3rd Italian-Turkish Forum
150th Anniversary of the Italian-Turkish Relations:
A common vision towards the EU

Introductory speech
Alessandro Profumo, CeO UniCredit Group
Rome, November 8, 2006

This year's Forum celebrates an important date in history: the 150th anniversary of the opening of diplomatic relations between Italy and Turkey. One hundred and fifty years of continuous progress in relations between the two countries, which have opened the door to Italy to become a strategic partner for Turkey in the fields of trade, economics and international relations.

Today, Italy is Turkey's third-largest trading partner. Over the last five years in particular, trade between the two countries has grown without interruption, thanks to exponential growth in Turkish exports to Italy (+132%) and at the same time steady growth in Turkish imports (+28%).

Nevertheless, it would be rather reductive to limit the importance of economic ties between Italy and Turkey to a mere analysis of volumes. These relations are also excellent from a more qualitative point of view.

Today, over 350 Italian companies do business inside Turkish borders. Their investment expenditure totals 3.5 billion dollars, representing approximately 9% of all foreign investment in Turkey. These companies are engaged in many of the most strategic sectors of the Turkish economy, from telecommunications to finance, infrastructure and pharmaceuticals.

Furthermore, many of these companies are engaged in technology-intensive sectors, thus contributing significantly to supporting the overwhelming growth process of the nation.

Underpinning relations between the two countries is the good level of complementariness of their industrial systems and a corporate ownership structure in Turkey which is very similar and compatible with the Italian system.

The strongest factor supporting trade links between Italy and Turkey though is the fact that Italy is considered not only as an important trading partner but a full-blown cultural model from which inspiration can be taken, and an economic model to emulate. (1)

Italy is also an outstanding strategic partner for Turkey in the field of international relations. When I say international relations, I refer not only to the important role played by Italy in Turkey's entry into NATO or the fundamental mediation role played from the beginning of the Eighties in promoting Turkey's entry into the European Economic Community. In speaking about international relations, I refer above all to the unwavering commitment of Italy to bringing Turkey into the European Union, begun formally on the 3rd of October last year with the opening of negotiations for EU accession.

And it is by no chance that this date marks the acceleration of a convergence process begun in the Sixties, which has brought significant improvements to the entire Turkish economy.

The opening of accession talks has helped foster an extraordinary growth in foreign investment, which in 2005 reached a figure of almost eight billion euros (2) and which is forecast to reach, in 2008, sixteen billion euros. Such growth has been truly astounding considering that in 2004, foreign investment in Turkey amounted to little more than three billion euros.

Foreign investment has been channelled above all into the services sector, within which a leading role has been played by the banking sector. I should mention that in 2002, UniCredit was the only foreign banking group to have made significant investment in Turkey, whereas today the majority of private-sector banks in Turkey are foreign-owned. This turnaround has been driven by an important privatization process that has affected not only the finance sector but, more generally, the entire Turkish economy and its industries.

Over the last few years, this has brought about a significant improvement in competitiveness, with levels that today are not only in line with but often better than those of other nations in Central and Eastern Europe. Such progress has been fostered by sensible investment decisions in the Research and Development sector, which in Turkey represent 0.7% of gross domestic product, compared to 0.6% in Poland and Slovakia, 0.5% in Bulgaria, and 0.4% in Romania.
These important decisions have led Turkey to double its weight in international exports in just over a decade.

It has been the prospect of becoming part of the European Union that has provided Turkey with the necessary drive to support such extraordinary progress and to stand up and face the great crises of November 2000 and February 2001. These crises were overcome thanks to the adoption of an intense and effective programme designed to boost the stability of the country through important structural reforms. These reforms were focused above all on fiscal policy, which was made more thorough and transparent, monetary policy, which gained greater credibility and was carefully focused on containing inflation, and the restructuring of the economy. Within the scope of the latter, an important role was played by the introduction of a floating exchange rate, an extensive programme for the creation of infrastructure, and the introduction of automatic wage adjustments pegged to inflation.
The programme has led to astounding economic growth levels which, for some years now, have topped 5%, with forecasts estimating that growth will remain at such sustained levels for the near future. Such growth has been also been driven by constant growth in consumption and investment.

The same reform programme has further led to strong growth in productivity, with the index rising by approximately 50% over the last five years, a strong dampening of inflation, which has now dropped below 10%, a fall in public-sector debt, and important cuts in interest rates. To better appreciate the extent of such cuts, we need merely think that the reference rate has fallen from an average of 76% for the 1998-2001 period to 13.5% in 2005, with further cuts expected to bring the reference rate level down to 10% over the next three years.

Considerable stimulus to Turkey's economic recovery was further provided by the restructuring of the banking sector. Previously, the sector represented one of the weakest in the Turkish economy, marked by high levels of fragmentation in private-sector banks, considerable inefficiency in state-run banks, and high risk levels linked to unfavourable economic trends. (3)

A wide-ranging and highly significant transformation process was thus launched in the banking sector in an effort to improve its key role in supporting the real economy through wide-spread recapitalization and modernization, especially as concerns account-keeping regulations, risk management processes and corporate governance.

Within the scope of these reforms, the Turkish banking system has undergone an important conglomeration process. In the commercial banking segment, the number of banks between 2000 and 2005 fell from 61 to 34, with the leading eight banks holding 80% of all assets in the sector.

At the same time, operating efficiency in state-run banks has improved considerably, as has efficiency throughout the sector.
Newly transformed, the banking sector has now begun significantly increasing its financial brokerage levels. Between 2002 and 2005, bank loans grew at an average rate of 48% per annum, and deposits grew by 22%.

In spite of the brilliant economic and financial results achieved, there is little room for doubt that much remains to be done along the road to Turkish accession to the EU.
What is fundamental though is that efforts are made to ensure that these outstanding problems, for which suitable solutions have yet to be found, do not distance Turkey from its key goal for the future - entry into the European Union.
It is for this reason, today more than ever, that Turkey needs Europe and Europe needs Turkey.

In saying this, I am backed by a deep belief and conviction that has been built on the significant experience acquired by the UniCredit Group in Turkey. An experience full of success, which has brought Turkey to become one of the Group's most important markets and one of the keys to its brilliant results in Europe.

Since 2002, the UniCredit Group has pursued a precise investment policy in a country which back then, as it still does today, presented truly extraordinary potential for growth. A country which houses Central and Eastern Europe's most important market, with a population of over 70 million inhabitants - equal to the entire population of all ten of the new European Union member states put together - and a very young population, whose average age is around 29, compared to an EEC average of 38.

Then there is another factor which has contributed to increasing the attractiveness of this country with respect to the economies of the eight EEC countries that have newly entered the EU; namely Turkey has always been an open market, as it has never been a planned economy. This in fact is a guarantee of greater appreciation of the workings of a market economy and considerable business savvy and expertise.

UniCredit made its first investments in Turkey at a time when to the majority it seemed rather uncertain that the country would recover the competitiveness it effectively has in years since. UniCredit pushed ahead with its investments in the conviction that Turkey was destined to become a leading player on the international stage. In addition, UniCredit was sure that in Turkey it could count on excellent local managerial capacity, which is always a guarantee of investment success.

In 2002, the UniCredit Group signed an agreement with the Koc Group with the specific objective of creating a leading financial force in Turkey whose success was to be based on the banking know-how brought by UniCredit and the distributive strength and capacity of Koc.

Encouraged by the excellent prospects opening up in Turkey after the agreement with the Koc Group, UniCredit then proceeded with the acquisition of Yapý Kredi, thanks to which a third private-sector banking group was established in Turkey, capturing a market share of over 10%.

Following the acquisition and the results achieved in the meantime, Turkey has now become one of the Group's leading markets. To better appreciate its importance, I need only mention that Turkey has become the nation in which the Group has the largest number of customers - over seven million, followed by Poland and Italy.

The results being achieved fully bear out the strength of our investment moves.
In fact, whilst in our first year on the Turkish market revenues totalled 286 million euros and profit 4 four million euros, last year, these figures had grown respectively to 1,712 and 217 million euros.

The recent take-over of Koçbank by Yapý Kredi is also destined to further improve the effectiveness of the UniCredit Group's presence in Turkey. The goal of Yapý Kredi today is to become Turkey's leading bank in terms of growth and value creation, and to stake out a position of excellence in all its main business lines.

As I mentioned earlier, one of the key factors to the success of the UniCredit Group in Turkey has been the excellent managerial skills available locally, thanks to which we have been able to attain outstanding results from all points of view.

UniCredit Group employees in Turkey, representing over 11% of the Group's entire work force, vaunt high educational levels. Over 70% of our Turkish employees are graduates, whereas in Italy graduates make up approximately 40% of staff.
Another characteristic of UniCredit's Turkish work force is the high percentage of young people; over 45% of our Turkish staff is under 30 years of age, whereas in Italy this age group makes up only 12.6%.

Furthermore, the female component is also much higher than in Italy. Women in fact make up 60% of all Turkish staff, whilst in Italy they constitute just over 40%. Women also weigh in much more heavily at the managerial level - in Turkey 22% of managerial roles are held by women, whilst in Italy the figure falls to below 9%.

These figures are all extremely significant and fully express the great dynamism and quality of our Turkish colleagues.

With our Turkish colleagues today we share the same business vision, and the exchange of experiences acquired following the two acquisitions has enabled us to significantly and reciprocally enrich our expertise.

This partnership has also enabled the Group to push forward with a number of very important initiatives also outside the strict scope of financial operations. Within this framework, for example, there are the educational and cultural initiatives promoted in Turkey by the Fondazione Unidea and the Vehbi Koc Foundation, which have been identified as important drivers in promoting the modernisation of the country.

These considerations, I believe, help paint a clear picture of the reasons why UniCredit is convinced that the accession process must not be slowed down.
By choosing Turkey and channelling significant investment there, the UniCredit Group has laid down an important gauntlet for its future. And the results achieved so far have only borne us out.