## cr1733 ## Source details **Canonical URL:** [cr1733](https://www.imf.org/-/media/files/publications/cr/2017/cr1733.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1733.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1733.pdf.json) --- ### Introduction - Turkish authorities introduced a new automatic enrollment pension system to raise the domestic savings rate and encourage employees to save for post-retirement welfare. - This select issue paper: - provides policy advice to promote private savings, - assesses the macroeconomic impact of the recently enacted provisions, - identifies advantages relative to the current voluntary private pension industry and several design weaknesses that limit the reform’s ability to promote private savings. - Assessment and industrial-organization advice based on chapter 3 of Impavido et al. (2010). ### Industrial organization — implementation and roles - Automatic enrollment: - Salaried workers younger than 45 years of age are automatically enrolled in pension plans chosen by their employers. - System is voluntary in that individuals can opt out; opt out rate expected to be lower than the current voluntary system (8.3 percent of stock per year). - Industry structure and roles: - Collection of contributions, record keeping, asset management and custodianship remain with existing voluntary pension firms and service providers. - Voluntary pension system: 19 vertically integrated pension fund management companies (dedicated subsidiaries of financial services companies). - Pension Monitoring Center (PMC) manages registration, individual account data, reconciliation, and the 25 percent government contribution subsidy. - Takas bank provides centralized record keeping and custodianship. - Fees and comparability: - Pension firms can only charge a capped fee levied on assets under management. - Cap set at 0.85 percent of assets under management. - Outstanding bylaws to be prepared by the Undersecretariat of Treasury include: enrollment procedures; employer criteria for choosing companies/plans; funds for contributions; employer-company contract; right to withdrawal; workplace change rules; transfer of accumulated savings; payment on termination; pausing contributions; abandonment; payment of Government contributions. ### Advantages of the new design - Exploits consumer inertia to maximize participation. - Employers act as procurement board on behalf of workers, reducing wasteful individual-targeted competition. - Stock design of automatic enrollment: - Applies to the stock of salaried workers, serving inert customers. - Allows participants to spend whole working career in procured segment served by sequence of providers selected through periodic procurement auctions. - Requires periodic auctions to maintain service quality. - Maximizes short-term increase in private savings. - Fee improvement versus voluntary system: - Voluntary system average fees: 2.5 percent. - Reform fee cap and structure likely to contribute an additional 20 percent cash balance at time of retirement for the average career worker (everything else equal). ### Key design weaknesses (three main) - (i) The procurement component is incomplete. - (ii) Providers can charge a fee based on assets under management (AUM). - (iii) The fee rate is capped without a link to the structure of providers’ costs. - Experience elsewhere shows these weaknesses can lead to: - wasteful competition in the market, - extraordinary profits and rent extraction by service providers, - regulatory capture when legislated fee caps require change. ### Problems with incomplete procurement, AUM fees, and fee caps - Incomplete procurement: - Employers may adopt simple biased rules; may not reduce marketing incentives. - Contribution collection remains costly: sales force expenditures typically amount to 30 percent of total pension firms’ expenditure. - PMC reconciles flows but collection is not centralized; SSI is in principle best placed to collect contributions. - Other services (record keeping, administration, custodianship, asset management) have high fixed costs and could exploit economies of scale if centralized/auctioned. - Current plan: use current pension firms for administration and asset management; PMC for record keeping and reconciliation; Takas Bank for custodianship. Asset management auction limited to Turkish incorporated managers. - Problems with AUM-based uniform proportional fees: - Uniform proportional fees reduce supply efficiency and can lead to extraordinary profits as fee base grows convexly while costs are essentially fixed. - Marketing expenses typically add up to 30 percent of fees charged. - Uniform fees on heterogeneous bases promote wasteful competition rather than directing customers to higher net-return firms. - Problem with caps not linked to costs: - Caps bound firms’ ability to charge above average costs when demand elasticity is low but need frequent adjustment, increasing likelihood of regulatory capture. - Firms face regulatory risk if populist administrations change caps arbitrarily. ### Other potential design weaknesses (unregulated at time of writing) - Auctions for asset management limited to Turkish incorporated entities: - Current pension funds charge asset management fees around 250bps. - This suggests incapacity to bid for a 70–100bps capped fee or lack of competition. - Allowing qualified foreign asset managers could generate competition and lower costs. - Investment rules: - Decided by the Deputy Prime Minister based on an investment advisory committee; applicability and governance unclear. - Concern about undue political influence on asset allocation and inclusion of government debt. - Investment limits in government debt should be kept at a minimum to avoid cheap financing of budget deficits. ### Recommended industrial-organization reforms (hybrid model and operational advice) - Adopt a hybrid I/O separating demand into procurement and quasi-market segments: - Procurement segment: participants selected by a public procurement board through periodic auctions covering collection, administration, record keeping, custodianship, and asset management. - Quasi-market segment: participants choose their own provider. - Undecided participants typically allocated to procured segment; participants free to choose segment. - Five critical policy considerations for Turkey: - First: establish a procurement board with strong governance and transparent periodic auctions. At time of writing, no procurement board existed and employers were required to choose on behalf of workers. - Second: target participants using objective rules (e.g., undecided, low assets); Turkish authorities had not defined employer rules for choosing firms. - Third: exempt recently chosen participants from default allocation; individuals should be free to leave procured segment. At time of writing, authorities had not defined this. - Fourth: mitigate heterogeneity in fee bases—encourage flat fees to avoid destabilizing procurement participation; Staff discourages AUM-based fees. - Fifth: choice between stock and flow models—Turkey chose the stock model; periodic auctions must be designed to preserve quality. - Specific operational recommendations: - Complete hybrid I/O along World Bank lines and establish a procurement board for undecided participants. - PMC could act as public procurement board to ensure checks and balances. - Assign contribution collection to the SSI. - Initially allow Takas Bank to provide custodianship, record keeping and administration; auction these periodically. - Asset management to be allocated through competitive auctions allowing foreign asset managers; consider bundling asset management and custodianship. - In the quasi-market, use flat fees and replace proportional subsidy with a means-tested flat subsidy to enable low-wage participation. ### Macroeconomic impact — approach, data, and scenarios - Objective: assess effectiveness of automatic enrollment in reducing external imbalances. - Method: estimate potentially covered population and wage mass, project cash balances and aggregate savings under scenarios, and assess macroeconomic impacts using the G20 core module of the Flexible System of Global Models (FSGM). - Data and reconstruction (labor force survey 2015): - Total salaried workers reported: 14.1 million. - Total monthly net earnings reported: TL26 billion. - Average monthly net earnings: TL1,838 (Table 01, 2015 Net). - Grossing up for 30 percent minimum wage increase of 2016: - Total monthly gross earnings (grossed): TL37.5 billion. - Average monthly gross earnings: TL2,757 (Table 01, 2016 Gross). - Effective PIT estimates: - A nominal levy of 0.0795 percent is applied on gross wages in the micro-based calculation. - Micro-based expression shown as: 0.14 x = 0.000795 + .07 - 0.08 (as displayed in source). - Macro-based estimate (2014 data): x = 0.093 (implied PIT revenues from wage income are 9.3 percent of gross wages). - Gross earnings reconstruction and 2016 simulation steps: - Increase 2015 gross earnings distribution by 8.3 percent to simulate 2016 before minimum wage increase. - Annual nominal gross wage growth used equals headline inflation 6.3 percent plus productivity growth 1.9 percent (sum reported elsewhere as nominal wage growth of 8.27 percent). - In 2015 labor force survey, 5.8 million individuals had estimated 2015 gross earnings below the 2016 minimum wage: - 3.8 million between the 2015 and 2016 minimum wages. - 2 million below the 2015 minimum wage. - Raising those between the 2015 and 2016 minimum wages to 2016 minimum wage simulated; omission of labor force growth (1.9 percent) underestimates wage mass growth. - Simulated minimum wage increase: 30 percent in 2016; November 2016 adjustment referenced as “brought to 7.5”. - Increase in contribution base would approximately add an additional 10bps in GDP to the increase in aggregate savings (approximate phrasing from source). ### Scenario definitions and common assumptions - Scenarios summary (Scenarios 1–5): - Scenario 1: - Restrictions: age (a ≤ 45) and minimum gross salary (WG > SSI). - Contribution base capped at maximum SSI contribution wage TL10,705.5. - Workers: 10.22 million; Monthly Earnings TL28,399.58 million; Monthly Average TL2,777.96. - Scenario 2: - Restriction: only minimum SSI salary (WG > SSI); age cap removed. - Workers: 12.20 million; Monthly Earnings TL34,742.52 million; Monthly Average TL2,848.46. - Scenario 3: - Neither age nor contribution base restricted; full remuneration allowed. - Workers: 14.12 million; Monthly Earnings TL37,508.88 million; Monthly Average TL2,656.78. - Scenario 4: - Based on scenario 2; private sector contribution rate doubled to 6 percent; no government subsidy/contribution. - Scenario 5: - Based on scenario 3; no government subsidy/contribution. - Reform and baseline macro assumptions (Table 2 values preserved): - Pr. Sect. Contrib. Rate (1/ (Percent)): 3.00 for Scenarios 01–03 and 05; 6.00 for Scenario 04. - Pub. Sect. Subsidy (2/(Percent)): 25.00 for Scenarios 01–03; - for Scenarios 04–05. - Pub. Sect. Contrib. Rate (3/(TL)): 1,000.00 for Scenarios 01–03; - for Scenarios 04–05. - Gross Rate of Return (Percent): 9.27. - Years to full Coverage (Unit): 5.00. - Labor Force Growth Rate (Percent): 1.90. - Nominal Wage Growth Rate (Percent): 8.27. - Nominal GDP Growth Rate (Percent): 10.07. - GDP Deflator Growth Rate (Percent): 6.34. - Productivity Growth Rate (Percent): 1.93. - Full coverage achieved in 5 years; gross rate of return on balances assumed equal to 9.3 percent; projections over next 20 years; assumed inertia: individuals do not opt out in primary projection. ### Aggregate savings projections and scenario outcomes - Aggregate savings increase components: 1. Government dissaving due to lump sum and government contribution on private sector flow contributions (largest in early years). 2. Government dissaving becomes private sector savings (transfer into private accounts). 3. Private sector contributions grow with covered labor force and contribution wage. 4. Accumulated assets yield return reinvested (balances illiquid). - Comparative outcomes (timing to reach +1 percent of GDP increase in aggregate savings): - Scenario 1: +1 percent of GDP after 10 years. - Scenario 2: +1 percent of GDP after 7 years. - Scenario 3: +1 percent of GDP after 6 years. - Scenario 4: (6 percent private contribution rate, no subsidy) increases aggregate savings the most and accumulates most quickly. - Scenario 5: relax age and salary constraints but eliminate subsidy; aggregate savings grow less than scenario 2 because added workers have low average wages and without subsidy contribution potential is low. - Sensitivity: - Faster implementation could reach 1 p.p. target 1–2 years earlier but improvement remains small. - A slightly larger base and a higher contribution rate are needed to materially rebalance the economy. ### Macroeconomic model (FSGM) simulated effects - Model features: - Semi-structural FSGM; households are finite-lived OLG with liquidity constrained (LIQ) households. - Simulations treat aggregate savings changes as annual shocks. - Key simulated effects when aggregate savings increase: - Investment increases overall (financial accelerator amplifies short-term response). - Real exchange rate (REER) depreciates; nominal depreciation with inflation constant. - Employed labor remains constant in net terms; short-run wage inflation decreases. - Potential output increases; small negative output gap opens short run but closes quickly; long-run GDP increases. - Monetary authority decreases policy rate to keep headline inflation constant; policy rate remains below baseline over 20 years then returns to baseline later. - Government dissaves more than projected; debt-to-GDP worsens due to automatic stabilizers (when GDP growth decreases by 1 pp, budget deficits increase by 25 bps). Deficit assumed debt financed. - Higher aggregate savings reduce flow and stock external imbalances over time; short-run NFA/GDP may worsen slightly, long-run NFA/GDP improves as current account improvement accelerates. ### Timing and magnitude of external-adjustment effects - Impact on external imbalances felt only after 20 years. - Under plausible scenarios, the CAD would improve by 1 p.p. only between 2024 and 2028 (latter date more than 10 years from time of writing). - An improvement of 2 p.p. would not be possible before 20 years from time of writing. - Staff advice: increase private sector contribution rate and the contribution base. - Specific numeric guidance: a contribution rate of at least 6 percent is needed to improve the CAD by at least 1 p.p. in the next 5 years; sooner if the government subsidy is maintained. - Individuals older than 45 years should also be allowed to participate and the cap on their contribution salary lifted; legislative and reconciliation caveats noted. ### Annex I — Key operational features and parameters of auto-enrollment (as provided) - Participation and eligibility: - Salaried employees under 45 years and registered with SGK included via employer-arranged pension contract. - Employer-chosen pension company must be approved by the Undersecretariat of Treasury. - Contributions: - Participant contribution: 3 percent of earnings subject to SSI contributions. - Earnings limits: lower limit monthly gross minimum wage (TRY1,647 for 2016); upper limit 6.5 times Gross Monthly Minimum Wage (TRY10,705.5). - Council of Ministers authorized to double contribution rate or lower it to 1 percent, or determine it to a fixed amount. - Matching and subsidies: - Government state subsidy: 25 percent of employees' paid contributions. - One-off subsidy of TRY1,000.00 if employee stays in plan. - Employer matching not an option. - Opting out and portability: - Opt out within 2 months; accumulated contributions and investment income refunded within 10 days. - Full portability via accounts linked to national ID number. - Retirement benefits: - Choice of one-lump sum or monthly annuity; if annuities exceed 10 years, state provides extra 5 percent contribution of total savings. - Fees: - Pension companies cannot charge fees other than capped fund management fees. - Roll out: - Plan to start implementing with large employers in January 2017. - Pending issues awaiting Undersecretariat bylaws listed under Implementation Details. ### Quantitative highlights and preserved numeric values - 0.0795 percent levy on gross wages (micro-based term). - Micro-derived expression: 0.14 x = 0.000795 + .07 - 0.08 (as displayed in source). - Macro-based PIT from wages: x = 0.093. - 2014: 17 million wage-employed; annual average gross earnings TL27,083; PIT revenues TL73,899 million; 60 percent of PIT from wage income. - 2015 labor force survey: 5.8 million below 2016 minimum wage (3.8 million between 2015 and 2016 minimum wages; 2 million below 2015 minimum wage). - Minimum wage increase simulated: 30 percent in 2016; November 2016 adjustment referenced as “brought to 7.5”. - Increase in contribution base would approximately add an additional 10bps in GDP to increase in aggregate savings (approximate phrasing preserved). - Gross rate of return on balances: 9.27 percent (Table 2); note references 9.3 percent. - Years to full coverage: 5.00. - Baseline rates: Labor Force Growth Rate 1.90 percent; Nominal Wage Growth Rate 8.27 percent; Nominal GDP Growth Rate 10.07 percent; GDP Deflator Growth Rate 6.34 percent; Productivity Growth Rate 1.93 percent. - Scenario worker counts and monthly earnings: - Scenario 01: Workers 10.22 million; Monthly Earnings TL28,399.58 million; Monthly Average TL2,777.96. - Scenario 02: Workers 12.20 million; Monthly Earnings TL34,742.52 million; Monthly Average TL2,848.46. - Scenario 03: Workers 14.12 million; Monthly Earnings TL37,508.88 million; Monthly Average TL2,656.78. - Aggregate savings outcomes timing to +1 percent of GDP: - Scenario 1: after 10 years. - Scenario 2: after 7 years. - Scenario 3: after 6 years. ### Conclusions and policy recommendations (summary) - Industrial organization assessment: - Automatic enrollment has advantages (exploits inertia, capped fees, reduces wasteful competition) but the hybrid I/O is incomplete without a public procurement board and periodic auctioning of pension services. - Employers are unlikely to be more skilled than individuals in choosing plans; fees based on AUM and uncoupled caps create risks of wasteful marketing, rent extraction, and regulatory capture. - PMC is well placed to act as procurement board; collection should be given to SSI; Takas Bank can provide custodianship and record keeping initially; asset management should be auctioned competitively including foreign managers. - Use flat fees in the quasi-market and replace proportional subsidy with a means-tested flat subsidy. - Macroeconomic policy advice: - Increase the private sector contribution rate and the contribution base. - Specific numeric guidance: contribution rate of at least 6 percent needed to improve the CAD by at least 1 p.p. in the next 5 years (sooner if subsidy maintained). - Allow individuals older than 45 years to participate and lift the cap on their contribution salary where feasible; legislative and reconciliation constraints noted. - Timing of macro effects: material external-adjustment effects are long-run; CAD improvement of 1 p.p. occurs between 2024 and 2028 under plausible scenarios; 2 p.p. would not occur before 20 years. *Source: IMF staff chapter content provided in the supplied PDF unit.* ### Introduction _________________________________________________________________________ 3 ### NEW PRIVATE PENSION AUTOMATIC ENROLLMENT: A MISSED OPPORTUNITY ### Introduction - The Turkish authorities have introduced a new automatic enrollment pension system to promote private savings. - Authorities’ stated rationale: to raise the domestic savings rate and to encourage employees to save funds for their post-retirement life so that they can maintain the welfare level they enjoyed during their employment period. - This select issue paper: - provides policy advice to promote private savings, - assesses the macroeconomic impact of the recently enacted provisions, - identifies advantages relative to the current voluntary private pension industry and several design weaknesses that limit the reform’s ability to promote private savings. - The assessment and policy advice on industrial organization is based on chapter 3 of Impavido et al. (2010). ### Industrial Organization Considerations - Four main features relevant to the assessment: - Automatic enrollment: - Salaried workers younger than 45 years of age are automatically enrolled in pension plans chosen by their employers. - The system is voluntary in nature as individuals can opt out, but experience shows that consumers are inert and tend to stay in the system, treating the voluntary contribution as an addition to their personal income tax. - Exploiting such inertia is central to the Government strategy of raising private savings. - The opt out rate is likely to be even lower than in the current voluntary system (8.3 percent of stock per year). - Industry structure and roles: - Collection of contributions, record keeping, asset management and custodianship remain the responsibility of existing voluntary pension firms and their service providers. - The current voluntary pension system is based on vertically integrated pension fund management companies (now 19) which are dedicated subsidiaries of financial services companies. - These companies collect contributions and will use their sales force to attract employers into the system and retain individual workers. - The Pension Monitoring Center (PMC), governed by representatives of the companies and the Government, acts as the front-line information and monitoring hub of these companies, manages the registration and data on individual accounts and manages the 25 percent contribution subsidy provided by the Government to encourage pension saving. - Takas bank, an offshoot of the stock exchange, provides centralized record keeping and custodianship of the assets—but with the account management duplicating that of the Pension Management Companies—reflecting the concern at establishment in 2003 to have an ultra-safe triple wall of protection for the assets of pension fund members. - Reconciliation and contribution base: - The PMC will reconcile information and contribution flows. - The contribution base is the same as the one for contributions to the Social Security Institution (SSI). - The PMC will cross check contribution flows to the individual pension funds with the information extracted from the data transmitted to the SSI. - Fees and comparability: - Pension firms can only charge a capped fee levied on assets under management. - The single fee facilitates performance comparison to help employers choose the firms/plans with the highest net rate of return. - The cap is set to 0.85 percent of assets under management. ### Implementation Details and Outstanding Rules - Many implementation details are yet to be defined; the Undersecretariat of Treasury needs to prepare bylaws on: - enrollment of an employee to a pension plan by way of their employer; - criteria to be taken into consideration by the employer when choosing the company and pension plan; - the funds in which contributions will be invested; - the contract to be entered into by the employer with the company; - the right to withdrawal; - enrollment of an employee to a pension plan by the employer in cases where the employee changes their workplace; - transfer of accumulated savings in cases where the employee changes their workplace; - payment to the related pension plan upon the request of the employee whose employment relationship has been terminated; - pausing contribution payments; - abandonment of the system; and - payment of Government contributions. ### Paper Scope and Structure Notes - The paper includes a fuller set of automatic enrollment features summarized in Annex I; this fuller set is used in the macroeconomic assessment section. - Terminology: the note distinguishes between pension firms (the corporate entity) which operates a pension plan (the legal contract) by, inter alia, managing pension funds (the accumulated cash balances). For a more detailed private pension taxonomy, see Impavido (2013). *Prepared by Gregorio Impavido.* ### 5. The new design has many advantages when compared with the existing voluntary ### 5. The new design has many advantages when compared with the existing voluntary pension industry. ### Advantages of the new design - The reform exploits consumers’ inertia; this is at the frontier of private pension system design and a central consideration for optimal industrial organization design of these quasi-markets. - Employers act as a procurement board on behalf of workers; choice is exercised by employers, which reduces competition in the market for individuals that has proved wasteful in other countries. - The automatic enrollment applies to the stock of salaried workers. The stock design: - Allows the full segment of participants (the inert customers) to be served by providers procured by employers. - Lets target participants spend their whole working career in the procured segment served by a sequence of providers selected through periodic procurement auctions. - Requires periodic auctions for service providers to keep high the quality of services. - Maximizes the increase in private savings in the short term. - Only one type of fee can be charged and it is capped. Improvement relative to the voluntary system average: - Voluntary system average fees: 2.5 percent. - Everything else equal, the reform is likely to contribute an additional 20 percent cash balance at time of retirement for the average career worker. ### Key design weaknesses (three main) - (i) The procurement component is incomplete. - (ii) Providers can charge a fee based on assets under management. - (iii) The fee rate is capped without a link to the structure of costs of pension service providers. - Experience shows these weaknesses have in other countries contributed to: - (i) wasteful competition in the market, - (ii) extraordinary profits for, and rent extraction by, service providers, - (iii) regulatory capture when legislated fee caps need to be changed. ### The problem with incomplete procurement - Limiting choice by employers may not reduce marketing incentives; employers tend to adopt simple rules of thumb and exhibit systematic biases similar to individuals. - Empirical example (Mexico, cited): nearly 40 percent of switches were made to pension funds with lower historical gross returns and higher fees. - Pension services should be auctioned. - Collection of contributions is not centralized but implemented by existing pension firms: - Contribution collection is extremely costly; sales force expenditures typically amount to 30 percent of total pension firms’ expenditure. - Because revenues are capped, pension firms may subsidize collection via other arms of their financial groups and recuperate costs by selling complementary services, creating a captive revenue source and increasing mis-selling risk. - The SSI is in principle best placed to collect contributions: - The SSI already collects SSI premia through the payroll system on the same contribution base and enforces compliance with the labor code through labor inspectors. - Additional costs relate to software to divert contributions and information to pension funds chosen by the employer but expected to be minimal. - The reform does not establish a public procurement board to auction other pension services: - Other services (record keeping, administration, custodianship, and in part asset management) have high fixed costs; centralization exploits economies of scale. - Authorities plan to use current pension firms for administration and asset management; PMC for record keeping and reconciliation; Takas Bank for custodianship. Asset management is planned to be auctioned but only to Turkish incorporated managers. - Current reform appears to create a captive source of additional revenues to the current banking and private pension fund industry. ### The role and merits of a public procurement board - A public procurement board would assign participants to pension firms using an exogenous, public, and transparent rule (contests based on prices, yields, or performance-related variables). - Competition for the market (via procurement) removes incentive for providers to spend on marketing to attract clients, eliminating rent extraction activities (mis-selling, cream skimming). - Examples of countries using procurement: Singapore, Bolivia, United States (Thrift Savings Plan). ### The problem with fee rates based on assets under management (AUM) - Uniform fee rates are transparent and equitable but can generate super natural profits: - Uniform proportional fee rates reduce efficiency in supply and can lead to extraordinary profits as the fee base grows convexly while pension service costs are essentially fixed. - This amounts to redistribution from consumers to pension firms unless fees are capped and continually lowered. - Uniform fee rates applied to heterogeneous bases promote wasteful competition: - Different participants represent different rents; firms invest in marketing when marginal rent exceeds marginal search/contact investment. - Marketing expenses typically add up to 30 percent of fees charged to participants. - Because individuals are inert, uniform fees on heterogeneous bases promote wasteful competition rather than directing customers to higher net return firms. ### The problem with caps on fees not linked to supply costs - Capping fee rates (as in Turkey) reduces supply inefficiencies by bounding firms’ ability to charge above average costs when demand elasticity is low. - But caps need to be adjusted frequently, increasing likelihood of regulatory capture: - Caps not linked to the cost structure of pension firms can become obsolete as the fee base grows. - In absence of a formal process tying caps to production costs, pension firms can rely on lobbying to influence policy making. - Firms face excessive regulatory risk if a populist administration arbitrarily lowers caps. ### Other potential design weaknesses (unregulated at time of writing) - Auctions for asset management limited to Turkish incorporated entities: - Current pension funds charge fees on asset management around 250bps. - This suggests incapacity to bid for a 70–100bps capped fee or lack of competition exposing consumers to predatory pricing. - Allowing qualified foreign asset managers to participate could generate competition and reduce costs. - Investment rules decided by the Deputy Prime Minister in charge of the Undersecretariat of the Treasury, based on advice of an investment advisory committee: - Unclear applicability (investment options procured vs. rules asset managers must follow). - Concern about undue political influence on asset allocation (direct lending, equity investment, facilitating issuance of domestic debt). - Governance of advisory committee undefined; opinions unlikely to be published. - Hosting of insurance and pension supervisor within the Treasury does not justify political appointee decision on technical matters. - Investment rules will include government debt: - If the objective is to pre-fund pension liabilities, investing in government debt does not achieve that objective. - Many countries have used private pension funds as cheap financing of budget deficits, weakening fiscal discipline. - Investment limits in government debt should be kept at a minimum. ### How to strengthen the pension industrial organization (I/O) weaknesses in Turkey - A hybrid I/O would eliminate most weaknesses by separating demand into procurement and quasi-market segments: - Procurement segment: pension fund service providers selected by a public board through periodic auctions (collection of contributions, administration and record keeping, asset management). - Quasi-market segment: participants choose their own provider. - In attractive hybrids, each participant is free to choose segment; undecided participants are typically allocated to the procured segment. Countries with hybrid models include Mexico, Bulgaria, Chile, New Zealand (Kiwisaver), and Sweden (PPM). - Advantages of a hybrid I/O: - Creates performance benchmarks for the board and suppliers via outside options. - Replacing undecided consumers’ choices with a technically qualified public board improves welfare of the undecided. - Increasing share of active participants in the quasi-market raises demand elasticity, potentially lowering prices and marketing expenditures. - Public notoriety of a procured segment may increase public awareness about price differences and raise price elasticity (example: Mexico press intensified information on prices when allocation occurred). - Five critical policy considerations for designing a well-functioning hybrid model (especially for Turkey): - First: procurement needs a strong governance framework. Allocation to procured segment must be transparent and well-reasoned; procurement board should assign periodic licenses through auctions. At time of writing, Turkish authorities had not established a procurement board and required employers to choose on behalf of workers. - Second: targeting of participants should use objective rules (e.g., participant is undecided; observable attributes like low assets). At time of writing, Turkish authorities had not chosen employer rules for choosing pension firms. - Third: participants who recently chose a pension firm should be exempted from default allocation; individuals should be free to leave the procured segment. At time of writing, Turkish authorities had not chosen how individuals can elect alternatives; discussions suggest this may be via choosing alternative investment options within procured segment (as in US Thrift Savings Plan). - Fourth: heterogeneity in fee bases can destabilize the hybrid model: - If average base in undecided (procured) segment is much lower than in the quasi-market, providers to the procured segment need higher fee rates to collect the same fee income, possibly eliminating participation in auctions absent large fiscal subsidy. - When flat fees dominate (e.g., New Zealand), no inequality in fee bases exists. Encouraging flat fees reduces risk of eliminating the hybrid model. - At time of writing, Turkish authorities allowed providers to charge a fee based on asset management, which Staff would discourage. - Fifth: choice between stock and flow models: - Stock model allocates all undecided individuals to the procured segment, targets inert participants, protects them from predatory pricing, and maximizes short-run increase in private savings. It requires periodic auctions to ensure incumbents maintain quality. - At time of writing, Turkish authorities chose the stock model but still needed to design and introduce periodic auctions for services like asset management, custodianship, administration, and record keeping. ### Macroeconomic impact of the reform — approach and initial estimates - Objective: Assess how effective the automatic enrollment system is in reducing external imbalances. - Method: Estimate potentially covered population and their wage mass, project cash balances and aggregate savings under several scenarios, and assess macroeconomic impacts using the G20 core module of the Flexible System of Global Models (FSGM) developed by IMF Research Department. Estimating the covered population and wages (data and steps) - Data source: labor force survey of 2015 containing salaried individuals for private and public sector. - Sample totals and averages: - Total salaried workers reported: 14.1 million. - Total monthly net earnings reported: TL26 billion. - Average monthly net earnings: TL1,838 (Table 01, 2015 Net). - Grossing up net wages to account for the 30 percent minimum wage increase of 2016: - Total monthly gross earnings (grossed): TL37.5 billion. - Average monthly gross earnings: TL2,757 (Table 01, 2016 Gross). - Procedure to derive distribution (three steps summarized from source): - Move from 2015 net earnings to 2015 gross earnings using the formula and definitions provided: - Variables and parameters explicitly stated: - s = 0.15 is the sum of the SSI and UIF contribution rates. - TL1,273.5 is SSI minimum contribution wage in 2015 (noted as TL1, 273.5_SSI in source). - TL8,227.75 is the maximum 2015 SSI contribution wage (calculated as 6.5 times the minimum wage). - 0.093 x = 0.093 is the proportional factor of OT in WG (effective average PIT rate on gross wages). - Estimate the effective average PIT rate on gross wages in two ways and take the maximum of the two estimates: - In Turkey, the SSI premium is 14 percent of gross wages and the UIF premium is 1 percent of gross wages. - Wages net of SSI and UIF premiums are used as base for the PIT. - PIT averages 17 percent of such base or 14 percent of gross wages. - A minimum living allowance of about 45 percent of the PIT is deducted from the PIT; this allowance amounts to 8 percent of the PIT base or 7 percent of gross wages. - Note: The labor force was not increased by the 1.9 percent assumed growth rate in calculations, so these calculations underestimate growth in the wage mass (the omission contributes very little). *Italic line removed by pipeline — source: IMF staff chapter content provided in the supplied PDF unit.* ### 0.0795 percent is also levied on gross wages. Hence, the effective PIT rate is estimated as ### cr1733 - 0.0795 percent is also levied on gross wages. Hence, the effective PIT rate is estimated as ### Effective PIT estimate and alternative macro-based estimate - A nominal levy of 0.0795 percent is applied on gross wages in the micro-based calculation. - Micro-based calculation yields an estimated effective PIT rate of 0.14 x = 0.000795 + .07 - 0.08 (expression shown in source). - These micro-based estimates likely underestimate the effective PIT rate because they use SSI population data where earnings are notoriously underreported. - Macro-based alternative (2014 data): - 17 million individuals categorized as wage employed. - Annual average gross earnings: TL27,083. - PIT revenues: TL73,899 million, of which 60 percent are from wage income. - Implied PIT revenues from wage income are 9.3 percent of gross wages. - Hence macro estimate: x = 0.093. ### Gross earnings reconstruction and 2016 simulation steps - Gross earnings relation used: WG = (1/(1 - s x)) (WN - ???) — source shows symbolic expression: (1 1 WG WN s x 1 − = − −) (preserve form as in source). - Steps to create 2016 gross earnings distribution: - Increase the whole 2015 gross earnings distribution by 8.3 percent to simulate 2016 gross earnings distribution before the 30 percent minimum wage increase. - The annual growth rate for average nominal gross wage used in projections equals average headline inflation of 6.3 percent and a productivity growth of 1.9 percent (sum reported elsewhere as nominal wage growth of 8.27 percent). - Simulation of the 30 percent minimum wage increase in 2016: - In 2015 labor force survey, 5.8 million individuals had estimated 2015 gross earnings below the 2016 minimum wage: - 3.8 million between the 2015 and 2016 minimum wages. - 2 million below the 2015 minimum wage. - For individuals between the 2015 and 2016 minimum wages, bring their 2016 estimated gross earnings up to the 2016 minimum wage. - Assumption notes: - November 2016 adjustment brought the minimum wage to 7.5 (contextual phrasing in source). - Increase in contribution base would approximately add an additional 10bps in GDP to the increase in aggregate savings calculated in the note. - Simulation assumes no impact on quantities and excludes any impact on wages above the 2016 minimum wage. - Simplification likely underestimates the overall impact on the wage mass. ### Labor Force Survey baseline values (Table 1 excerpts) - Scenario 01 initial condition: - Workers: 10.22 million. - Monthly Earnings (TL Million): 28,399.58. - Monthly Average Earnings (TL): 2,777.96. - Scenario 02 initial condition: - Workers: 12.20 million. - Monthly Earnings (TL Million): 34,742.52. - Monthly Average Earnings (TL): 2,848.46. - Scenario 03 initial condition: - Workers: 14.12 million. - Monthly Earnings (TL Million): 37,508.88. - Monthly Average Earnings (TL): 2,656.78. - Aggregate initial summary reported in text: total number of 10.2 million workers with estimated monthly gross earnings of TL28.4 billion and average monthly earning of TL2,778 for scenario 1 (rounded context in source). ### Scenario design (summary of Scenarios 1–5) - Scenario 1: - Restrictions: age (a ≤ 45) and minimum gross salary (WG > SSI). - Contribution base capped at maximum SSI contribution wage TL10,705.5 (SSI). - Individual contribution base formula provided in source text. - Table 1: 10.22 million workers; monthly gross earnings TL28,399.58 million; monthly average TL2,777.96. - Scenario 2: - Restriction: only minimum SSI salary (WG > SSI); age cap removed. - Contribution base capped at SSI as in scenario 1. - Table 1: 12.20 million workers; monthly gross earnings TL34,742.52 million; monthly average TL2,848.46. - Scenario 3: - Neither age nor contribution base restricted; full remuneration allowed. - Eliminating minimum wage constraint adds 2 million workers with reported gross earnings below the 2016 minimum wage. - Table 1: 14.12 million workers; monthly gross earnings TL37,508.88 million; monthly average TL2,656.78. - Scenario 4: - Based on scenario 2; private sector contribution rate doubled to 6 percent; no government subsidy/contribution. - Scenario 5: - Based on scenario 3; no government subsidy/contribution. - Footnote/context: Authorities count 14 million individuals under scenario 1 with average wage between TL2,300 (public) and TL2,500 (private); differences attributed to exclusions in the IMF estimate (around 2 million individuals with earnings below minimum wage and those with zero reported net earnings). ### Projection and model assumptions (Table 2 and text) - Reform assumptions (common across scenarios unless specified): - Pr. Sect. Contrib. Rate (1/ (Percent)): 3.00 for Scenarios 01–03 and 05; 6.00 for Scenario 04. - Pub. Sect. Subsidy (2/(Percent)): 25.00 for Scenarios 01–03; - for Scenarios 04–05. - Pub. Sect. Contrib. Rate (3/(TL)): 1,000.00 for Scenarios 01–03; - for Scenarios 04–05. - Gross Rate of Return (Percent): 9.27. - Years to full Coverage (Unit): 5.00. - Baseline macro assumptions: - Labor Force Growth Rate (Percent): 1.90. - Nominal Wage Growth Rate (Percent): 8.27. - Nominal GDP Growth Rate (Percent): 10.07. - GDP Deflator Growth Rate (Percent): 6.34. - Productivity Growth Rate (Percent): 1.93. - Additional narrative assumptions: - Full coverage achieved only in 5 years. - Gross rate of return on accumulated balances assumed equal to 9.3 percent (noted elsewhere as average return in last 5 years of voluntary pension system). - Projections over next 20 years. - Assumed inertia: individuals do not opt out in the primary projection (authorities’ alternative assumptions noted in footnote). ### Aggregate savings projection results and ranking of scenarios - Aggregate savings increase components: 1. Government dissaving due to lump sum and government contribution on private sector flow contributions (largest in early years). 2. Government dissaving becomes private sector savings (transfer into private accounts). 3. Private sector contributions grow with covered labor force and contribution wage. 4. Accumulated assets yield return reinvested (balances illiquid). - Comparative outcomes: - Scenario 1: Aggregate savings increase the least. Aggregate savings increase by 1 percent of GDP in only 10 years when coverage is complete. - Scenario 2: Aggregate savings reach +1 percent of GDP after 7 years. - Scenario 3: Aggregate savings reach +1 percent of GDP after 6 years. - Scenario 4: Replicates scenario 2 but with 6 percent private contribution rate and no government subsidy; aggregate savings increase the most and accumulate more quickly than all other scenarios. - Scenario 5: Relax age and salary constraints but eliminate government subsidy; aggregate savings grow less than in scenario 2 because added workers have low average wages and without subsidy contribution potential is low. - Sensitivity notes: - Faster implementation schedule would reach the 1 p.p. target 1–2 years earlier but improvement remains small. - A slightly larger base and a higher contribution rate are needed to materially rebalance the economy. ### Model simulations and macroeconomic effects (FSGM G20 core module) - Model features: - Semi-structural FSGM combining micro-founded and reduced-form formulations. - Simulations treat aggregate savings changes as annual shocks. - Households are finitely lived OLG and include liquidity constrained (LIQ) households (non-Ricardian features). - Key modeled effects when aggregate savings increase (deviations from baseline): - Investment increases overall: - Global interest rate (cost of capital in FX) increases as REER depreciates, which would depress investment. - Real interest rate decreases as monetary policy accommodates (to keep inflation constant), which increases investment. - Financial accelerator amplifies short-term investment response; net effect: real investment increases. - REER depreciates (nominal depreciation with inflation constant). - Employed labor remains constant in net terms (higher capital demand offset by income and wealth effects reducing labor supply); wage inflation decreases short run. - Potential output increases (higher investment; TFP and labor unchanged). - Small negative output gap opens short run (consumption falls) but closes quickly; long run GDP increases as investment and net exports offset consumption decline. - Monetary authority decreases policy rate to keep headline inflation constant; policy rate remains below baseline over 20 years but returns to baseline in longer run (not shown). - Private sector saves as projected; non-Ricardian aspects (OLG finite lives and LIQ households) break Ricardian equivalence. - Government dissaves more than projected and debt-to-GDP worsens due to automatic stabilizers (when GDP growth decreases by 1 pp, budget deficits increase by 25 bps). Deficit assumed debt financed. - Higher aggregate savings reduce flow and stock external imbalances (real depreciation improves competitiveness; current account and NIIP improve). Short-run NFA/GDP may worsen slightly, but long-run NFA/GDP improves as current account improvement accelerates. ### Quantitative highlights and timelines - Key numeric values preserved from source: - 0.0795 percent levy on gross wages (micro-based term). - Micro-derived effective PIT expression: 0.14 x = 0.000795 + .07 - 0.08 (as displayed in source). - Macro-based PIT from wages: x = 0.093. - 2014: 17 million wage-employed; annual average gross earnings TL27,083; PIT revenues TL73,899 million; 60 percent of PIT from wage income. - 2015 labor force survey: 5.8 million below 2016 minimum wage (3.8 million between 2015 and 2016 minimum wages; 2 million below 2015 minimum wage). - Minimum wage increase simulated: 30 percent in 2016; November 2016 adjustment referenced as “brought to 7.5”. - Increase in contribution base would add approximately 10bps in GDP to increase in aggregate savings (approximate phrasing from source). - Gross rate of return on balances: 9.27 percent (Table 2) / note references 9.3 percent. - Years to full coverage: 5.00. - Baseline rates: Labor Force Growth Rate 1.90 percent; Nominal Wage Growth Rate 8.27 percent; Nominal GDP Growth Rate 10.07 percent; GDP Deflator Growth Rate 6.34 percent; Productivity Growth Rate 1.93 percent. - Scenario worker counts and monthly earnings (Table 2): - Scenario 01: Workers 10.22 million; Monthly Earnings TL28,399.58 million; Monthly Average TL2,777.96. - Scenario 02: Workers 12.20 million; Monthly Earnings TL34,742.52 million; Monthly Average TL2,848.46. - Scenario 03: Workers 14.12 million; Monthly Earnings TL37,508.88 million; Monthly Average TL2,656.78. - Aggregate savings outcomes: - Scenario 1: +1 percent of GDP after 10 years. - Scenario 2: +1 percent of GDP after 7 years. - Scenario 3: +1 percent of GDP after 6 years. *Source: IMF staff calculations as presented in the provided content unit.* ### Conclusions and Policy Recommendations ### Conclusions and Policy Recommendations ### Industrial organization — assessment of the new automatic enrollment provisions - The newly enacted automatic enrollment provisions "has several advantages" relative to the current voluntary private pension system: they exploit consumer inertia to maximize participation, fees are capped, and they attempt to reduce wasteful competition in the market. - Weaknesses and risks identified: - "The hybrid I/O is not complete without the establishment of a public procurement board and periodic auctioning of pension services." - Employers are "unlikely to be more skilled than individuals in choosing pension plans for their workers." - Fees are charged on heterogeneous bases ("asset under management") prompting competition and "wasteful marketing expenses." - Fees "would become obsolete over time and it will be necessary to lower them periodically exposing the authorities to the risk of regulatory capture." - "The SSI is not used to collect pension contributions while pension firms’ sales forces are used to retain individuals in the system generating he incentives and opportunities for misspelling." - "A political appointee is in charge of investment rules and/or investment options." - Governance of the investment advisory committee is "yet to be defined" and its opinions "are not likely to be publicized as customary of the style of Turkish policy making." - "Foreign asset managers are not likely to be allowed to participate in the auctions." - Staff advice to complete the hybrid I/O model (summary of concrete recommendations): - "Complete the hybrid I/O model along the lines recommended by the World Bank by establishing a procurement board for pension services for undecided participants." - Rationale: "The most important objective of the reform is to avoid competition in the market. The central benefit of the procurement board is that it removes the responsibility from employers for choosing pension providers and it establishes a centralized mechanism to select them via periodical auctions. Repeated auctions would contribute to maintaining prices close to average costs even with uniform fees applied to heterogeneous bases." - Specific operational recommendations: - "The Pension Monitoring Center (PMC) appears to be the ideal candidate to act as a public procurement board. The private sector/public sector representation in the would ensure sufficient check and balances during, and transparency about, the public procurement activity." - "Collection of contributions should be given to the SSI. No private sector service provider would be able to provide the same service at lower costs. In addition, this would represent a duplication of service. It is more efficient for the Government to provide collection of contributions as a public good." - "Initially, allow Takas Bank to provide custodian services and/or record keeping and administration. This service, especially custodianship, would need to be auctioned periodically so as to ensure maintenance of quality of service over time." - "Asset management should be allocated through competitive auctions where foreign asset managers could participate. Ideally, new entrants would provide a limited set of investment options following passive asset management styles. Asset management and custodianship could be bundled in the same auction." - "The presence of qualified foreign asset managers could be beneficial for specific mandates for which local expertise is missing or weak. In addition, they would generate competition among domestic asset managers to reduce the currently very high fees." - "For the quasi market, wasteful competition within the market would be eliminated with flat fees. A flat fee kills incentive for marketing and protects participant in the procured segment from predatory pricing by providers in the quasi market. It also protects participants in the quasi market from wasteful competition from pension firms. More critically, it facilitates the existence of the procurement segment where fee rates would be much higher than in the quasi-market segment to cover production costs." - "Finally, replace the current proportional subsidy with a means tested flat subsidy. Flat fee would be high for low income participants or participants with low contribution density in general. Hence a flat subsidy that is means tested and comparable to the current proportional one in terms of fiscal cost, would enable low wage individuals to participate in the hybrid I/O pension system." ### Macroeconomic impact — expected effects and timing - Positive macroeconomic implications highlighted: - "The increase in aggregate savings would increase GDP and potential output." - "As real investment would increase with the lower cost of funding and higher savings, potential output would be boosted." - "Higher real investment and stronger net exports would compensate for the fall in consumption induced by higher aggregate savings." - "This would raise GDP growth keeping the output gap closed in the long run." - Timing and magnitude of external-adjustment effects: - "The impact on external imbalances of the new enrollment system would be felt only after 20 years." - Under plausible scenarios, "the CAD would improve by 1 p.p. only between 2024 and 2028 with the latter date being more than 10 years from today." - "An improvement of 2 p.p. would not be possible before 20 years from today." - "The increase in aggregate savings would be even smaller if the authorities’ assumptions discussed in footnotes 13 and 15." (footnotes referenced in source) - Staff advice on contribution policy: - "Hence, Staff advises to increase the private sector contribution rate and the contribution base." - Specific numeric guidance: - "A contribution rate of at least 6 percent is needed to improve the CAD by at least 1 p.p. in the next 5 years; sooner if the government subsidy is maintained." - Coverage and age eligibility: - "Individuals older than 45 years of age should also be allowed to participate and the cap on their contribution salary lifted." - Caveat: "However, a change in the contribution base would require a legislative amendment which could be impractical. It would also reduce the ability to reconcile the flows of contributions and information. Hence, maintaining the current wage cap could be compensated by a further increase in the contribution rate." ### Annex I — Key aspects of the new auto enrollment system (operational features and parameters) - Automatic participation: - "Salaried employees under 45 years of age and registered with the Social Security Institution (SGK) will be included in a pension plan through a pension contract arranged by the employer." - "The pension company that the employer may choose must be amongst the one approved by the Undersecretariat of Treasury." - Contributions: - "Participants' contribution amount will be 3 percent of their earning subject to Social Security Insurance (SSI) contributions." - Earnings limits: "The lower limit is the monthly gross minimum wage (TRY1,647 for 2016), and the upper limit at 6.5 times Gross Monthly Minimum Wage (TRY10,705.5)." - "The Council of Ministers is authorized to double the contribution rate or lower it to 1 percent, or determine it to a fixed amount." - "The employee may request the employer to make a deduction in an amount greater than the amount specified in the pension contract for automatic enrollment." - Matching and subsidies: - "The Government will provide state subsidy for employees amounting to 25 percent of employees' paid contributions to private pension account." - "In case the employee stays in the plan, the government provides another one-off subsidy of TRY1,000.00." - "Employer’s matching contribution is not an option within the auto enrollment system." - Opting out and portability: - "Participant employees may opt out from the system within 2 months of participation. In this case the accumulated amount of contributions and investment income, if any, will be refunded within 10 days." - "Full portability is ensured by having individual accounts linked to the national ID number." - Procedures on workplace change and continuation of contributions are specified in the system description. - Retirement benefits: - "Upon retirement, the employee has the choice of receiving their savings in a one-lump sum or as a monthly annuity over the course of several years." - "If the employee chooses to receive their pension in annuities exceeding 10 years, the state will provide an extra 5 percent contribution of a private pension customer’s total savings." - Fees: - "Pension companies cannot charge any fees on participants of auto-enrollment plans other than fund management fees. These will be capped." - Roll out: - "The plan is to start implementing the new system starting with large employers in January 2017." - Pending issues at the time of writing (items yet to be defined by the Undersecretariat of Treasury): - Enrollment by employer; criteria for employer choice of company/plan; funds in which contributions will be invested; employer-company contract; right to withdrawal; enrollment on workplace change; transfer of accumulated savings on workplace change; payment upon request after termination; pausing contribution payments; abandonment of the system; payment of Government contributions; other principles and procedures governing enforcement. ### Annex II and III — Model framework and simulation highlights - Model framework: - The Flexible System of Global Models (FSGM) is described as a semi-structural model combining micro-founded and reduced-form formulations. - Real GDP determined by sum of demand components in short run and potential output in long run. - Consumption block uses the Blanchard-Weil-Yaari overlapping generations (OLG) model with liquidity constrained (LIQ) households included. - Private business investment uses an updated Tobin's Q model with quadratic real adjustment costs. - Government absorption and public capital detailed; aggregate supply via Cobb-Douglas with trend TFP, steady-state labor force, NAIRU, and capital stock. - Prices: core CPIX determined by an inflation Phillips curve; Phillips curve for nominal wage growth exists; inclusion of commodity prices (oil, food, metals). - Policy: monetary policy via an interest rate reaction function; long-term 10-year interest rate based on expectations theory plus term premium; interest rates on instruments are weighted averages of 1-year and 10-year rates. - Model simulations: - Annex III presents model simulations of Scenarios 1 and 4 using G20MOD with a range of macro variables charted over 2016–2036, including Consumption (% difference), Investment (% difference), Exports (% difference), Imports (% difference), GDP (% difference), GDP Growth (% pt difference), Employment (% pt difference), Potential Output (% difference), Output Gap (% pt difference), Policy Rate (% pt difference), Inflation (% pt difference), Real Corporate Interest Rate (% pt difference), Real Effective Exchange Rate (% Difference; + =appreciation), Private Saving (% pt GDP difference), Budget Deficit (% pt GDP difference), Government Net Debt (% pt GDP difference), Current Account (% pt GDP difference), and Net Foreign Assets (% pt baseline GDP difference). *Source: Conclusions and Policy Recommendations (cr1733).* ### References ### References ### Key citations - Andrle, M., Blagrave, P., Espaillat, P., Honjo, K., Hunt, B., Kortelainen, M., Lalonde, R., Laxton, D., Movroeidi, E., Muir, D., Mursula, S., and Snudden, S., 2015, “The Flexible System of Global Models (FSGM)“. IMF Working Paper No. WP/15/64. - Calderón-Colín, R., Domínguez, E. E., and Schwartz, M.J., 2008, “Consumer Confusion: The Choice of AFORE in Mexico”. IMF Working Paper No. WP/08/177. - Impavido, G., 2013, “Pension Funds” Chpt 47 In: Gerard Caprio (ed.) “Handbook of Key Global Financial Markets, Institutions, and Infrastructure”, Vol. 1, pp. 523–32. (Oxford: Elsevier Inc. Pub.). - Impavido, G., Lasagabaster, E., and García-Huitrón, M., 2010 “New Policies for Mandatory Defined Contribution Pensions – Industrial Organization and Investment Products”. (The World Bank Pub.). ### Tourism sector: recent developments and macroeconomic impact — major findings - By 2015 Turkey became one of the most popular touristic destinations in the world: - Turkey’s share in global inbound tourist flows increased from 1.5 percent in early 2000s to about 3 percent in 2015. - The number of foreign tourists’ arrivals tripled and reached 36 million people by 2015. - Visits for travel and entertainment increased by 146 percent since 2004; business related visits and shopping tours increased about 6–11 percent. - Source countries and expenditures: - Top three source countries by number of tourists in 2015: Germany (5.6 million), Russia (3.6 million), and the UK (2.5 million). - Combined share of EU countries over 50 percent of arrivals. - Over half of the increase in tourist arrivals between 2004–2015 came from EMDCs. - The average level of expenditures by foreigners did not change much since 2004, and decreased slightly in 2015. - Competitiveness and capacity: - REER depreciated vis-a-vis developing economies by over 30 percent since 2003. - Between 2003 and 2014 the number of airports increased to 52 from 26. - Turkish Airlines expanded the list of destinations to 280 countries. - Country’s accommodation capacity increased 2.5 times in 8 years; total bed capacity exceeded 1,250 thousand. - As of 2011 Turkey had very open visa policies: just 3 percent of foreign tourists requiring visas among G20. - Security developments and shock to arrivals: - The total number of registered attacks exceeded 400 in 2015 (compared to an average of 70 in 2010–2014), including at least 40 episodes in key touristic areas. - Russia introduced restrictions at end-2015, including sanctions on charter flights and sales of travel tours. - January–September 2016: tourist arrivals from Europe dropped by over 30 percent and from Russia by more than two-thirds. - This contributed to about 30 percent drop in exports of transportation services, and negative spillovers to the food & accommodation sector. - Sector size and employment: - In 2015 travel services earned around US$27bn of export revenues (3.7 percent of GDP and about 13 percent of total export proceeds). - Tourism directly generated over 600 000 jobs (2.3 percent of total employment), with about two-thirds associated with foreign tourism. - Approximately one million jobs created indirectly. - Sensitivity and recovery patterns: - Studies show repeated incidence of violence tends to have long-lasting effects on tourist arrivals; recovery time varies widely from a few weeks to a few years. - EU tourists tend to book at least 4–6 months in advance, implying lagged effects on tourist season following attacks. - Russian travel restrictions were lifted in 3Q 2016, but inflows may remain weak due to security uncertainty. - Estimated near-term macro impact (Bayesian VAR analysis): - Four BVAR models estimated using alternative tourism indicators; models include: - number of foreign tourist arrivals or real exports of travel services; - real gross value added (GVA) for food & accommodation, transportation, and rest of economy; - income level in source countries measured as PPP based GDP weighted by time-varying shares of countries in total tourist arrivals; - CPI-based real exchange rate index and a trend variable as proxy for capacity improvement. - A 10 percent shock to foreign arrivals is estimated to have 0.2–0.3 percent impact on GDP (annualized). - Fall in real GVA: food & accommodation about 0.8–1.7 percent; transportation about 1.3–2.0 percent. - Based on median responses, absent policy measures and other positive shocks, GDP would decelerate to around 2 percent in 2016. - Impulse-response median immediate spillovers from a 1 percentage increase in tourist arrivals or real tourism revenues are: - about 0.15 percent in the two most affected sectors (model based on real tourism revenues); - around 0.2 percent in the two most influenced sectors (models based on tourist arrivals). - Recovery scenarios (summary): - “Quick recovery” scenario: tourist arrivals/revenues reach pre-shock trend in 2017. - Would lead to output growth around 1 percent higher in 2017 and additional 0.3 growth acceleration in 2018. - Would imply 5–8 percent higher value added in the most affected sectors. - “Slow recovery” scenario: tourist arrivals/revenues remain below trend until end-2018. - Would lead to only 0.2–0.3 percentage points higher GDP growth in the first two years with negligible spillovers to other sectors. - Caveats and limits of the analysis: - VAR approach provides a rough aggregate estimate; confidence intervals are large due to relatively short data series. - Historical estimates capture capacity building effects; given significant spare capacity after the shock, recovery in demand will unlikely stimulate additional capital spending. - Assessment does not account for counter policy measures, including withdrawal of fiscal stimulus introduced to mitigate GDP fall during shock. - Real GVA series used are taken from data available prior to the release of 2016:Q3 GDP estimates and do not account for methodological changes announced in December 2016. ### Model and estimation notes (Annex I highlights) - Bayesian VAR estimates performed in the BEAR toolbox with priors for residuals assumed Normal-Wishart. - Hyper-parameters chosen by grid search to achieve highest marginal posterior. - Two models with best forecast performance used for simulations: - Model with highest Bayes-factor: based on current account data with one lag. - Model with tourist arrivals (1 lag) had higher Bayes-factor for sample 2003:1–2016:2 but different forecast performance across sectors. - Forecast evaluation reported using Root Mean Squared Errors for 2015:Q1 – 2016:Q2. - Illustrative simulations and impulse responses presented for: - Model 1: BVAR with Real Tourism Revenues, Sample 1998:1–2016:2. - Model 4: BVAR with Tourist Arrivals, Sample 2003:1–2016:2. *International Monetary Fund — TURKEY’S TOURISM SECTOR: RECENT DEVELOPMENTS AND THE IMPACT ON BROADER ECONOMY* ### References ### References ### Bibliographic Sources Cited - Acevedo, S., Han., L., Kim, H.S., and Laframboise, N., 2016, “Flying to Paradise: The Role of Airlift in the Caribbean Tourism Industry”; IMF Working Paper WP/16/33. - Ahlfeldt, G., Franke, B., Maennig, W., 2015,” Terrorism and international tourism: the case of Germany”. Jahrbücher für Nationalökonomie und Statistik, 235 (1). pp. 3–21. - Akkemik, A. K. and Senerdem, E. D., 2014, “CGE Assessment of Tourism Policies in Turkey”, 54th ERSA Congress, St. Petersburg, August 26–29, 2014. - Aslan, A., Kaplan, M., & Kula, F., 2009, “International Tourism Demand for Turkey: A Panel Data Approach”, Research Journal of International Studies, 29, 2009, pp. 65–73. - Canova, F., Dallari, P., 2013, “How Important Is Tourism for the International Transmission of Cyclical Fluctuations? —Evidence from the Mediterranean”, ECB Working Paper Series No. 1553. - Central Bank of the Republic of Turkey, 2016, Inflation Report 2016–IV, Box 4.1. - Dieppe, A., Legrand R., van Roye, B., 2016, “The Bayesian Estimation, Analysis and Regression (BEAR) Toolbox—Technical guide, Version 3.0”, European Central Bank, mimeo. - Tsounta, E., 2008, “What Attracts Tourists to Paradise?”, IMF Working Paper 08/277. - Tourism Research Australia (TRA), 2011, “Factors Affecting the Inbound Tourism Sector”. - Neumayer, E., 2006, “The Impact of Political Violence on Tourism — Dynamic Cross-national Estimation”, Journal of Conflict Resolution, Vol. 48 No. 2, April 2004 259–281. - Gul, H., 2015, “Effects of Foreign Demand Increase in the Tourism Industry: a CGE Approach to Turkey”, Anatolia—An International Journal of Tourism and Hospitality Research, 2015. - International Monetary Fund, 2011, “Paraguay—Selected Issues, Potential Output Growth and Spillovers from Agriculture”, 15 July 2011. - Institute for Economics and Peace, 2016, “Global Terrorism Index 2016”. - Tase, M., 2016, “Sectoral Dynamics and Business Cycles”, Finance and Economics Discussion Series, Federal Reserve Board, 2016–066. - World Travel and Tourism Council, 2016, “Travel and Tourism Economic Impact—Turkey”. ### Understanding Turkish Residential Real Estate Dynamics — Key Findings and Stylized Facts - Summary assessment: - Turkish housing valuations appear to be stretched benchmarked against a variety of standard metrics. - Macroeconomic spillovers from housing market risks may be contained, as the household sector still has buffers to cushion against possible price corrections. - House prices show a strong relationship with financial and labor market conditions, as well as mortgage debt affordability. - Housing developers are highly leveraged with significant FX exposures, and relatively high NPL ratios. - Stylized facts (numbered as in source): 1. Cumulative house price changes: - Headline house prices for existing homes rose by a cumulative 110 percent and 35 percent respectively in nominal and real terms from December 2010 to July 2016. - Recent reversion to the 5-year mean real price growth noted; persistence of cooling uncertain. 2. Supply-demand balances and recent moderation: - The difference between annual occupancy permits and new house sales peaked at some 300,000 units in 2014:Q2 and declined to 116,000 units in 2016:Q1 mainly due to a cut in occupancy permits. - House price growth has recently shown signs of moderating. 3. Construction sector share: - The share of the construction sector’s value-added has remained moderate, while the sector accounted for a higher share within total employment than in GDP, suggesting increasing employment generation with lower productivity (or relatively higher productivity growth in other sectors). 4. Government roles and mega projects: - Government roles include urban regeneration plans, activities of the Mass Housing Administration (TOKI), and mega projects (Istanbul Financial Centre, Istanbul 3rd Airport, Channel Istanbul) with potential housing market implications. 5. Counter-cyclical policy actions to stimulate housing demand: - From February 2016, government announced matching contributions equivalent to 15–20 percent of household savings (capped at TL 15,000) for first single home purchases. - LTV ratio increased from 75 to 80 percent. - VAT temporarily cut from 18 percent to 8 percent for luxury houses. - 49 private developers offered some 60,000 houses at below-market lending rates and higher LTV ratios as part of a temporary sales campaign. - Banks cut lending rates on mortgage loans (from 13.8 percent compounded in June to 12.1 percent) in late October (year implied in source). 6. Demographic and social drivers: - A young and rapidly growing population with high and steeply rising urbanization rates increases demand for housing. 7. Household and preference changes: - Number of households increased while average household size declined. - Home ownership and ownership of multiple houses have increased. - With increasing income, households prefer newer and larger houses. 8. Geographic and income heterogeneity: - Significant variations across cities and income groups; Istanbul heavily influences aggregate indices. - Prices of houses of the richest and poorest households stand respectively at 157 percent and 44 percent of the overall average house price (context in source). - Presence of more than 2.7 million Syrian refugees since March 2011 has affected local housing prices in border cities (Gaziantep, Kilis, Hatay, Adana, Sanliurfa). 9. Data gaps in housing price indices: - Two main indices: CBRT (from January 2010; based on valuation reports for mortgage extension) and REIDIN (from June 2007; based on listed sales offer/ask prices by private developers), with major differences in coverage and methodology. - CBRT indices lack intra-city level granularity. 10. Relationship with business and credit cycles: - House price gap analysis (HP-filter based) shows dynamics have turned counter-cyclical and increasingly disconnected from output and mortgage credit cycles. - 5-year rolling correlations of house prices with output and mortgage credit cycles are positive but weakened through late 2014. 11. Price-to-Rent metric and user cost: - Price-to-Rent ratio used to compare owning cost with renting cost; a notional user cost at market equilibrium computed (Box 3 referenced). - A positive and widening gap between actual price-to-rent and benchmark price-to-rent may indicate stretched prices. 12. Price-to-Rent findings: - House price valuations appear stretched on Price-to-Rent metrics. - Implied anticipated nominal house price increases from equilibrium remain well below actual nominal house price growth. 13. Income-segment differences in valuation pressure: - Price-to-Rent ratios less stretched for lower-income households; poorest households have seen an improvement possibly related to TOKI’s subsidized social housing. 14. Cross-country comparison: - Turkish price-rent ratios appear high relative to peers. - Turkey leads peer countries in cumulative change in Price-to-Rent ratio from 2010:Q1 to 2015:Q4 for available comparators. ### Box summaries (policy and institutional implications) - Box 1. Urban Regeneration - Policy focus: - 10th Development Plan (2014–2018): reduction of disaster risks, removal of infrastructure bottlenecks and slum areas. - Urban Regeneration Law 6306 (2012) tasked Ministry of Environment and Urbanization with identification and renewal of risky buildings, with TOKI participation. - Scale and needs: - 71 percent of households live in buildings erected before 2000 (2014 Household Budget Survey). - Of 19 million residential units, 14 million need testing for compliance; demolishment or reinforcement up to 6–7 million units may be needed (Ministry estimates). - Financial/administrative support: - Government assistance since 2012 totals TL 2.5 billion for rental support, subsidized loans, and expropriation payments. - Market impact: - Large-scale regeneration requires private sector collaboration and may have significant implications for housing supply-demand balances over time. - Box 2. Housing Development Administration (TOKI) - Mandate and operations: - Founded in 1984; revenue-sharing model with private developers for land development and housing supply. - Social housing ~85 percent of TOKI’s portfolio. - Cumulative housing units developed reached 750.1 thousand through October 2016. - Portfolio composition through October 2016: 43 percent middle-income, 20 percent poor/low-income, 16 percent urban regeneration/slum transformation, 5 percent disaster relief, 14.8 percent high-income housing. - Financials and eligibility: - TOKI balance sheet size reached US$2.3 billion (3 percent of GDP) with a net profit of US$ 1.8 billion, as of 2014. - Eligibility thresholds as of October 2016: net monthly household income below TL 3,700 for Istanbul and below TL 3200 for the rest of the country. - Per 2014 Household Budget Survey, 57 percent of households eligible to purchase TOKI social housing targeted to poor and low-income groups. - Market implications: - Subsidized mortgage loans backing TOKI sales imply competition with private developers and banks. - Revenue-sharing and participation in higher-end projects may have subsidized lower-end housing but contributed to oversupply at the higher end. ### Key statistics and indicators (as reported) - Headline house prices: cumulative 110 percent (nominal) and 35 percent (real) increase from December 2010 to July 2016. - Supply wedge: peak ~300,000 units in 2014:Q2; 116,000 units in 2016:Q1. - TOKI cumulative housing units: 750.1 thousand through October 2016. - TOKI portfolio shares (through October 2016): 43 percent middle-income, 20 percent poor/low-income, 16 percent urban regeneration/slum transformation, 5 percent disaster relief, 14.8 percent high-income. - TOKI balance sheet: US$2.3 billion (3 percent of GDP); net profit US$ 1.8 billion (as of 2014). - TOKI income eligibility thresholds (October 2016): TL 3,700 (Istanbul), TL 3200 (rest of country). - Syrian refugees absorbed since March 2011: more than 2.7 million. - Mortgage lending rates movement: 13.8 percent compounded in June to 12.1 percent in late October (year as in source). - Government matching contributions for first home purchases: 15–20 percent of household savings (capped at TL 15,000). - VAT change: from 18 percent to 8 percent (temporary, for luxury houses). - Private developer sales campaign: 49 developers offering some 60,000 houses. *International Monetary Fund — TURKEY: UNDERSTANDING TURKISH RESIDENTIAL REAL ESTATE DYNAMICS (excerpts and references as provided in source PDF)* ### Box 3. Constructing the User Cost of Housing ### Box 3. Constructing the User Cost of Housing ### Definition and role in ownership decision - The user cost of housing equals the difference between the financial costs and benefits of house ownership over a period of time and is used by potential home buyers to compare the marginal utility from renting an additional unit of housing to the marginal user cost of owning. - It equals the sum of ownership costs (after-tax house depreciation, recurrent maintenance costs, property taxes, risk premium for ownership-related uncertain costs, mortgage interest payments, and the opportunity cost of housing equity) minus the financial benefit from owning (the after-tax anticipated capital gain). - Household expectations for the after-tax capital gains are a crucial component because large expected capital gains can lower the (net) user cost of owning relative to renting and thereby increase demand for ownership. ### Formula and calibration (annual basis, LTV = 25 percent) - User Cost of Housing = P(25% i_d + 75% i_m + m − π) (1) - P represents the house price. - 25% i_d: after-tax opportunity cost of the 25 percent down payment if deposited in a bank at an interest rate of i_d. - 75% i_m: after-tax cost of the mortgage interest payments at a lending rate of i_m. - m: sum of recurrent maintenance costs, property tax, depreciation, and risk premium, all expressed in percent of the house price. - π: anticipated after-tax rate of capital gain from house price appreciation. - Components and assumed values for m (expressed in percent of the house price): - recurrent maintenance costs: 0.6–0.7 percent (as derived from Household Surveys) - property tax: 0.1 percent (by regulation) - depreciation: 2 percent (by assumption) - risk premium on the residential property: 0.5 percent (by assumption) - Anticipated after-tax capital gain (π): - assumed to be based on the historical long-term average real price increase (exclusive of tax on capital gain) of 5.5 percent over the 12-month ahead CPI inflation expectation. ### Equilibrium relation with rents and benchmark price-to-rent ratio - In housing market equilibrium the potential cost of owning is assumed equal to the annual cost of renting R, implying: - R = P(25% i_d + 75% i_m + m − π) - Benchmark Price to Rent Ratio: - P/R = 1 / (25% i_d + 75% i_m + m − π) - The price-to-rent ratio calculated from the above equation is used as a benchmark approximating economic fundamentals. - Empirical computation in line with the literature: - price-to-rent ratios are calculated as the ratio of the nominal house price index to the rent component of the CPI. ### Implications highlighted in the box - Expectations of after-tax capital gains can decisively affect whether owning is financially preferable to renting: if expected capital gains largely dominate ownership financial costs, the net user cost of owning falls and ownership demand can increase. - The user cost framework is applied on an annual basis in the paper, using an LTV ratio of 25 percent for ownership equity and the specified calibration for m and π. *Box 3. Constructing the User Cost of Housing (from the supplied IMF country report excerpt).* ### 0.4 percentage point q-o-q increase with the real house price increases. ### cr1733 - 0.4 percentage point q-o-q increase with the real house price increases. ### Econometric model results — House Price Model (selected coefficients and statistics) - House Price 1-quarter lag of House Price coefficients: - 0.938*** (t-statistic (34.44)) - 0.942** * (t-statistic (26.50)) - 0.897** * (t-statistic (21.86)) - 0.954** * (t-statistic (21.33)) - Debt affordability / liquidity and labor variables: - Liquidity Conditions (Money Base (M2)/GDP Ratio): 0.406*** (t-statistic (6.92)) - Unemployment: -0.344 (t-statistic (-1.69)) - Mortgage Lending Rate: -0.433*** (t-statistic (-3.40)); other specifications: -0.239 (t-statistic (-1.40)) and -0.424** (t-statistic (-3.24)) - Hourly Earnings: 0.213*** (t-statistic (3.84)); alternative specs: 0.167** (t-statistic (2.11)); 0.185** (t-statistic (2.25)) - Housing market variables: - House Sales coefficient: 0.0289 (t-statistic (1.48)) - Construction Cost coefficient: -0.0513 (t-statistic (-0.47)) - Dummy for Q3: 0.0177** (t-statistic (2.29)); 0.0164** (t-statistic (2.33)); 0.0192** (t-statistic (2.68)); 0.0181** (t-statistic (2.27)) - Constant terms across specifications: - 0.0908 (t-statistic (0.76)) - -0.696** (t-statistic (-3.75)) - -0.661** (t-statistic (-3.39)) - -0.388 (t-statistic (-0.57)) - Sample and fit: - Number of Observations: 35, 34, 35, 35 (by specification) - Adjusted R-Squared: 0.98 (all reported specifications) - t statistics in parentheses; significance: * p<0.1, ** p<0.05, *** p<0.001 ### Key empirical findings (magnitudes preserved) - Hourly Earnings [+]: "A one percentage point q-o-q increase in household real earnings growth is associated with a 0.2 percentage point q-o-q growth in real house prices." - House sales [+]: "A one percentage point q-o-q increase in house sales growth has a surprising and statistically insignificant association of a mere .03 percentage point increase in the q-o-q real house price growth." - Construction Cost [-]: "Real changes in the construction cost seem to have a negative but statistically insignificant relationship with the real house price growth." - Overall: "House price growth seems to have stronger associations with higher domestic liquidity, lower mortgage lending rates, and stronger labor market conditions." ### Household sector — risk outlook and indicators - Savings and indebtedness: - Household saving: "at 9 percent in 2015." - Overall household liabilities as a share of disposable income: "51 percent in 2015 from 34 percent in 2009." - Household leverage ratio (financial liabilities-to-assets): "rose by 15 percentage point to 51 percent in four years from 2009 to 2013" and "declined again to 44 percent in 2015." - Household interest payments as a share of disposable income: "remain low at 5 percent." - Household financial net worth: "improved to 27 percent of GDP." - Sensitivity to shocks: - "Households may have become more sensitive to income and debt service shocks, due to higher leverage." - Households likely reduce consumption rather than default when hit by shocks; "sensitivity of consumption to shocks may increase with higher household indebtedness." - Mortgage and housing loan metrics: - "Housing loans including TOKI loans stand at a mere 7.8 percent of GDP through the third quarter of 2016 with extremely low NPL ratios for mortgage loans." - Mortgage debt concentration: "mortgage debt appears mostly concentrated in upper income groups." - Regulatory and structural buffers: - Legal prohibition: "Households are not allowed to borrow in foreign currency by law, and housing loans are mostly contracted at fixed rates." - LTV regulatory enforcement: "enforcement of a regulatory LTV requirement for mortgage lending in 2010 has helped to contain risks." - Tax treatment: "Tax code has featured no tax-deductibility for mortgage loans." - Note: "These measures have very recently been loosened." ### Risks associated with the construction sector - Leverage and liquidity: - Construction sector leverage and selected ratios (In percent): - Total Debt / Total Assets (Leverage Ratio): 2009: 76.1; 2012: 71.1; 2013: 72.0; 2014: 73.3; 2014 - Overall NFC Sector: 61.8 - Total Debt/ Own Funds (Debt to Equity Ratio): 2009: 318.2; 2012: 246.0; 2013: 257.3; 2014: 274.5; 2014 - Overall NFC Sector: 161.9 - Shareholders Equity / Total Assets: 2009: 23.9; 2012: 28.9; 2013: 28.0; 2014: 26.7; 2014 - Overall NFC Sector: 38.2 - Short Term Liabilities / Total Liabilities: 2009: 57.0; 2012: 48.5; 2013: 46.1; 2014: 44.2; 2014 - Overall NFC Sector: 37.2 - (Cash Ratio) (Liquid Assets + Marketable Securities )/ Short Term Liabilities: 2009: 9.6; 2012: 18.3; 2013: 17.8; 2014: 17.8; 2014 - Overall NFC Sector: 25.9 - Net Profit / Own Funds (Return on Equity): 2009: 10.8; 2012: 12.6; 2013: 7.9; 2014: 8.5; 2014 - Overall NFC Sector: 6.9 - Net Profit / Total Assets (Return on Assets): 2009: 2.6; 2012: 3.6; 2013: 2.2; 2014: 2.3; 2014 - Overall NFC Sector: 2.6 - Profit Before Interest and Tax / Interest Expenses (ICR): 2009: 354; 2012: 516; 2013: 315; 2014: 294; 2014 - Overall NFC Sector: 214 - FX exposure and NPL vulnerability: - "The construction sector accounts for more than 10 percent of the overall NFC FX loans" and "is exposed to significant exchange rate risks." - "Construction sector NPLs—which already are quite high relative to the rest of NFC—may further rise if the currency’s recent weakening were to continue unabated." - Business model risks: - "Pre-selling" practice and reliance on advances from house buyers increases project completion risk. - Developers offering mortgage loans at below-market rates: "causing margin compression" and potential shadow-banking/credit-risk spillovers. - Pricing distortions: "developers may incrementally raise ask prices, to generate a perception of high capital gains even before completion of construction." ### Summary of main findings - "Various metrics suggest that housing valuations may be stretched." - Macroeconomic spillovers likely to be contained because of: - "favorable factors supportive of housing demand," - "prudent regulatory norms on household borrowing," and - "low levels of buyer leverage." - Linkages with fundamentals: - Stronger associations of house price growth with "higher domestic liquidity, lower mortgage lending rates, and stronger labor market conditions." - Disconnection observations: - "A weak association of house prices with house sales and construction costs indicate a disconnection with the overall business cycle and cost-push factors." - Supply-side concern: - "Construction companies are highly indebted, often in foreign currency, and some may have weak balance sheets and risky financing models." ### Policy recommendations (preserving phrasing and options) - "Fill data gaps. Identify and bridge data gaps with more granular data particularly on prices, sales and permits at sub-provincial level with a longer time horizon, especially for key metropolitan cities." - "Assess financial soundness of the construction sector developers. Develop mechanisms to conduct periodic financial soundness assessments on the construction sector firms." - "Re-assess the regulatory arrangements relevant for the construction sector. Regulatory arrangements that allow foreign currency lending to construction firms with no FX income may be re-assessed. Regulatory arrangements may be tightened to further mitigate risks associated with the housing developers pre-selling business model." - "Tighten standards to contain risks related to shadow banking practices. Tighter regulatory and supervisory measures to contain risks stemming from mortgage-loans offered by the construction firms at below-market rates and above regulatory LTV ratios may be needed." - "Tighten macroprudential standards for construction sector loans. With a view to mitigating risks associated with high overall and FX leverage, further macroprudential and regulatory measures may also be considered, such as risk-weighted capital requirements, incremental provisioning requirements, and more binding concentration limits." - "Tighter lending standards and macroprudential measures for mortgage loans. Together with other macroprudential policy options for tighter borrowing standards, tightening in financial intermediation taxes on mortgage borrowing (see also Annex II) may also be considered." - "Re-assess tax advantages. Together with a re-assessment of overall tax incentives, the exclusive tax advantages granted with REITs could be re-evaluated. In addition to transaction taxes which cause underreporting of residential real estate valuations, further property taxes could be considered especially in case of overheating in the housing market." - "Lower the degree of informality in house purchase transactions. To combat widespread misreporting of transaction values, further measures may be considered to enhance electronic cross-check mechanisms, as well as better monitoring and registry capacity particularly at the title deed offices." ### Annex and data notes (selected) - Model definitions: - House Price : ln Real REIDIN House Price Index (2010Q1=100) - Hourly Earnings : ln Real Hourly Earning - Mortgage Lending Rate : Annual Real Housing Lending Rate (in percent) - House Sales : ln House Sales - Real Construction Cost Index : ln Real Construction Cost Index - Liquidity Conditions : Money Base (M2)/GDP Ratio - Unemployment : Unemployment Rate (in percent) - Data Sources: TURKSTAT, CBRT, REIDIN, quarterly data over 2007:Q3–2016:Q2 (model specifics indicate seasonal dummies for Q2, Q3 and Q4 with only statistically significant dummies included) - Selected variable sample statistics (as reported): - House Sales Observations: 34; Mean: 12.19061; Std. Dev.: .40983883; Min: 11.43514; Max: 12.77339 - Mortgage Lending Rate Observations: 34; Mean: .1296353; Std. Dev.: .0299368; Min: .0871154; Max: .2128538 - Hourly Earnings Observations: 34; Mean: 4.739447; Std. Dev.: .851938; Min: 4.602549; Max: 4.939237 - House Price Observations: 37; Mean: 4.437079; Std. Dev.: .137237; Min: 4.266376; Max: 4.683636 - Liquidity Conditions Observations: 36; Mean: .5268178; Std. Dev.: .0618266; Min: .3969969; Max: .6367493 - Unemployment Observations: 36; Mean: .1008056; Std. Dev.: .0161401; Min: .076; Max: .148 *Source: cr1733 - 0.4 percentage point q-o-q increase with the real house price increases.* ### Introduction of Building Completion ### Introduction of Building Completion ### Insurance by Law 6502 - Objective: Provide consumer protection for mortgage-financed house purchases through an insurance scheme in light of risks associated with developer firms' possible defaults under the pre-selling business model. - Functions: - Protects consumers against developers' failure to meet construction completion commitments. - Enables banks to pre-screen creditworthiness of the mortgaged housing projects of developers in combination with assessment of household creditworthiness. - Announcement date: March 2015 ### Introduction of government matching contributions for housing related savings by Law 6637 - Policy detail: Government to provide matching contributions at 15-20 percent of accumulated savings. - Cap: capped at TL 15.000 for savings allocated for the first and single house purchases. - Condition: Participants must continue to contribute to the scheme for minimum three years. - Announcement date: August 2016 ### Introduction of project-based extra incentives for infrastructure projects by Law 6745 - Policy detail: New incentive law enables the government to decide on project-based ad-hoc extra incentives and their extent for individual infrastructure projects deemed worth government support. - Announcement date: September 2016 ### Planned New Regulations and Announcements - Authorities to construct turnkey manufacturing plants for the private sector - Government announced construction of production plants on unused government lands for mid-sized manufacturers in exchange of symbolic rents. - Announcement date: March 2016 - Authorities to launch trading of real estate certificates at the Istanbul Stock Exchange - Legislative arrangements underway for issuance and trading of real estate certificates at the stock exchange. - Reportedly, the state-run house developer TOKI will pioneer issuing real estate certificates. - Expected effect: accelerate expansion of the construction sector via providing an alternative source of finance and deepen local capital markets by attracting more local and foreign investors. - Announcement date: March 2016 - Authorities to Introduce new tax measures for Capital Gains on Real Property - Consideration to tighten taxation of capital gains at sales both as a result of natural house price increases and for price increases induced by infrastructure up-grading or land zonning changes in neighborhoods of metropolitan areas. - Announcement date: April 2016 - Authorities to Introduce Golden Visa Issuance to Foreign Real Estate Investors - Arrangement will grant longer residence and work permits for foreigners who buy real property in Turkey over a certain scale. - Announcement date: May 2016 - Authorities to accelerate the works under the nationwide urban regeneration projects - Authorities announced that around 150,000 houses will reportedly be renewed in one year's time without specifying project concentration areas. - Announcement date: August 2016 - Authorities to Issue Real Estate Certificates - Arrangement allows real estate investors to have partial and tradable ownership dividends in various construction projects to deepen financing of real estate projects. - Announcement date: August 2016 - Authorities to invest in infrastructure and building construction in the South East of Turkey - Context: rebuilding of terrorism-hit districts in the South Eastern region. - Reported investment: TL 10bn in the south-eastern districts Sur, Sirnak, Silopi, Idil, Cizre, Yuksekova and Nusaybin. - Housing plans: reportedly a total of 36,000 new houses will be built by the state in these provinces; the number of houses to be built in the entire region will reportedly amount to 67,000. - Social support: government will provide families that lost houses due to clashes with rental aid until the conclusion of house projects. - Additional infrastructure envisaged: construction of 15 public hospitals, 660 dental care centres, several youth and sport centres. - Announcement date: September 2016 *International Monetary Fund — Introduction of Building Completion (cr1733).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1733.pdf_