Absence of election turmoil opens opportunity for economic reforms.
Throughout the past year’s turmoil in Turkey, one thing has remained constant: the need for foreign capital. Foreign inflows are necessary to roll over nearly $180 billion of debt due over the coming year, to enable the ambitious goal of closing the prosperity gap with developed economies and to build world-class infrastructure. Such is the importance of foreign direct investment (FDI) that few were surprised when the government Investment Support and Promotion Agency (ISPAT) was revamped last year to become the Presidency of the Republic of Turkey Investment Office—or Investment Office, for short.
But what has surprised some is that Turkey has sustained its appeal at a time when most emerging markets have been struggling. FDI inflows into Turkey last year were up 14% over 2017, reaching $13.2 billion.
“Despite all the adversities, there has been no decrease in investor appetite. And its quality rose, with services falling from 72% in 2017 to 55.5% in 2018, as manufacturing’s share increased to 30.6%, up from 16%,” says Arda Ermut, head of the Investment Office. “Turkey also diversified FDI sources, with Asia and the Turkic Republics investing in large projects.”
Ermut is confident that the upward trend will continue, especially as he expects the four-and-a half-year gap until the next elections will usher in a period of focus on economic reform, which should directly benefit the investment environment.
“Actually, over the past decade and a half, Turkey has been continually implementing reforms and incentives to attract more FDI. Last year [we] announced ‘super incentives’ for a number of projects worth TRY135 billion [$23.4 billion], equivalent to around 4% of GDP,” he says, adding that the investment office is stepping up promotional activities to create greater awareness among investors.
Infrastructure investment has been a big part of its efforts. April 2019 saw the opening of the vast, new $11 billion Istanbul airport: 30 square miles, with two-and-a-half times the capacity of London’s Heathrow Airport, or up to 200 million passengers when it reaches full capacity; it is officially the world’s largest airport. Investment has also been proceeding apace at ports and railroads. Late 2017 saw the completion of the Baku-Tbilisi-Kars railway (BTK), created to be a lynchpin of Turkey’s modernized transportation system and eventually carry some three million passengers and 17 million tons of freight a year.
Unsurprisingly, given the government’s avowed strategy to look East as well as West for FDI, Turkey has committed to being a part of China’s Belt and Road Initiative. It has put forward its own Middle Corridor initiative as part of this project, which would link Turkey via the BTK to Kazakhstan and then China. At the same time, Turkey hopes to deepen trade and investment links with Siemens. Last year, the German company signed a €340 million ($384.9 million) contract to provide 10 high speed trains to Turkish State Railway, amid talk of a much larger, billion-euro project aimed at transforming Turkey’s railway system.
But in the short term, amid continuing tensions with Western countries, it is China that looks set to be playing a defining role in FDI into Turkey. The Beijing-based Asian Infrastructure Investment Bank (AIIB), which celebrated its third birthday this January, counts Turkey among its biggest customers, particularly for transport and energy projects. To date, AIIB has approved some $800 million in financing for two megaprojects: the TSKB Sustainable Energy and Infrastructure On-lending Facility, and the Tuz Golu Gas Storage Expansion project. More projects are in the pipeline.