Good morning. I am delighted to be here in Turkey. My visit is the latest stage in our countries’ ongoing efforts to forge a new Strategic Partnership, as agreed between Prime Minister Erdogan and Prime Minister Cameron during his visit to Turkey in July 2010.
We have been building on it in the year since: we were delighted to welcome Prime Minister Erdogan to the UK in March, and we look forward to President Gul’s state visit in November.
That agreement is a tangible sign of the UK’s commitment to giving relations with Turkey the emphasis they deserve, and a recognition of Turkey’s growing global influence both politically and economically. We want a bilateral relationship based on equality and mutual respect.
It is why the UK is a stalwart supporter of Turkish accession to the EU - and we are committed to making Turkey’s case to our EU partners.
Economic growth in Turkey over the past decade has been impressive, reaching almost 9% last year. Indeed, Turkey’s growth rate is tipped to be the second fastest in the world by 2017.
This is an extremely positive story of economic development, boosted by an enviable demographic profile; a strong entrepreneurial spirit; and increasing openness to international partnership and investment. There are few other countries in the world which combine economic dynamism, financial stability and democracy as effectively as Turkey.
As the economy has grown, so have the global ambitions of Turkish business. Companies like Vestel, the largest TV manufacturer in Europe accounting for 16% of the LCD TV, as well as 25% of the digital set-top boxes markets in Europe are already well known.
So it is a natural next step for the ambitious Turkish government to seek to establish Istanbul as first a regional - and then a global - centre for finance.
The financial sector is developing rapidly here, and it will be crucial to Turkey’s future growth and development to have banking and long term investment institutions and investment management skills which are able to mobilise domestic savings and also to create efficient financial intermediation so that Turkish companies can tap into those savings in the form of debt or equity.
My own sense is that Turkey has got its priorities in the right order: creating a thriving economy which then provides the foundations for an properly grounded financial sector - one designed around the needs of the economy, in other words, as opposed to an economy built around the needs of finance. The next big step is to internationalise financial markets to create a deeper pot of saving and investment opportunities and services which go with them.
As the past three years have illustrated so vividly- and a decade ago, in the Asian financial crisis, having a substantial financial services sector brings hazards, as well as opportunities. The benefits are substantial. Our insurance and reinsurance companies, commodity traders, commercial lawyers, asset managers, project financiers and other financial and professional services are major, valuable sources of tax revenue and employment and represent one of our major export industries.
I must also offer some observations about how a couple of the potential risks you may encounter might be mitigated - the product of our recent rather painful experiences in the UK.
The first risk stems from the size of the banking sector compared to a country’s overall GDP. I realise that you are familiar in Turkey with banking crises having experienced major problems in 2001 as a result of weak regulation. You have since returned stability to the sector.
The UK was hit particularly badly because of our high level of exposure to the banking sector. Our public sector balance sheet was only just able to bear the strain.
UK-headquartered banks were tested at the height of the crisis in 2008 and some were found to be unstable. Disaster was averted only because the government - and ultimately the UK taxpayer - stepped in to provide guarantees and emergency lending for all the banks short of liquidity (and we had to nationalise insolvent banks.)
Risk two concerns potential contagion from other markets.
Recently, gyrations in the markets have been triggered by renewed fears over sovereign debt levels in the Eurozone, and a loss of confidence about the strength of the US recovery, reinforced by concerns about the recent gridlock in its fiscal policy. These concerns are not unique to the UK. Switzerland has tried to reduce its exposure to large Swiss-domiciled banks.
Fortunately, the UK is not on the danger list in respect of sovereign risk because the markets have faith in our government’s ability to deliver its deficit reduction programme. This has in turn created the space for some tax cutting measures. Over the next four years, corporation tax will fall from 28% to 23%; and we are introducing new rules that effectively apply an ultra-competitive 5.75% rate on overseas financing income. These changes, and others we plan to make, will - I believe - also increase the appeal of the UK to Turkish investors.
These strict deficit measures, alongside the Government’s decisive steps to reform the banking sector over the past year - through tougher banking regulation, tightening controls on cash bonuses and putting a permanent levy on bank balance sheets to compensate the taxpayer - have stabilised the banks, but we recognise the need for a long-term structural solution.
Even today, UK headquartered banks have combined balance sheets more than four and a half times the size of the UK economy.
At the same time, our banks are exposed to other countries at risk. The UK government is determined to tackle the risks which stem from this.
The UK’s Independent Banking Commission, which reported its final conclusions a fortnight ago, has provided a template for reforming the structure of our banks. The UK Government has already welcomed the Commission’s recommendations in principle, and is now considering evidence and views on the design of the implementation options available.
Its recommendations are, of course, designed for the UK finance sector, and I am not suggesting that they be adopted by Turkey wholesale. Nevertheless, the principles underpinning the UK’s Independent Banking Commission’s work will I’m sure be of wider interest.
The first principle put forward by the Commission is that traditional banking - personal and small business deposits; mortgages and business loans must be protected by the state from the risk of systemic collapse. It underpins a modern economy and should therefore be ring-fenced from most wholesale and investment banking activities including proprietary trading.
These arrangements mean that banks would no longer be able to use the deposits of UK savers to play the equivalent of roulette: Investment banks will no longer be able to subsidise their activities using the money that depositors place in high street banks. They will need to fund themselves: and if they go bust, no one will rescue their shareholders and bond holders.
These arrangements could also enable vital services, which households and small and medium sized companies depend on, to be insulated when problems occur elsewhere in the financial system -whether in the UK or elsewhere.
The independent commission recognised the trade-off between the benefits of making banks safer through separation and the costs that would accrue to the banks. It concluded that the latter can be justified if they reduce the possibility of a future financial crisis or reduce the negative impact on business and consumers in the event that a crisis does occur. We further hope that - in the longer-term -a safer, more stable financial system will attract investment as the real economy will be less exposed to the impact of external shocks.
Secondly, the Commission recommended that retail banks should hold higher levels of equity capital than now and an additional buffer of loss-absorbing capital of seven to 10%. The aim of this is to help to temper risk-taking within banks and give them greater reserves to fall back on in times of global economic distress.
No country can afford to ignore what is in the best interests of its taxpayers and its economy. This is a lesson that established finance centres such as the UK have had to learn through harsh experience. Claims that the reforms will force universal banks to relocate to other countries have been countered by the Commission, however. Will Singapore, Hong Kong or any other centre - Istanbul included - be willing to take such risks with their own finances and economy? I doubt it.
Besides its stability recommendations, the Commission has also outlined proposals to deliver a genuinely competitive banking sector Indeed creating the conditions to encourage new, challenger banks to rival large incumbents should result in a more diverse and balanced sector. Personal and small business customers should be able to move their accounts much more easily than at present, providing a powerful incentive for banking services to improve.
As a result of these reforms of the banking sector we hope to have the world’s most transparent and best regulated industry; an excellent partner for collaboration in this country.
These principles will be vital as the UK considers how it will shape the future of its banking sector, but we are also looking to diversify our economy. We continue to attach considerable importance to our banking sector but we are also promoting advanced manufacturing, ICT, energy efficiency and renewable energy, creative industries and the professional and financial services and these are sectors where we can be the partner of choice for Turkey. Only yesterday I launched a “Knowledge Partnership” between our two countries at the Sabanci University, matching the priorities and strengths of the UK and Turkey.
Indeed, that is why we are keen to attract more Turkish investment to the UK and are making real efforts to ensure the UK is an attractive destination for Investment from partners in Turkey.
Similarly, trade between the UK and Turkey, while it has grown quite strongly in the past couple of years (exports up 30% ad imports up 11% in 2011 to date), has the potential to be much greater and I am convinced that this can increase much faster and go much farther than it has hitherto. Despite all the many good signs Turkey is only the UK’s 20th largest trade partner (first six months of 2011 import and export). The UK, it is true, is Turkey’s second largest export market only behind Germany (10.1%), [UK (6.3%)] but still lags a little behind Turkey’s major import partners: Russia (11.6%), Germany (9.5%), China (9.3%), USA (6.6%), and Italy (5.5%).
We therefore, should build on what has been achieved so far to strengthen further UK/Turkish business links because there is much for both our countries to gain from doing so.
I know that the UK-Turkey CEO Forum, which was formed earlier this year, is jointly exploring initiatives to help develop Turkish branding. Furthermore they are working together to develop mentoring strategies to encourage smaller businesses in both our countries to share their expertise.
The UK has also been developing closer links with the Turkish Construction sector. Thirty-three Turkish companies, carrying out projects worth about $130 billion in 70 countries are among the top 225 global contractors in the world. My delegation this week includes design, engineering and architectural businesses keen to work with Turkish business, including to develop the opportunities which will arise in helping Libya re-build its shattered infrastructure.
It’s also why we are supporting an initiative to support the development of Istanbul as a financial centre - involving The CityUK, London & Partners, HSBC, Clifford Chance and DLA Piper. This includes plans by the City UK to establish a Turkey Working Group to develop closer links with Turkey’s financial community. This subject will be explored in a later session by the City UK, who have joined me on this trip.
These are all excellent initiatives which build on the theme of “Knowledge Partnership” I mentioned earlier and which utilise the best qualities of our respective business sectors.
But back to the theme of this conference, and this speech.
The UK welcomes every opportunity to work with Turkey - and Istanbul in particular - as a partner in much more than financial and related services, sharing ideas and expertise.
So, I have every confidence Turkey will only enhance its position in the global economy and its reputation for dynamism. I wish you every success.