Atlantic Council Energy & Economic Summit: “New Opportunities in a Dynamic Region”
Looking Forward: Building a More Prosperous Future in a Dynamic Region
Welcome and Moderator:
Robert Abernethy, President,
American Standard Development Company
Speakers:
H.E. Delyan Dobrev,
Minister of Economy and Energy, Republic of Bulgaria
H.E. Mehmet Şimşek,
Minister of Finance, Republic of Turkey
M. İbrahim Turhan,
Chairman and CEO, Istanbul Stock Exchange
Location: Istanbul, Turkey
Date: Friday, November 16, 2012
Transcript by
Federal News Service
Washington, D.C.
ROSS WILSON: Ladies and gentlemen, if you’ll please take your seats. Welcome to this final regular session before our gala dinner tonight of the 2012 Atlantic Council Energy and Economic Summit.
We entitled this session “Looking Forward: Building a More Prosperous Future in a Dynamic Region,” which was also the overall title of these two days – this two-day event that we’ve had here in Istanbul.
The idea here is really to kind of look ahead. We’ve looked at sort of a little bit at the past and certainly a lot of present tense concerns on the energy side, on the economic side, and the political side. Here, talk a little bit about some of the strategies that individual countries need to be thinking about to build prosperity for the future and in particular hear from two minister and from the private sector to kind of fill that picture out for those of us who are here, and hopefully there will be – I’m sure there will be a few others that straggle in from the previous event.
The Atlantic Council is extremely grateful to Turkish Finance Minister Mehmet Şimşek in particular for being here. We’re very grateful to all of our participants. But I want to particularly note Minister Şimşek, who has spoken at each of the previous gatherings we’ve had here in Istanbul. He has been very supportive of what we’re trying to do, both in general in this country and in this region, and in particular supportive of what we’re doing in these Atlantic Council Energy and Economic Summits.
Minister Şimşek is a second term member of the Turkish parliament. He is in his second term, I guess we could say, as a minister here, having started as economy minister and moved to the finance portfolio a couple of years ago.
Before entering politics, he worked for Merrill Lynch. He has important private sector experience that will also – both leavens his work as a minister, but will also leaven our discussions here.
In addition to that part of his portfolio, I at least feel a little bit of kinship with him because many, many, many years ago, he worked at the American Embassy at Ankara as an economic analyst. And I was very pleased and proud to talk about that with our embassy staff when I was there. There’s a bright future for you in international finance and potentially in Turkish politics if you decide to go in that direction.
I’m also very grateful that Minister Dobrev can be with us. His predecessor attended these events in 2010 and 2011; spoke with us at the Atlantic Council in Washington. Bulgaria is a good and important friend of the Atlantic Council, and we’re very grateful that you can be here as well, Mr. Minister.
Let me do briefly two bits of housekeeping before I turn the proceedings over to our moderator, Bob Abernethy, a member of the Atlantic Council board of directors.
First, you have on the desks in front of you a questionnaire. We’d ask you to please fill it out and check some boxes as appropriate to give us some feedback about this two days’ worth of events, what was interesting, what was maybe less interesting, what would you like to see more of, less of, et cetera. This will be very helpful to us as we work to continue to improve this event and develop it over time.
The last thing I’ll note that – and it I think is especially for those of you that might not be at tonight’s dinner – at dinner tonight, Atlantic Council president and CEO Fred Kempe will more formally announce the dates for next year’s – the tentative dates for next year’s Energy and Economic Summit here in Istanbul. We announced last year that this would be our long-term home. We plan to do this next year, the same two-day period, keyed to the American calendar. We have done this for several years now in the Thursday-Friday before our American Thanksgiving Week. American Thanksgiving is next week. In 2013, Thanksgiving is a little bit later. So the tentative dates we’re planning on, please mark these in your diary, are November 21, 22. We look forward to seeing all of you there.
With no further ado, let me turn it over to Bob Abernethy. Thank you.
ROBERT ABERNETHY: Thank you, Ross. I want to thank you for everything you’ve done in making this conference possible. I think you were the driving force that put it all together, came up with the ideas of the program content. You’ve done a fabulous job. You came into it with knowing not only Turkey but this whole region intimately before you started in this process. So we appreciate that.
I’d also like – I’m vice chairman of the board of the Atlantic Council and also a chair of its Programs Committee. And I would like to say a word of thanks and appreciation on behalf of my colleagues to Fred Kempe. Fred came in about five years ago to an organization which was 45 years old and was sleepy and needed waking up. And he sure did. We are alive and going places. The organization is creative; it’s pushing back the frontiers of thinking in a half of dozen to a dozen different areas of scholarship in international and Atlantic relations. It’s all because of the leadership that Fred has exhibited. And we are grateful. Thank you, Fred.
The conference this year was renamed. And that was done for several reasons. One, it was done for recognizing that Turkey’s interests – and we’re grateful for being – having had Turkey as our host for three out of the four years of the conference – are really reaching out much more globally than they used to be, and they’re becoming a player that’s very much more active in parts of the world that are at further distance from Istanbul and Ankara than they used to be. So that’s one of the reasons.
The second reason is that we think the issues are interdependent and they affect the whole globe. And we’re interested in expanding the geography in order to be able to expand the issue base in years to come and look forward to coming back to Istanbul again.
So in that regard, understanding that we’re going through this process of trying to expand the energy discussions that we’re having on a continuing basis, I want to second Ross’ comment that we would be very grateful for your observations, your ideas about this particular session and also what you think the Atlantic Council ought to be doing in the future in this energy arena, and, as a matter of fact, in any portion of our work in order to make us more successful in the objectives that we’ve set forward.
I would like – I think Ross did a pretty good job of introducing two of the three people on the panel so I won’t repeat his effort there.
I just wanted to welcome Ibrahim Turhan, who is head of the stock exchange here, who has really I guess made possible, along with the minister of finance and his colleagues, the tremendous record that you see Turkey doing in the production of 10 percent of their gross national product increase there that they’ve had when most everyone else, including my home country, has been way, way below that. So he is – got a master’s degree and a Ph.D. in financial economics. He got it here from Marmara – if I’m pronouncing that correctly – University here in Istanbul. And he also has been associated with the London School of Economics and the Financial Policy Commission, Monetary Policy Working Commission of that school. So welcome. And thank you.
I would like to ask our minister from Turkey to comment on a little bit about how he brought about that spectacular increase in the Turkish economy and what he thinks about what he needs to do given where Europe is today to sustain Turkey’s position and its economic development and also to contribute ideas and other sources of help to the rest of Europe and its recovery from its position? So do you want to use the lectern for a few minutes or do you want to talk from your chair? Over there. Thank you.
MEHMET ŞIMŞEK: Distinguished guests, ladies and gentlemen, members of press, my colleagues, I’m delighted to be here with you. I’d like to congratulate the Atlantic Council for the summit. Yes, I’ve been here before. I think this is my third time. And, you know, top quality really summit. And I’m delighted that Istanbul has become the center and the scope of it obviously has changed in a way that it is still energy dominated but other subjects are also now an important part of the agenda.
The answer to your question, well, in a couple of minutes, we have focused on providing investors markets with a medium-term fiscal and macro framework. I think that was absolutely critical because, you know, there was a lot of dust in the air in 2008-2009, very little visibility, and almost every country has suffered on the back of the global financial crisis. We needed to prove that this just was one of shock, that the good fundamentals we had built starting from 2002 onwards were not temporary gains. They were actually solid gains, and that the sort of fiscal discipline, the downward path in debt-to-GDP ratio would be sustained, and ultimately that growth would resume.
So, I think the first – I mean, this is still probably irrelevant for some of the European countries because the adjustment that is required is so significant, it is very hard to see how that can be sustained unless you can come up with a credible program that ultimately would allow you to do it gradually, because what Europe needs, what we need in every country, you need growth. That is absolutely clear. Without growth, you cannot achieve any adjustment. You know, you cannot forever pursue fiscal adjustment when there is no growth and then it becomes unsustainable.
We’ve invested in people, and in particular during the global crisis, and I think going forward is still relevant. We decided that active labor market policies were absolutely critical. You know, preserving employment but also boosting employment was critical, and I think going forward is still relevant.
You know, a few years ago, if you go back to 2007 or 2008, in active labor market sort of programs, we had only like 30,000 people. This year, in the first 10 months of the year, we have about 400,000 people. Now, that’s why we’ve been able to create about 4.2 million net jobs since the crisis. This is quite significant, even by sort of global standards. So job creation is absolutely critical, while having a program that is credible in terms of fiscal, in terms of debt dynamics is equally important.
Going forward, my country has prioritized education. We have increased the education budget – I’m talking about numbers for 2013 onwards – by sixfold in the last decade. And the share of – I mean, the share of education spending in the budget is now two times what it was back in 2002. This is about next 30 years, next 40 years.
Quality of human capital stock is going to be absolutely critical in terms of our ability to compete. If we’re going to compete with Koreans or, you know, other sort of relatively, you know, countries that are doing well, we need to invest in human capital stock.
We’re also equally investing heavily in infrastructure as well as in people. Our challenge, of course, is high dependency on energy imports. If you look at the last 12 months, our current account is in surplus, but only if you exclude energy. But when you include energy, we have $56 billion of deficit. And that is the core issue in terms of competitiveness. So it’s not just only the fact that it leads to current account deficit, you know, that – you know, it raises risk premium.
Many products that are not produced in Turkey that could have easily been produced in a competitive fashion it’s largely because of energy costs. And that’s why a focus, a very strong focus on renewable, on local resources, and also even on nuclear, even though that is debatable.
But this is – you know, we have no choice. And that’s why if you look at our energy generation mix – I mean, if you look at the installed capacity right now, out of 54,000 megawatt – I’m sure our energy minister might have mentioned – about 26, 27 percent is hydro, wind, kind of like what you would consider to be kind of renewable.
But if you consider what we are building right now that is under construction, within five to seven years, we’re hoping that that mix will be 46 to 53 percent, 46 renewable and hopefully more local as well. So energy is one core area really that – I mean, as far as Turkey is concerned, that we need to continue.
Another challenge for us, enhancing – which is also relevant probably for our region, in particular the Middle East, maybe not necessarily Europe, but in particular Middle East – we need to boost labor participation among females, among women.
The labor participation rate in this country among – I mean, for men is about 70 percent, which is fine. I mean, it’s not great. It’s fine. But when it comes to women, it’s down to about 30 percent. And, by the way, this is up from about 25, 26 percent. Why? It’s all to do with education. Again, if you look at women with university education, actually, the labor participation rate is almost at par with Europe, European Union average, which is about 69, 70 percent. And that’s the case in Turkey. But as you sort of look at the overall, clearly we have a very poor situation.
So Turkey’s long-term outlook is quite – I mean, positive, simply because we have favorable demographics; working age population is going to continue to grow to 2030. But equally important, if we can get the other half, you know, women labor participation rate increased, which we think we can through better education, then I think the upside in Turkey becomes even more significant. And that’s why a decade ago we had only 91 female students per 100 boy students. Now, we have got 100.4 girl students per 100 boy students. And we’ve raised compulsory education to 12 years. So, for me, this is really important when you take very long-term energy – you know, in terms of competitiveness becomes extreme.
One important point, again, for our region and in particular, I think, I’m sure that applies to some of our neighbors, unfortunately, international – I mean, academic studies suggest that when debt-to-GDP ratio for public sector increases beyond 85 percent for corporate sector, for household sector; when debt-to-GDP ratios go about 80, 90 percent, that tends to be a big drag on growth. And, unfortunately, that is the case for much of OECD – many of OECD nations, in particular the eurozone.
So I think diversification becomes also an important issue. We’ve been successful in managing this diversification over the last few years. Europe used to account for about 57, 59 percent of our total exports. Now it is down to 38 percent, but our exports continue to grow, largely on the back of our focus on MENA region and Asia.
The share of MENA region in our exports grows from about 12 percent to (33 ?) percent. So you can imagine, had we not been successful in doing so, the fallout from Europe would have been so much more pronounced and it would be so significant.
So I think Europe has lost five years. I’m talking about the eurozone here. Prospects are that unless, you know, things change quickly, that they might have a sub-trend growth of another five years, or essentially – I mean, if you take European Union GDP as 100 in 2007, right now it’s 98 so they’re actually still not where – not at the pre-crisis level.
So five years have been lost, another five years risk, and I think it’s important that we begin to focus, again, on regions, where there is a lot more dynamism, and capitalize on obviously those opportunities.
I’m sorry if I’ve taken a little bit more time, but our priority is human capital stock, both in terms of education but also skill building; on infrastructure, energy which is included. R&D is important to move up the value chain as a big challenge for all of us, and I think we all have to be wary that in the industrial world, clearly this relatively high level of debt burden is a drag on growth. And until, you know, these nations that are traditional engines of global growth or have been so fix this problem, clearly we need to continue to explore sort of other opportunities while obviously continue to focus on the core markets.
So thank you very much. I’ll be happy to answer any questions. And that’s all. (Applause.)
MR. ABERNETHY: Thank you, Mehmet.
Delyan, you’re a minister of energy, and tourism, and also of finance. And you are that all of a country, Bulgaria, that is contiguous to Turkey and a neighbor. Tell us about what you see the role of yourself and your country in contributing to what Mehmet was talking about, the good health of the European group of countries in getting out of the economic problems they have today. Also, if you would talk a little bit about South Stream, and what are your thoughts about that and the investments that are needed to produce that, at least the portion going through Bulgaria, and how you plan to get those put in place.
DELYAN DOBREV: Thank you. First, I want to say that I’m really impressed by everything my colleague said. I completely agree with him. And I was listening very, very carefully because we want to learn from Turkey how they managed to achieve such high growth rates in the last couple of years.
And hearing everything he said, I now have a partial explanation of why this happened. It is really important for all of us to look at the good examples and try to multiply them so that we live in a world where recession, economic and financial crisis are behind us and we are on a sustainable path – sustainable growth path.
Bulgaria is not doing that bad. Right now, at the moment, we are only one of six countries in the European Union with a positive growth rate for this year. Twenty-one countries, according to our statistics, would probably finish the year with a negative growth rate. Of course, this is not enough because our growth rate is expected to be a little above 1 percent. So we’re definitely looking for opportunities to create this business environment that would allow our economy to grow faster.
One way to do that is to keep the low tax rates that we have in Bulgaria. Bulgaria is very proud with its very low tax rates. We have 10 percent corporate tax rate. We have 5 percent tax on dividends. And we have 10 percent flat personal income tax. So we plan to keep these tax rates, and we’re proud that we managed to keep these very low tax rates throughout the economic crisis without increasing significantly our budget deficit.
Only 2009 was the only year when Bulgaria had higher than 3 percent budget deficit. Every year after that, we had a budget deficit with – (audio break) – percent. For this year, we expect to have a budget deficit of about 1.5 percent. And, in addition to this, we’re proud to have one of the lowest debt-to-GDP ratios in the European Union, actually second lowest with only between 15 and 16 percent of GDP.
These low tax rates and fiscal and macro-economic stability, combined with the stimulus that we try to provide for investments, large investments in the country, we believe that would bring us back on the road of high economic growth.
I completely agree with my colleague that we need to invest in education. We need to invest in innovation and technologies. We need to make our companies more competitive. And by saying this, I’ll try to move to my other part of my portfolio, energy.
Part of the answer for making our economies and our companies more competitive is having lower cost of energy and being more energy efficient. Energy efficiency is a completely – is a particularly important topic for Bulgarian countries in the region because we are very energy intensive. The Bulgarian economy, for example, is five times more energy intensive than Italy, which is around the average.
So first we need to invest in energy efficiency, and, second, we need to have more affordable cost for the energy resources. These affordable costs for the energy resources come from diversification, larger competition, and liberalization of the market. And bringing down the energy cost, improving the energy efficiency would be a key factor in the next decade, in my opinion, for making our companies more competitive.
And your question about South Stream, yesterday Bulgaria took a final investment decision for South Stream. So we were actually the last country to take this final investment decision. So, right now, all the countries that participate in South Stream have given it a green light in a way.
On the Bulgarian territory, this project would cost – our technical teams have evaluated that this project will cost about 3.3 billion euro. We have 540 kilometers of pipeline, with another 59 detour, and 300 kilometers of loops so the pipeline itself will be around 900 kilometers. In addition to the 900 kilometers, we’ll have three compressors, three stations, three metering stations, and one (acceptance ?) station on the border of the Black Sea.
For the Bulgarian territory, there are still additional activities to be implemented before the start of actual construction. The start in construction on the Bulgarian territory cannot start before the second half of next year earliest.
What is more important for us, though, is the Southern Gas Corridor because South Stream would give us more security of supply because the pipeline would not go through a couple of countries before it enters Bulgaria but from Russia, crossing the Black Sea would enter directly Bulgaria. So this would give us higher security of supply, because in 2009, many of you probably know, the Bulgarian people, and Bulgarian business and economy suffered immensely from the gas prices in general in 2009. So we will improve our energy security. But what is more important for us is to diversity our sources of energy. And the Southern Gas Corridor would bring gas from another source – gas from the Caspian region – to Bulgaria and the neighboring countries.
So the really important project for us is the southern gas stream. And this is our biggest alternative in gas, biggest priority in gas infrastructure.
MR. ABERNETHY: Where will the three-plus billion Euros come from?
MR. DOBREV: There is an SPV company in Bulgaria who is responsible for implementing the project, 70 percent – the idea of the project is to be financed 100 percent from – with project financing initially in the shareholder agreement, it said that up to 70 percent would be financed with loans. But at this final stage, we believe that 100 percent should be financed with project financing. And we have agreed with the other shareholders that the Bulgarian state or the Bulgarian Energy Holding would not provide any state guarantees, or corporate guarantees, or any other leverage for financing this project.
MR. ABERNETHY: Ibrahim, you’re chairman and chief executive officer of the organization that has made possible the buying and selling of shares and companies that are instrumental to what happened when Mehmet talked about the tremendous volume of new jobs that was created in Turkey. Talk to us a little bit about how your organization, the Exchange, has fitted into that picture of helping produce that 10 percent number and how it’s helped produce those jobs, and how you facilitated that, and also expand into what else you think maybe the countries of Europe ought to be doing in order to pull out of the problem that faces them now.
IBRAHIM TURHAN: Thank you. First of all, let me express my gratitude to the Atlantic Council to organize this event. I am really delighted that my institution is able to contribute, though in a humble way, and ease the conditions that make possible this event to take place in Istanbul.
Well, prior to this job, I was working at the Central Bank, and before that, I used to be an academician. I was an economist. And, as everybody knows, the founder of modern economics is accepted as Adam Smith. And the name of his book is most of the time quoted as “Wealth of Nations,” but the full name is “An Inquiry into the Nature and Causes of the Wealth of Nations.”
So, as an economist, the first question you face is: why some nations are wealthier, more prosperous than others? And, by coincidence, Daron Acemoğlu – I’m sure many of you know him. He is an academician at MIT, is a classmate of mine from high school. So, you know, his field is institutional economics. So I personally do believe that what makes the difference is really the institutions. And, in that regard, of course, the capital markets, and, more specifically, the exchanges, play a role in this sustainable and strong growth issue. Let me try to specify it further.
Being a deputy at the central bank, I attended several meetings of G-20. It was a good exercise, I should say, though not necessarily all the time very productive, but yet it was worth it to participate in. I don’t remember any single meeting between 2008 and 2011 that we did not mention the global balancing and the role of emerging markets in the making up of the global economy.
So everybody I guess appreciates the role of emerging markets. And emerging markets will definitely play a more determinant role in the future. And they should actually play a more determining role if you want sustainable, balanced and strong growth for the globe.
But the problem with the emerging markets is that they lack institutions sometimes. So what is the role of institutions? For example, what is the role of an efficient exchange? What you are missing if you don’t have one?
Well, it’s very clear to me, because for emerging and developing economies, the backbone of the economy is small and medium-size enterprises. And for small and medium-size enterprises, it’s very difficult to have access over bank lending, simply because banks require, of course, very strong collateral and they look at the track record, but for SMEs, it’s not always the case to have – to be able to provide strong collateral, nor can they always provide a strong track record.
And this is not actually peculiar to the emerging markets as well. For example, I can name a few names: Henry Ford, the founder of the automobile industry, and maybe Steve Jobs, and also Michael Dell. Well, what is common with them? Well, I think if there was – if there had been no well-functioning, efficient, capital markets in their country, they would have not been able to exist ever.
For example, I remember for Ford, when he applied to a bank for a bank loan, it was in 1911. I mean, the reply and the comment of the analysts was simply, well, the cars, automobiles may be fancy, colorful toys, product of a very, very rich imagination, but I never think that they will become a major element in transportation given that horses will be always with us. And they rejected his application.
And, I mean, for Steve Jobs or for Michael Dell, do you think that a banker in very dark suits will ever never be ready to open a line, open credits to some guys leaving the university and gathering in the garage of their house? I don’t think so.
The same holds true for emerging markets. Small, emerging market companies, very difficult for them to be able to be financed, but they need finance because we know that, for example, for Turkey, when it comes to Turkey, the government put forward a strategic vision that is to make Turkey one among 10 largest economies in the world by 2023, the centennial of the establishment of the republic. It requires to have a GDP that is equal to $2 trillion, which means that we should add the existing Turkish economy one and a half Turkey in almost 10 years. This requires investment and for investment you need finance.
Obviously, the banking industry has reached its natural boundaries. And given that what you learned throughout the recent North Atlantic – not global – financial and economic crisis, bank lending is becoming tougher and tougher, and it is really reasonable and understandable. So we should develop capital markets for emerging markets and especially in this region.
And, to that regard, I am really thankful to the government that they prepared a brand new capital markets law that is pending at the parliament. It passed at the first step that is commission discussions. Now, I expect it to be brought into the floor by – before the end of this month.
And it not only creates a playing field in full compliance with international standards and norms, but also it opens the gate for the exchange to restructure itself. And when we will restructure it, it will include all the available markets, all the available financial contracts. Cash equities, derivatives, commodities, even energy contracts will be traded and provided to the investors from a single access point, with a single technology, single interface, single market rules, single clearing settlements procedures. And I think this will help a lot to the sustainable and strong growth for Turkey.
MR. ABERNETHY: Ibrahim, thank you. You have touched on an interesting point that leads into my next question, which I’m going to ask all three of the panelists to comment on, what you mentioned the sponsor, the original sponsor of – (inaudible) – father’s business, Henry Ford, which got much of the industrialization of early Turkey started. That’s 100 years ago.
This region has an old and wonderful history. And its energy resources and history go back a long time – the Caspian Sea, the Black Sea, the current happenings around the Black Sea, some call the Caspian derby going on.
But we’ve been in a great game. The great game began a long time ago. It continues. But we’ve left behind the original days of the great game, which were Rudyard Kipling’s Kim’s days and George MacDonald Fraser’s Mr. Flashman’s days. And, in that period of time, most people looked upon the game as a zero sum game: what was one person’s gain was another person’s loss.
That has changed a lot. And we are now in a game with much different rules and a much broader outlook of cooperation. I think the recent discoveries or maybe it’s whatever – methods that are enabling and going to enable the transportation of liquefied gas to other sources have brought home to it at least one and probably several countries the interdependence and the fact that that’s not a zero sum game but is one that we all need to cooperate in.
The question I want to ask is: what international mechanisms do you see ought to be used, and if they’re not in place ought to be put in place, in order to get the nations we’ve been talking about to be able to work together to build the coalitions that do what you guys have been talking about, and to succeed in being able to cause what’s happening in the many changes that our energy arena to be turned into additional gross national product and additional benefits for the population as a whole?
So, Mehmet, would you start out on that?
MR. ŞIMŞEK: Thank you. Well, we would like the U.S. begin to license companies to begin to sell shale gas. That would certainly help, but coming back to the region, clearly, a big chunk of global energy resources, including natural gas, lie east of Turkey. And so in some way we’re a natural sort of hub.
I think more democracy would help; more stability would help because that would make this type of projects relatively easier to implement. I guess that would certainly be helpful.
I mean, Iraq is now an important player, but unfortunately you’ve got – you know, obviously, disagreements between central government and northern – I mean, Kurdish regional government, but clearly while this debate goes on, while these internal sort of disagreements continue, energy is out there, and that could easily be (bought ?) for the benefits of the region, for the people of Iraq.
The situation in Iran, you’re quite familiar, obviously, the problem with the international community, concerns of international community get in the way. I mean, the fact that Iran is – it is what it is. I mean, that prevents such a large-scale cooperation.
In, obviously, Turkmenistan, Azerbaijan, Russia, already we have pipelines. Of course, there are considerations for additional pipelines. You know, make even a strong case, if Iraq was relatively more stable and more predictable, maybe you could even – even – I’m just making an argument – contemplate a pipeline all the way from, you know, GCC countries from Gulf. So clearly there’s plenty of opportunities out there.
How can we get countries to cooperate to make this doable? Well, as I said, we’re optimistic about what has happened over the past couple of years. The Arab Spring has been making in general terms a big disruption and a source of uncertainty as it happens, but I think in the long run, clearly, we think this will lead to better – you know, more transparency, better enhanced standards of democracy and, of course, stability and prosperity. And these would facilitate these types of cooperation on a bigger scale much easier.
This is my own perspective. I’m not an energy specialist. But, clearly, we need more energy to come to the market because demand is growing and resources, obviously, are limited and price – I mean, look at this year.
The eurozone is in a recession. I mean, it’s not flirting with recession. I mean, the eurozone is in a recession. The U.S. is growing sub-trend, significantly below what the U.S. could do. The story in Japan is nothing new. Even emerging markets have slowed down quite a bit. If you look at India, China, they have the lowest sort of growth since the crisis. And, as a headline, even including fast-growing Asian countries, emerging markets sort of growth trade is going to be at least one or maybe 1.5 percentage points lower than what it was last year.
Now, despite all this relatively subdued global economic outlook, (brand ?) oil prices have not fallen, you know, meaningfully below $110 per barrel. I mean, even with all this normally such a global backdrop calls for substantially lower energy prices, but that hasn’t happened. So it’s partly, obviously, countries that are energy rich, resource rich, fortunately some of them at least have relatively less stable backdrop and that gets in the way. So until we can probably move forward, then I think we can talk about regional – on a bigger scale regional cooperation, regional prosperity, regional stability.
MR. ABERNETHY: Thank you.
Delyan.
MR. DOBREV: We do need more energy. In order to get more energy, we need faster and larger scale exploration, and we need a faster construction of major pipelines so that this energy can go to the markets, because my colleague is right, that even in a period of a slowdown, global slowdown of all the economies, which means slowdown in the demand of energy resources, the prices continue to go up.
I would only disagree that large quantities of oil and gas lie only in the Middle East and some other areas, because from what we have seen in the U.S. in the last couple of years, this world map of reserves is changing. There are new spots on the world map and the future would show what is the potential of these spots. But there are huge potentials in areas where we never thought there would be any oil and gas reserves thanks to alternatives – alternative forms of production.
And we should also concentrate – of our countries, we should also concentrate to explore the possible reserves for oil and gas. This is what Turkey is doing. This is what Romania is doing. Bulgaria has also started to this year. With one deep Black Sea concession, Romania has already proven successful with quite large quantities for this region, 84 bcm of gas. This is significant for the region. Turkey has also found significant quantities – well, not for the Turkish market, but still significant quantities based on the expectations we initially had.
So there is potential in the region as well. And with the unconventional forms of oil and gas, the map of reserves worldwide could change.
MR. ABERNETHY: Ibrahim.
MR. TURHAN: Well, I’m afraid I’m not expert in oil and energy, but I’ll try to answer this question from the perspective of international cooperation in the region.
Well, I think there are two aspects of your question, one being theoretical and structural, the other one is practical.
When it comes to the theoretical, I think we have a problem, not only in the region but as the world, because we managed to create a global infrastructure in terms of economic relations, trade relations, financial integration. It’s a fully integrated global system. And, obviously, throughout the last crisis, it has become very visible, and something happens somewhere, you have the consequences and impacts – other (extreme ?) of the markets.
But, yet, our mechanisms or our structures – this is the infrastructure, but supra-structure is really based on the Westphalia Treaty or Berlin – sorry, Vienna Congress, I mean, back to 17th or 19th centuries, nation-state systems. And it creates of course a kind of tension. And it’s very normal to have conflicts within the structure, global, national.
And then it comes to more practical issues. I think as far as you can show all parties that your existence will be under threat otherwise, then, even under the existing circumstances, you can manage to create collaboration.
Let me just give you an example from my industry, the exchange business. Well, in the exchange business, liquidity has become – maybe was always the determining factor. And, for the time being, 50 percent of all liquidity is into exchanges, NYSE and NASDAQ. And if you combine the six largest, it makes 75 of the liquidity, 75 percent of the liquidity. So everybody is running after the liquidity.
Well, in this case, of course the economies of scales kick in, and if you don’t have – and the size – if you don’t have the capacity, it is really very challenging for you, given that also there is a rising competition, not necessarily from other exchanges but also alternative trading venues.
So exchanges understand that if they stand alone, it will be very difficult for them. So, like in nature, I mean, two organisms one day feel that they will cease to exist, they come together and create like a symbiosis. Well – and what we are trying for Borsa Istanbul as of now is exactly the same. We are trying to establish a network of exchanges, an ecosystem, in which there will be a win-win game.
For example, we established in 1995 a Federation of Euro-Asian Stock Exchanges. Bulgaria is a member. Turkey is a member. And it includes Southeastern Europe, West Asia, Middle East and North Africa headquarters in Istanbul. Actually, a few months ago, we were sitting next to each other with Mr. Minister at Sofia on the occasion of the annual general assembly of this generation.
It is, for example, a model. And it works because we are able to develop, for example, common indices or ETFs that will be traded in more than one exchange, or even market connectivity we can discuss.
But, of course, I mean, normally speaking, if a system is in equilibrium, it will be not possible for it to move. But, in order to move something, you should show the threat and benefits. And this is the basic nature of human beings to behave.
MR. ABERNETHY: Thank you. Thank you.
I would like to broaden the discussion to all of us in the room. You’re free to make a comment or ask questions. You don’t have to disguise a comment as a question if you don’t want to. You can make it straight out. But let’s see if I can see hands here. The lady in the center here.
Q: Thank you. I would like to raise my question to His Excellency, Mr. Şimşek, and to Mr. Turhan. We all know that Turkey has experienced significant developments in energy liberalization. And having the project of Borsa Istanbul, I would like to ask which type of energy contracts are you planning to introduce? And also – I mean, if you could give further detail, it also would be nice.
And also, if you introduce – once you introduce, are you planning to bring tax incentives for the exchange trading of energy products to further contribute to the energy – liberalization of the energy markets in general? Thank you.
MR. ŞIMŞEK: Tax incentives is currently not on the agenda, but certainly will be. We don’t have energy exchange yet, and we’ll be open to suggestions from the exchange if that’s what would facilitate it. But, at this stage, I’m not sure what sort of tax incentives would be expected of us.
The only incentive that we’re willing to provide, of course, is for renewable energy. So we have set a minimum sort of purchase price, and we believe that maybe sometimes in 2017, 2018, that would help facilitate a significant sort of capacity building in solar energy, where Turkey obviously has an attractive or has a significant potential.
We are in the process of divesting energy distribution networks. More than 50 percent of distribution networks are now in private sector hands. We would like to complete the sale of remaining networks hopefully by the end of this year if not by the first quarter of 2013. The sale of energy generation assets are on the way.
So, essentially, you know, our liberalization program is – you know, with a bit of delay, it’s still under way. And, hopefully, in a few years’ time, essentially, the energy sector will be almost purely dominated by domestic or international private players. Both on the distribution side as well as on the energy side we’ll just be doing the regulation bit. As I said, I’m not aware of any proposals in terms of tax incentives for the trade of energy contracts on the exchange, but as I said, we could look into that. Thank you.
MR. TURHAN: Well, liberalizing the energy market is of utmost importance, no question. And, you know, for anything, any market to be liberalized, the most essential issue is efficient price formation. And I don’t know any more appropriate milieu than exchange to have efficient price formation.
Thus, to have an energy exchange is really very critical. We have been working with the minister of energy on that issue, and we have reached an agreement with them, but, of course, it depends on the approval of the first government, and then it will be brought into the parliament as a law.
But, what we have in our mind – I can just comment on them because otherwise I would be exceeding my capacity – but what we have in our mind is that there should be two separate markets, of course, integrated at the same time but in terms of classification.
One we can call it such as cash market, which will include their (head ?) contracts, enter the contracts and offsetting contracts, balancing contracts. On the other hand, we need, of course, to provide the forward contracts are well or energy derivatives. But, as you know, especially electricity is a very peculiar item. You cannot store it and all the financial contracts need to be settled in physical delivery. So the provider of the energy electricity, the traders and the, of course, consumers should be integrated in a complete and perfect way through this exchange. And that’s what we are trying to realize.
And it will be a separate body, not within the Borsa Istanbul – it will not be a market of Borsa Istanbul, rather we are planning to create a separate entity, but Borsa Istanbul will be the market operator. So all the contracts will be traded at the Borsa Istanbul’s trading venues, but we need to have a separate body simply because of the peculiarity of the electricity contracts.
When it comes to the tax issue, of course, it’s – it has several aspects. I do acknowledge that behind the success story of Turkey, there is, obviously, the success in fiscal policies. But, of course, the financial contracts have their own characteristics, and in their trading, there shouldn’t be a tax. But, of course, when it comes to revenue creation, it’s something else. But simply buying and selling of contracts, to my opinion of course, should be abated from any kind of taxation.
MR. ŞIMŞEK: Just to add, right now, equities – I mean, trading in equities, even capital gains from equities is completely tax free. So, I mean, just to suggest. So there is no – we’re not contemplating of imposing any taxes on trading or any other instruments. Almost all financial instruments are traded tax free, and some of them, even capital gains are completely tax free, you know, just for your information.
MR. ABERNETHY: The tea party would love you. Here.
Q: Your Excellency, during your very interesting presentation, you mentioned a very important part of strategy in Turkey, education. And we know that is growing now by quantity. What about quality? Turkey is a part of European education system.
Also, I know that this year came to end of program when Turkey sent thousands of young students to the United States, best American universities. Are you planning to continue?
Also, there is an obvious growth of religious tendency in Turkey. That’s why in this situation, how are you keeping gender balance on education for growing role of women on high education process and in society as well, also the role of women in economy, because for Turkey as a continuation of tradition of secular state is also very important. Thank you very much.
MR. ŞIMŞEK: Thank you. Well, unfortunately, quality of education is not that great in Turkey. So I’ll be the first to admit. And if you look at PISA exam results, we don’t fare that well.
We have about 17 million primary and secondary and high school students, so primary and high school 17 million. That is bigger than the populations of many of our neighbors or many nations in Europe. So it’s absolutely important that not only we build – we continue to build new schools, create new universities, and hire new teachers, but also to improve quality.
On the quantity side, we’ve done phenomenally well. We have built 180,000 plus new classrooms. We have doubled the number of universities in just a decade, hired 360,000 new teachers, blah, blah, blah. So numbers are great.
Quality is something else. Now, quality has to do with performance-based culture, I mean, teachers. For now, what we are doing, there is a big divergence between education, let’s say, in a place like Istanbul, or let’s say in Hakkari, which is the furthest southeastern spot in Turkey.
So my government is trying – is in the process actually – we have a project called FATIH Project. We are equipping every single classroom in this country, even the remotest village, with fiber optic, sort of broadband Internet with touch screen, big whiteboards. And every student from the fourth grade onwards be given a tablet PC for free, like iPad, like, you know, tablet PC. So the objective here is that we centrally develop, you know, content and is accessible to every single student.
So this is one way we’re hoping that would improve quality of education, but we know that technology cannot do it on its own, so teacher training is an important angle, you know, again – you know, let’s say peer pressure in terms of performance measurements, in terms of incentives for successful ones this should follow.
Now, as far as your other questions are concerned, we obviously know the importance, the significance of educating both men and women. In this part of the world, in the past, unfortunately, that hasn’t been the case. I don’t want to take more time, but just to give you a very striking example.
I come from a family – my parents were illiterate, literally illiterate. I mean, they couldn’t read and write. They couldn’t speak a word of Turkish. Now, both of them passed away years ago. I’m the youngest of nine. Interestingly, for example, none of my sisters made it beyond primary school; even some of them didn’t make it to primary school, but all of my nieces and nephews, nieces and nephews, they’re now university graduates or high school graduates at least, but most of them university. So that tells you about the transformation that Turkey is going through.
We would like to build on this because we think this is absolutely essential in terms of Turkey’s long-term prosperity, long-term growth prospects.
And my government, despite the fact that, you know, the debate on the 12th year compulsory education in this country was hijacked by political issues, the reality is this country, if you look at population age 25 years and above, the average years of schooling is six years, six and a half years. But if you look at OECD nations, it’s 11.5 years. So that tells you the gap between Turkey and other OECD nations in terms of productivity, in terms of competitiveness.
And my government has just increased compulsory education to 12 years. If you add pre-school schooling, that is likely to be somewhere about 13 to 14 years. We think this is absolutely critical. And that’s why the education budget has gone up so much.
We value the secular characteristic of the state, but, at the same time, of course, students, in particular girls, women, if they want to go to the school of their choice with clothing of their choice, that is up to them. We should pave the way for them. Why? Because if you look at overall labor participation rate, it is 30 percent among females in this country, but if you look at university graduates it’s around 70 percent.
That is a very clear message that Turkey should move on and should allow choices to people. And we respect everybody’s way of life, their personal choices, and I think this is what makes Turkey so strong in the last – what has made Turkey so strong over the last decade and is likely to continue to help going forward.
MR. ABERNETHY: Thank you very much. I want to thank all of our panelists for taking time out of their busy days to be with us. We hope that you’re back again next year. We hope in the intervening months that you email us your thoughts, your ideas about what we in the Atlantic Council should be doing not only next year but throughout the year. And I want to thank everyone who came today to this session for coming here. And I believe we’ve got a wonderful dinner going in, Ross?
MR. WILSON: Yeah. Let me add my thanks on behalf of the Atlantic Council as a whole and the presidency of Fred Kempe to our three participants here today and to Bob Abernethy for leading this session.
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