Turkey

Risk assessment

Growth rebound in 2013

Activity slowed significantly in 2012. As for domestic demand, the Central Bank’s tightened monetary policy on the back of high inflation and considerable expansion of private sector. This put pressure on household consumption and business investment. However, in response to this anaemic growth, the central bank started to ease its monetary policy in late 2012. This trend is likely to continue in 2013 in a context of slowing inflation. Even if credit growth eases off slightly in 2013, investment, the main engine of Turkey’s economy in 2010 and 2011, will not manage to drive growth beyond its potential (4-5%). More abundant credit will also boost household consumption, so unemployment, which worsened slightly in 2012, is expected to decline in 2013 (from 9.3% to 8.5%).

Regarding external demand, exports were hit by the recession in the eurozone (30% of exports). However, the decline was in part offset by increased Iranian demand for gold (+400% compared with 2011 and 15% of total exports). These gold sales are a corollary to imports of Iranian gas (18% of energy needs), so Turkey does not have to depend exclusively on Russia for its energy needs. The energy balance deficit represents around 4% of GDP. This unconventional trade, combined with lower domestic demand, helped reduce the trade deficit in 2012. The current account deficit remains structurally high, however, and will increase in 2013. Exports will again suffer from renewed recession in the eurozone and further, exports to Iran could fall because of a law adopted in November 2012 by the American Senate aimed particularly at those exports.

Volatility of external financing needs watching

Turkey depends on volatile sources of capital: portfolio investments, short-term external loans and non-residents’ deposits. These sources of finance could dry up due to extension of the European crisis. During the first months of 2012, Turkey benefited from a lower global risk aversion resulting from the accommodative monetary conditions set by the ECB and the Fed. Meanwhile, the country benefits from satisfactory foreign exchange reserves (about $95bn or 4 months of imports), which allows it to intervene on the foreign exchange market to support the lira.

Regarding public finances, the government will pursue its fiscal adjustment policy. The public finances are being reformed under a three-year government Medium Term Programme (MTP). For 2013-2015, this programme refers to a public deficit of 2.2% of GDP in 2013, with the aim of cutting it gradually to 1.8% in 2015. The government intends to increase government revenues by raising taxes paid by motorists and on alcohol and tobacco. A third measure is to end tax relief for investment companies. In this context, Turkey’s public debt level is moderate and on a downward trend. Moreover, the debt repayment schedule is lengthening and the debt structure is improving (decline in share of floating-rate debt denominated in foreign currency and in lira).

The Turkish banking system is well capitalised. The bank penetration rate has risen considerably in recent yeas, a sign of Turkey’s growing confidence in its economy and banking system. However, even if banks are not directly exposed to exchange rate risk, thanks to off-balance sheet operations (foreign exchange and interest rate swaps), euroisation/dollarisation of the financial system remains a significant constraint.

Hardening relations with Syria

Turkey is well integrated in the international community. In view of European ambiguity, the Cyprus veto and the Armenian genocide, the prospects of EU accession seem more distant. The country is accordingly turning more towards the Middle East. But Turkey’s relations with Syria are in crisis, while tensions with the Kurdish minority remain strong. Unable to stand for a fourth term as leader of the government, Prime Minister Erdogan has his eye on a role as head of state. The presidential elections in August 2014 will be the first to take place by direct universal suffrage. In the run-up to these, he will be facing regional elections in October 2013. Meanwhile, the EU integration process has enabled Turkey to undertake ambitions reforms in the fight against corruption and to open its economy. The country outclasses its neighbours in this respect but still has not reached western standards.

Payment incident index

MEANS OF PAYMENT AND COLLECTION METHODS

In the domestic market, traditional instruments for credit payment are still in common use as they not only constitute a means of payment but also can often serve as negotiable instruments.

This is the case for promissory notes in regular use for commercial transactions by smaller and medium-sized companies. Similarly, with the postdating of cheques a commonplace practice, the cheque serves as both a title of payment and a credit instrument. Cheques circulate in the domestic market as negotiable instruments until the maturity date.

The new law on cheques, in force since December 2009, focuses on protection of the rights of cheque holders (beneficiaries) and institutes three categories of cheques – cheques for business users, cheques for consumers, and pre-printed bearer cheques – to facilitate tracking this payment instrument and to combat the underground economy.

Although banks are now required to exercise greater vigilance as regard the profile of their clients, the law also provides for large financial sanctions payable by the drawer of the cheque in case of non-payment.

There are, as such, particular advantages deriving to creditors from the use of negotiable instruments like bills of exchange, promissory notes, and cheques – provided they have been duly established and that any legal action is taken within the legal limitation period. They enable creditors, without obtaining a prior ruling, to approach directly the enforcement office (Icra Dairesi) for service on the debtor of an injunction to pay and then, as necessary, to proceed with the seizure of the debtor’s assets.

The debtor has 10 days to settle the arrears in question or 5 days to approach the enforcement court and to oppose payment on grounds that, for example, the signature on the document is not his own or that the debt no longer exists. In case of opposition on abusive grounds, the debtor is liable to large penalties.

Finally, for rapid and secure processing of bank transfers, the SWIFT electronic network is well-established in Turkish banking circles and constitutes the most commonly used instrument for international payments.

Out of court settlement is always advisable to taking legal action, and as a result, the sending of formal notice to pay, followed up by repeated telephone calls, remains a relatively effective method. As well, on-site visits can moreover pave the way for restoring communication between the supplier and his customer and thereby enhance the chances for negotiating a transaction.

Depending on the debtor's solvency, the terms of the transaction can range from payment in full to repayment by instalments, or even to a partial payment as final settlement.

In the absence of a voluntary settlement, the threat of a bankruptcy petition (iflâs) is a frequently employed tactic to elicit a response from the debtor and prompt him to repay the arrears.

In cases where the validity of the claim is disputed, the only recourse is to initiate the ordinary proceedings via a summons to appear in court.

In cases where Turkey has not signed a bilateral treaty or a reciprocity treaty with the plaintiff’s country, the plaintiff will be required to put up a surety bond, judicatum solvi, representing about 15 % of the claim, with the competent local court. It's the same with a Turkish applicant who has no permanent residence in Turkey.

At the commencement of the proceedings as well, the plaintiff must also put up one quarter of the court fees, which are proportional to the amount of the claim.

The ordinary proceedings are organized in three phases: first phase involving position statements by each party (statement of claim and statement of defence); then in a second and longer phase, the court investigates the case, examining the relevance of the evidence submitted, whether conclusive or discretionary evidence; and finally in the main hearing that constitute the third phase, the court hears the parties and their lawyers and issues a ruling.

The civil procedure code specifically states that the judge may at any time during the legal action encourage amicable settlement of the dispute, provided that it results from a real desire by the parties to seek an out-of-court settlement via a negotiated transaction.

The commercial court (asliye ticaret mahkemeleri), which is a specialized chamber of the court of first instance, is competent to hear commercial disputes and insolvency proceedings. Commercial courts exist in the main Turkish cities.

To combat against lengthy lawsuits and courts workload, the new civil procedure code, effective as of 1^st October 2011, aims to accelerate and simplify the proceedings.

Also, the parties have to submit their arguments of defence, their counter claims and available evidence at the commencement of the trial. These documents will be reviewed by the court at a preliminary hearing, during which the parties will be encouraged to compromise.

The litigants’ examinations and cross examinations will now be conducted by lawyers to discharge the judges who had so far a great tendency to resort to expert opinions to assist them in the content of the judgment.