monetary policy details for the year 2008. It announced that the inflation target rates, which are “point targets” based on CPI with a band of 2% in either direction, are 4% for the years 2008, 2009 and 2010. The Monetary Policy Committee (“MPC”) plans to meet during the second or third week of each month and to make its interest rate decision publicly available on the same day as the MPC meeting. The Central Bank also plans to continue publishing a quarterly “Inflation Report”, a semiannual “Financial Stability Report” and a monthly “Price Developments” report in 2008. On June 3, 2008, it was announced that the inflation target rates for years 2009 and 2010 were revised upwards due to the risks posed by rising food and energy prices to the medium term inflation outlook. The inflation target rates for years 2009 and 2010 were revised to 7.5% and 6.5% respectively and the inflation target rate for year 2011 was set at 5.5%. |
In its regular meeting held on June 16, 2008, the MPC decided to raise its short-term interest rates (policy rates) at the Central Bank Interbank Money Market and the Istanbul Stock Exchange Repo-Reverse Repo Market. As of June 17, 2008, the Central Bank overnight borrowing interest rate was 16.25%, and the Central Bank overnight lending interest rate was 20.25%. In its previous meeting, held on May 15, 2008, the MPC decided to raise its short-term interest rates by 50 bps. Moreover, commencing on July 20, 2007, the Central Bank began to issue liquidity bills in addition to the then current instruments (such as repo-reverse repo transactions) used in open market operations to enhance the effectiveness of liquidity management when necessary.
TOURISM
| • | | From January to April 2008, net tourism revenues (according to the balance of payments presentation) increased by approximately 24.3% to approximately $2.66 billion from approximately $2.14 billion during the same period in 2007. |
| • | | From January to April 2008, the number of foreign visitors visiting the Republic increased by approximately 12.37% to approximately 4,632,468 foreign visitors, as compared to approximately 4,122,387 foreign visitors during the same period in 2007. |
FOREIGN TRADE AND BALANCE OF PAYMENTS
Between January and April 2008, the trade deficit (according to the balance of payments presentation) increased by approximately 37.49% to approximately $16.92 billion, as compared to approximately $12.30 billion in the same period in 2007. Between January and April 2008, total goods imported (c.i.f.3) increased by 39.3% to approximately $67.0 billion, as compared to approximately $48.1 billion during the same period in 2007. The increase in imports was primarily driven by the demand for capital goods, intermediate goods and consumption goods. Between January and April 2008, capital goods, which are used in the production of physical capital, increased by approximately 30.7% over the same period in 2007. Between January and April 2008, intermediate goods, which are used in the production of other goods, such as partly finished goods and raw materials, increased by approximately 39.9% over the same period in 2007. Between January and April 2008, consumption goods increased by approximately 46.15% over the same period in 2007. During the period between January and April 2008, the current account deficit (“CAD”) increased by approximately 35.21% over the same period in 2007, from approximately $12.5 billion to approximately $16.9 billion.
As of May 30, 2008, total gross international reserves were approximately $131.1 billion (compared to $119.5 billion as of December 28, 2007) and commercial bank and participation bank reserves were approximately $53.6 billion (compared to $45.5 billion as of December 28, 2007). As of June 6, 2008, gold reserves were approximately $3.49 billion (compared to $2.76 billion as of December 28, 2007) and the Central Bank reserves were approximately $73.2 billion (compared to approximately $71.3 billion as of December 28, 2007).
As of June 16, 2008, the Central Bank held approximately YTL1.4 billion in public sector deposits.
PUBLIC FINANCE AND BUDGET
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| 3 | | c.i.f. means cost, insurance and freight; when a price is quoted c.i.f., it means that the selling price includes the cost of the goods, the freight or transport costs and also the cost of marine insurance. c.i.f. is an international commerce term. |
| • | | In May 2008, the central government budget expenditures were approximately YTL15.8 billion and central government budget revenues were approximately YTL19.2 billion, compared to a consolidated budget expenditure of approximately YTL17.7 billion and a consolidated budget revenue of YTL19.7 billion during the same period in 2007. |
| • | | In May 2008, the central government budget surplus was approximately YTL3.4 billion, compared to a consolidated budget surplus of YTL2.03 billion during the same period in 2007. |
| • | | In May 2008, the central government budget primary surplus reached approximately YTL5.07 billion, compared to the central government budget primary surplus of YTL6.65 billion during the same period in 2007. |
| • | | From January to May 2008, the central government budget expenditures were approximately YTL86.0 billion and central government budget revenues were approximately YTL83.9 billion, compared to a consolidated budget expenditure of approximately YTL83.5 billion and a consolidated budget revenue of YTL80.1 billion during the same period in 2007. |
| • | | From January to May 2008, the central government budget deficit was approximately YTL2.1 billion, compared to a consolidated budget deficit of YTL3.34 billion during the same period in 2007. |
| • | | From January to May 2008, the central government budget primary surplus reached approximately YTL17.5 billion, compared to the central government budget primary surplus of YTL20.3 billion during the same period in 2007. |
On December 18, 2007, the Republic announced its 2008 financing program. According to the 2008 financing program, the Republic expects to repay (including principal and interest) a total of approximately YTL149.7 billion of debt in 2008, of which approximately YTL130.8 billion constitutes domestic debt and approximately YTL18.9 billion constitutes external debt. The total borrowing target for the Republic in 2008 is approximately YTL106.9 billion, of which approximately YTL91.6 billion would consist of domestic borrowing and approximately YTL15.3 billion would consist of external borrowing. Other sources of funds in 2008 are expected to consist of primary surplus (which is targeted to yield YTL35 billion on a cash basis), collections from guaranteed receivables (which are targeted to yield YTL0.5 billion) and other sources including privatization revenues and revenues from SDIF (as defined below) (which are targeted to yield YTL9.2 billion).
On May 3, 2008, a medium term fiscal framework which covers the period between 2008 and 2012 was announced. Under this framework, medium term public debt stock to GDP targets and primary surplus targets were announced. While forming this framework, recent policy initiatives such as labor market reform, local government reform and expediting investments in high yielding projects such as the Southeastern Anatolian
Project4 were taken into account. With this framework the Government announced that it has reduced the primary surplus target to 3.5% of GDP from 4.1% for 2008. The primary surplus is expected to gradually decrease to 2.4% by 2012. Also, the debt to GDP ratio is expected to decline from 37% in 2008 to 30% in 2012.
PRIVATIZATION
The Government’s plans for privatization include, among others, the remaining shares of Turk Telekom, Tekel, Turkish Airlines, sugar factories, electricity generators/distributors, toll roads and bridges and ports.
Regarding the block sale of 100% of the shares of three electricity distribution companies, namely, Baskent Elektrik Dagitim A.Ş. Sakarya Elektrik Dagitim A.Ş. and Istanbul Anadolu Yakasi Elektrik Dagitim A.Ş., each operating in a different region, the bidding deadline for the privatization was initially announced as December 15, 2006 but was then postponed to January 19, 2007. On January 9, 2007, it was announced that the tenders for the three electricity distribution companies were postponed to a future date for the purpose of dispelling uncertainties in post-privatization investments and completing ongoing investment projects in these companies. The final bidding date for the Başkent and Sakarya Elektrik Dagitim A.Ş. was announced as June 10, 2008. On April 22, 2008, it was announced that the tender for the privatization of Istanbul Anadolu Yakasi Elektrik Dagitim A.Ş.was annulled. On April 30, 2008, the final bidding date for the privatization of Meram Elektrik Dagitim A.Ş. and Aras Elektrik Dagitim A.Ş. was announced as July 15, 2008. The privatization process of the remaining 15 electricity distribution companies is still pending.
On February 8, 2007, it was announced that PHC decided to privatize 51% of the shares of Petkim Petrokimya Holding A.Ş. (“Petkim”), a petrochemical corporation, through a block sale. On March 16, 2007, the Privatization Administration announced the tender for the block sale of 51% of the shares of Petkim. The bidding deadline for the privatization was announced as June 15, 2007. On June 7, 2007, it was announced that the bidding deadline for the privatization of Petkim was extended to June 25, 2007. On July 5, 2007, it was announced that the consortium of TransCentralAsia Petrochemical Holding made the highest bid of $2.05 billion and the consortium of Socar-Turcas-Injaz made the second highest bid of $2.04 billion for 51% of the shares of Petkim. On October 16, 2007, it was announced that the tender committee decided to submit the consortium of Socar-Turcas-Injaz’s offer to the Competition Board for approval. There was no
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| 4 | | The Southeastern Anatolia Project (GAP) is a multi-sector, integrated regional development effort based on sustainable development. The objectives of the project include the improvement of living standards and income levels so as to eliminate regional development disparities and contribute to such national goals as social stability and economic growth through the enhancement of productivity and employment opportunities in rural areas. The project covers nine administrative provinces, namely, Adiyaman, Batman, Diyarbakir, Gaziantep, Kilis, Mardin, Siirt, Sanliurfa and Sirnak. |
official announcement as to why the second highest bid was selected rather than the first highest bid. On November 9, 2007, it was announced that the Competition Board authorized the sale of Petkim to Socar-Turcas-Injaz. On November 22, 2007, the PHC approved the sale of Petkim to Socar-Turcas-Injaz. On December 27, 2007, it was announced that the Council of State suspended the sale of Petkim to Socar-Turcas-Injaz, ruling that the privatization of Petkim does not provide for public benefit. On March 19, 2008, it was announced that the Council of State rejected the case against the cancellation of the privatization of Petkim but the appeals process is still continuing. On May 30, 2008, it was announced that the block sale agreement was signed and the transfer of Petkim was finalized.
On March 21, 2007, Sama Dubai Istanbul Real Estate, a unit of Dubai Holding, was declared the winner of the auction for a land plot in Levent owned by the Istanbul Transportation Authority (“IETT”) with the highest bid of $705.5 million. However, several legal actions, including appeals to cancel the sale of the real estate, have been initiated in connection with this tender by several non-governmental organizations, including the Turkish Chamber of Architects and the Turkish Chamber of Civil Engineers. These organizations claimed that the proposed development that was to be constructed on this land plot would be too high, and therefore would cause extra burden to Istanbul’s infrastructure and not be in character with the city’s skyline. As a result, Sama Dubai Istanbul Real Estate did not pay the tender consideration citing these legal actions. On July 13, 2007, the Istanbul Metropolitan Municipality announced that a legal investigation had been initiated against Sama Dubai Istanbul Real Estate because the tender consideration was not paid on the due date. In September 2007, the court rejected appeals to cancel the sale of the real estate, ruling that the non-governmental organizations that appealed to the court did not have appropriate standing to object.
On July 23, 2007, the Privatization Administration announced the tender for the privatization of Mazıdağı Phosphate Enterprise which is owned by Sumer Holding A.Ş. The bidding deadline for this privatization was announced as November 8, 2007 and two bids were received for this privatization. However, only one firm, Toros Tarım San. & Tic. A.Ş. attended final talks held on November 20, 2007 and submitted a bid of $7.25 million. The privatization is currently awaiting the approval of the PHC.
On October 9, 2007, PHC’s decision on the privatization of public shares of Türkşeker A.Ş (Turkish Sugar Factories A.Ş. and the privatization of SUMERHALI (a carpet firm) was published in the Official Gazette (No. 26668). According to PHC’s decision, the public shares of Türkşeker A.Ş will be privatized through sale of assets. The privatization process is expected to be finalized within 24 months. Also, according to PHC’S decision, SUMERHALI will be privatized through sale and the privatization process is envisaged to be finalized in one year.
On October 10, 2007, the Privatization Administration announced the tender for the privatization of power stations owned by Ankara Doğal Elektrik Üretim ve Ticaret A.Ş. It was also announced that one of these power stations would be privatized through sale while all others would be privatized through transfer of operational
rights. The bidding deadline for this privatization was initially announced as January 7, 2008 and has since been postponed to February 22, 2008. Thirty bids were received for this privatization. On March 5, 2008, it was announced that the Zorlu Enerji won the tender for nine power stations with a bid of $510 million. The PHC decision approving the privatization of power stations to Zorlu Enerji was published in the Official Gazette on May 9, 2008.
On October 26, 2007, the Privatization Administration announced the tender for the privatization of TEKEL (assets in relation to cigarette production). The bidding deadline for this privatization was initially announced as January 25, 2008 and on January 11, 2008 the bidding deadline was postponed to February 18, 2008. Four bids were received for this privatization. British American Tobacco Tutun Mamulleri Sanayi ve Ticaret A.Ş. submitted the highest bid of $1.72 billion. On April 24, 2008, the approval of the TEKEL privatization by the PHC was published in the Official Gazette.
On November 16, 2007, the Privatization Administration announced the tender for the privatization of 33.5% of the shares of NITRO-MAK (a producer of emulsion type explosives) owned by Sumer Holding A.Ş. through asset sale. The bidding deadline for this privatization was announced as December 13, 2007. Two bids were received for this privatization. The consortium of Altay Endüstri Yatırımları ve Ticaret A.Ş., Altay Kollektif Şirketi, M. Murat DURAL ve Ortağı ANG Ali Nihat Gökyiğit Yatırım Holding A.Ş.,VİEM Ticari ve Sanayi Yatırımları Ltd. Şti. submitted the highest bid of $19.6 million. The privatization is currently awaiting approval from PHC.
On November 23, 2007, the Privatization Administration announced the tender for the privatization of Barit (a mineral grinding plant) through an asset sale. Barit is currently owned by Sumer Holding A.Ş. The bidding deadline for this privatization was January 3, 2008. Four bids were received for this privatization. AS Çimento Sanayi ve Ticaret A.Ş. submitted the highest bid of $5.6 million. The privatization is currently awaiting approval from PHC.
On November 29, 2007, the Competition Board approved the sale of UN Ro-Ro (Turkish shipping company) to US private equity firm Kohlberg Kravis Roberts & Co (“KKR”). The sale of UN Ro-Ro to KKR was completed on December 13, 2007. The transaction resulted in payment of cash consideration of €910 million (approximately $1.36 billion as of February 1, 2008).
On January 23, 2008, the Privatization Administration announced that it had selected a consortium lead by Deutsche Bank-Garanti Yatirim Kiymetler A.Ş. to serve as advisor on the initial public offering of 15% of the stock of Turk Telecom. On May 7-9, 2008, the public offering for 15% of the stock of Turk Telekom was completed at 4.6 YTL per share and a total of approximately $1.9 billion was raised. The stocks began trading on the Istanbul Stock Exchange on May 15, 2008.
On February 20, 2008, the Privatization Administration announced the tender for the privatization of the Bandrıma Port and Samsun Port through the transfer of operational rights for 36 years. These ports are currently owned by Turkish State Railways (TCDD). The bidding deadline for this privatization was April, 22, 2008. Eighteen bids were received for this privatization. The final negotiations for the privatization tenders for both Bandrıma and Samsun Ports were completed on May 16, 2008. The highest bid for Bandirma Port was by Çelebi Ortaklık Girişim Grubu for $175.5 million and the highest bid for Samsun Port was by Ceynak Lojistik Ticaret A.Ş. for $125.2 million.
Other significant privatizations completed in 2007 include the asset sale of Deveci Iron mine ($21.5 million), the transfer of operational rights of the Mersin Port ($755 million), the sale of a land plot in Levent owned by the General Directorate of Highways in Istanbul ($800 million), the sale of Celik Palace Hotel owned by Emekli Sandıgı ($38.9 million) and the sale of real estate owned by Sumer Holding A.Ş. ($58 million).
On July 3, 2007, PHC approved the transfer of operational rights of the Izmir Port ($1.3 billion) and the related decision was published in the Official Gazette dated July 4, 2007 (No. 26572). However, on February 28, 2008, it was announced that the Council of State suspended the sale of Izmir Port. On November 22, 2007, PHC approved the transfer of operational rights of the Derince Port ($195.25 million).
Several privatizations that are currently in the approval stage may be challenged in Turkish courts. Such legal challenges can cause delays in the privatization process and may, on occasion, as in the case of the sale of 65.76% of the shares in Tupras to Efremov Kautschuk GmbH in 2003 and 2004, lead to the cancellation of the previous privatization decisions.
BANKING SYSTEM
As of May 21, 2008, the Savings and Deposit Insurance Fund (“SDIF”), had taken over 22 private banks since 1997.
The SDIF is continuing its efforts to recover claims and sell off assets inherited from banks taken over by the SDIF. As of May 14, 2008, the SDIF had already signed protocols with 17 former owners of failed banks regarding the settlement of their debts to the SDIF. The SDIF has begun selling non-related party loans of failed banks through loan auctions and is also taking steps to dispose of its holdings of shares in companies and other assets taken over by the SDIF.
On February 6, 2008, SDIF signed a supplementary protocol with Toprak Group. Under this protocol, SDIF discounted some of Toprak Group’s debt as Toprak Group made early repayment of $363 million to SDIF.
On October 4, 2007, it was announced that SDIF would sell ATV-Sabah Group (a media firm) and the final date for prequalification was set as October 15, 2007. On
October 11, 2007, it was announced that the tender schedule for this sale was postponed and the deadline for prequalification was postponed to November 9, 2007 due to excess demand and Bayram (a religious holiday). On October 30, 2007, it was announced that the deadline for prequalification was postponed from November 9, 2007 to November 19, 2007 due to excess demand of investors. On December 5, 2007, only one firm, Çalık Group submitted a bid of $1.1 billion, the minimum price for the assets, and the tender committee accepted the bid. On December 6, 2007, it was announced that SDIF approved the bid of $1.1 billion for ATV-Sabah and submitted the bid to the Competition Board and RTÜK (Radio and Television Supreme Board) for their approval. On February 21, 2008, the SDIF Board approved the sale of ATV-Sabah upon the approval from the Competition Board and RTÜK (Radio and Television Supreme Board).
On January 25, 2008, SDIF signed a protocol with Deniz A.Ş., the legal representative of EGS Group. Debt of EGS Bank A.Ş. is envisioned to be liquidated in 12 years. Under this protocol, the company’s assets will be sold after the market value of these assets has increased and/or the collection of revenues has increased as much as possible until sale of the company.
On February 22, 2008, it was announced that SDIF had taken over Yasemin Turizm ve Ticaret A.Ş. to collect losses which were created by İnterbank A.Ş.
On March 9, 2008, it was announced that SDIF would sell the media companies under the control of Erol Aksoy Group.
On July 18, 2007, it was announced that Saudi National Commercial Bank (“NCB”) had reached an agreement with Boydak Group and Ülker Group to acquire 60% of Turkiye Finans for $1.08 billion. The transaction was completed on March 31, 2008.
On July 31, 2007, it was announced that National Bank of Kuveit (“NBK”) signed an agreement with Turkish Bank to acquire 40% of Turkish Bank for $160 million.
DEBT
The Central Government’s total domestic debt stock was approximately YTL268.8 billion as of April 2008, compared to YTL262.3 billion as of April 2007.
In April 2008, the average maturity of Turkey’s domestic public debt was 30.8 months, compared to 29.2 months in April 2007. The average annual interest rate on domestic public debt in local currency (including discounted treasury bills/government bonds and fixed rate government bonds) on a compounded basis was 18.3% as of April 2008, compared to 19.1% as of April 2007.
The total gross outstanding external debt of the Republic was approximately $247 billion (at then-current exchange rates) at the end of the last quarter of 2007.
Since January 1, 2007, the Republic has issued the following external debt:
| | • | | $500 million of global notes on January 17, 2007, which mature on March 17, 2036 and have a 6.875% interest rate; |
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| | • | | $500 million of global notes on January 17, 2007, which mature on September 26, 2016 and have a 7.00% interest rate; |
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| | • | | EUR1.25 billion of Eurobonds on February 2, 2007, which mature on April 2, 2019, and have a 5.875% interest rate; |
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| | • | | $750 million of global notes on February 23, 2007, which mature on June 5, 2020, and have a 7.00% interest rate; and |
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| | • | | $1.25 billion of global notes on October 3, 2007, which mature on April 3, 2018, and have a 6.75% interest rate. |
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| | • | | $1 billion of global notes on January 15, 2008, which mature on April 3, 2018, and have a 6.75% interest rate. |
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| | • | | $1 billion of global notes on March 5, 2008, which mature on March 5, 2038, and have a 7.25% interest rate. |
INTERNATIONAL RELATIONS
As a result of the continuing violence and civil unrest in Iraq, neighboring countries, including the Republic, have experienced and may continue to experience certain negative economic effects, such as decreases in revenues from trade and tourism, increases in oil expenditures, decreases in capital inflow, increases in interest rates and increases in military expenditures. The Republic continues to be affected by the consequences of conflicts in other countries in the Middle East, including Iraq, and has been the victim of isolated terrorist attacks.
On October 17, 2007, the Parliament gave authorization to the government for possible cross-border military operations in northern Iraq for a one- year period. On November 2007, the government gave authorization to the Turkish Army for possible cross-border military operations in northern Iraq and the first operation was executed in December 1, 2007. As of February 19, 2008, the Republic had executed six air strike operations. On February 22, 2008, the Turkish army launched a ground operation in northern Iraq. This operation was finalized on February 29, 2008. The Republic has cooperated with Iran by sharing information on certain of these military strikes into northern Iraq.
On November 20, 2007, an Electricity Collaboration Agreement was executed with the Islamic Republic of Iran which contemplates the building of new thermal power plants (one in the Republic and two in Iran), building a hydroelectric power plant in Iran
and improving the electricity transmission lines between the Republic and Iran. The task of improving electricity transmission lines is the responsibility of Turkish Electricity Transmission Company and thermal and hydroelectric power plants are planned to be built by both countries’ private sectors jointly. Furthermore, it is expected that a similar collaboration on natural gas may be executed in the near future between the two countries pursuant to a letter of intent signed in Ankara on July 13, 2007. Under this letter of intent, the Republic and Iran agreed on transporting Iranian gas to Europe through the Republic, and transporting Turkmeni gas to Europe through Iran and the Republic.
Regarding the EU accession process, on March 29, 2007, negotiations on the “Enterprise and Industrial Policy” (Chapter 20) were opened. This is the second chapter to be negotiated since the official opening of membership talks in October 2005. The conclusion of the chapter is subject to two benchmarks. Chapter 20 will not be provisionally closed unless the Republic meets its obligation to implement the customs union protocol and provides the EU Commission with a revised comprehensive industrial policy strategy aimed at strengthening the Republic’s industrial competitiveness. Moreover, Position Papers on the “Education and Culture” (Chapter 26), “Economic and Monetary Policy” (Chapter 17), “Statistics” (Chapter 18) and “Financial Control” (Chapter 32) chapters were submitted by the Republic and the position of the EU regarding the “Education and Culture” chapter has not yet been announced. On June 26, 2007, negotiations on the “Statistics” (Chapter 18) and “Financial Control” (Chapter 32) chapters were opened. The conclusion of negotiations of these chapters is conditional on satisfying two and five benchmarks respectively. Recently, a Position Paper on “Consumer and Health Protection” (Chapter 28) was submitted by the Republic and the position of the EU regarding this chapter is being awaited. On December 19, 2007, negotiations on the “Consumer and Health Protection” (Chapter 28) and “Trans-European Networks” (Chapter 21) chapters were opened. The conclusion of these chapters is conditional on satisfying one and five benchmarks respectively. On June 17, 2008, negotiations on the “Company Law” (Chapter 6) and “Intellectual Property Law” (Chapter 7) chapters were opened (both with closing benchmarks). In total, the Republic has eight chapters that have been opened for negotiation since the official opening of membership talks in October 2005.
On April 17, 2007, the Government announced “The Republic’s Programme for Alignment with the EU Acquis 2007-2013”. This document is a comprehensive roadmap and aims to be in alignment with the acquis. It is structured on the basis of 33 negotiation chapters and lists 200 primary and 600 secondary legal arrangements to be made during the 2007-2013 period. It also includes a timetable on when the measures will be taken. The EU announced that it welcomed the Republic’s reform action plan aimed at bringing the Republic in line with the procedures needed to join the EU. As a continuation of this process, all Turkish public institutions have determined legal arrangements to be made on a quarterly basis in order to arrange priorities in terms of alignment with the acquis. These legal arrangements have not yet been announced.
On November 6, 2007, the European Commission released the 2007 Progress Report on the Republic’s course of accession into the EU. Among its conclusions, the Progress
Report notes that although the Republic continues to sufficiently fulfill the Copenhagen political criteria, further efforts are needed in some areas, particularly concerning freedom of expression, women’s rights, trade union rights, fight against corruption and civilian control of the military. The Progress Report also points out that there is a need for the Republic to make more progress to develop the economic and social conditions of the East and Southeast region of the country. On the Cyprus issue, the Progress Report notes that despite the continued support of the Republic for UN efforts to find a comprehensive settlement of the Cyprus problem, the Republic needs to fully implement the Additional Protocol to the Ankara agreement and to make progress to normalize bilateral relations with the Greek Cypriot Administration. With regards to the Republic’s economy, the Progress Report concludes that the Republic can be regarded as a functioning market economy and has improved its ability to take on the obligations of membership. In this regard, the Republic has made progress in most areas, and alignment has advanced in certain areas. However, alignment needs to be pursued in certain other areas such as free movement of services, state aid and agriculture. As regards financial assistance, in 2007, the EU made available some €500 million through the new Instrument for Pre-accession Assistance for the Republic’s use.
On February 18, 2008, the European Council Decision on the principles, priorities, and conditions contained in the Accession Partnership with the Republic was published in the Official Journal of the European Union dated February 26, 2008.
