Economic Crisis to Affect Turkish Defense Sector

Turkey’s top procurement officials have claimed that the current global economic crisis would not have an impact on Turkey’s relatively lucrative defense industry, but both Western and Turkish defense industrialists have forecast that the Turkish defense industry sector will feel the effects of the economic crisis, if not today, in the near future.

“It is unavoidable that the Turkish defense sector will feel the effects of the crisis if a large portion of the national budget is earmarked for defense,” said an Ankara-based Western defense industrialist in an interview with Jamestown.

The Turkish Ministry of National Defense (MND) budget is forecast to be 14. 53 billion TL ($9.56 billion) for fiscal year 2009, a 9.1 percent increase from 13.27 billion TL ($8.7 billion) in fiscal year 2008. The MND budget does not, however, include extra-budgetary figures, of which only some are disclosed (www.maliye.gov.tr).

Murad Bayar of the Turkish Defense Industries Under-Secretariat (SSM), the country’s top military procurement agency, said that the Turkish defense industry would overcome the effects of the economic crisis through the development of local technology, which will also create employment, and through an increase in defense exports (Taraf, December 26). This remark is overly confident at a time when the local defense industry is not strong enough to withstand the effects of the economic crisis, a local defense manufacturer told Jamestown.

According to the SSM, Turkish defense industry exports amounted to about $420 million in 2007, with a target of $1 billion set for 2010. Turkish defense companies, which rely heavily on offset loans to export their already limited products, will be affected similarly with Turkey’s overall exports, down by more than 25 percent in 2008 compared with 2007, as a result of both the global financial crisis and the drop in Turkish exports.

"Almost 95 percent of the exports made by large companies, such as the Turkish Aerospace Industries (TAI), are realized through offset pledges. Turkish defense companies will therefore begin feeling the heat with regard to exports," a local defense manufacturer told Jamestown. SSM receives offset commitments from foreign contractors as part of its arms procurement agreements to increase the exports of Turkish defense industry products and services, thus decreasing the deficit in the balance of payments. Foreign contractors have so far met around $3.5 billion of their offset obligations while the remaining $2.5 billion are being fulfilled in accordance with the timetable.

The global economic crisis has had repercussions on the Turkish economy as a whole, prompting a rise in the unemployment rate and the temporary closure of some plants. According to the latest figures disclosed by the Turkish Statistics Institute (TUIK) late last month, the growth in gross domestic product (GDP) slowed to 0.5 percent in the third quarter of 2008 above the same period in 2007 for a total increase of 3 percent for the first nine months of 2008. This was despite the fact that the government had earlier predicted a 4 percent growth rate (TUIK, December 16, 2008).

The Turkish government has so far resisted taking measures such as canceling some of the arms procurement projects or delaying them to reduce the effects of the economic crisis, but Turkish military analysts predict that postponement, if not cancellation, of some major projects can be expected in the future. A senior Turkish general told Jamestown that any cuts in the military budget could be expected for the fiscal year 2010 since the arms procurement projects planned for 2008 and for 2009 had either been contracted or the funds already put aside.

The total turnover of Turkish defense companies stood at around $2 billion in 2007, comprising more than 1 percent of the gross national product (GNP), estimated at around $600 billion. Turkey has been spending about $5.5 billion for arms purchases every year (“Faaliyet Plani 2007,” www.ssm.gov.tr).

As a further sign of a possible impact of the economic crisis on the Turkish defense industry sector, the Turkish lira has fallen by more that 25 percent against the dollar since the beginning of September, when it stood at around TL 1.18 to the dollar. The rate has recently been TL 1.55 to the dollar.

Under a policy that came into effect in 2004, the government has taken initiatives to improve the poor infrastructure of the Turkish defense industry, which relied on foreign arms technology for almost 80 percent of its needs. Murad Bayar said earlier that this share had been reduced to about 55 percent when local companies began producing defense technology. It is unclear, however, whether the 45 percent produced domestically is critical military technology or mostly just assembly work.

To boost the local defense industry, the SSM gave contracts for various projects to local companies partnered with foreign contractors who agreed to transfer technology to Turkey. Thus Turkish defense companies are held responsible for the design of costly projects, including tanks, attack helicopters and unmanned aerial vehicles. The designs and prototypes of most of these ambitious projects are to be completed by 2012.

A senior Turkish defense industrialist told Jamestown, however, that if the development of those projects was not followed closely, the Turkish defense industry might face a serious crisis in 2012 after falling short of meeting the real needs of the Turkish Armed Forces (TAF).

Still, even if those projects are carefully watched to ensure their production at international standards, there are serious risks of delays or failures in the manufacture of good quality products, given the poor state of Turkey’s economy, which might not be able to generate the necessary revenue for research and development projects.

The end result of the overly ambitious programs will be a negative impact on the Turkish economy and the risk of leaving the TAF with few alternatives for meeting its real needs.