Political turmoil is roiling markets abroad and at home, yet observers say fundamentals should leave the country well-placed to draw FDI when sunshine returns.

Author: Justin Keay

The months since July’s attempted coup have been unnerving for Turkish citizens and investors alike. The government’s decision to extend the state of emergency indefinitely and arrest tens of thousands—including leaders of the main Kurdish political party, the HDP, and senior journalists at respected newspaper Cumhuriyet—has earned it rebukes from both Washington and Brussels. Meanwhile, war in neighboring Syria and domestic bombings continue unabated, impacting heavily on tourism, where arrivals and earnings are down by as much as 50% compared with 2015, itself not a great year.

The investor response, as the lira hit new lows against foreign currencies and corporate nonperforming loans rose, has been understandably negative. Capital inflows, upon which Turkey depends to finance its current-account deficit, are falling, fueled by fears that the momentum for reform has been lost as the government continues its purge of institutions across the land.

“After the ratings agency downgrades, investors have been reducing their exposure...and that was before Ankara decided to prolong the state of emergency,” says Roxana Hulea, emerging markets strategist at Societe Generale. “The lack of pragmatism from president Erdoğan has compounded the sense of instability and reduced the impetus of investors to look to Turkey for bargains.”

Meanwhile, the latest figures for foreign direct investment (FDI) suggest net inflows this year will be around $6 billion (compared with last year’s $11.9 billion). That’s less than 1% of Turkey’s $720 billion economy, and well below what an economy at its level of development should be attracting.


Health In The Banking Sector

However, Turkey’s banks remain healthy: Combined net profits rose 56%, to $9.4 billion, in the first nine months of 2016. The banks have been buoyed by the Central Bank’s decision to ease reserve requirements, which has cushioned liquidity, while interest rate margins have remained resilient. The generally solid state of the banking industry—despite a slight rise in nonperforming loans and concerns about the domestic deposit growth rate—encouraged foreigners to buy $10.2 billion net of Turkish financial assets in the year-to-date, according to Hüseyin Özkaya, CEO of Odeabank, a subsidiary of Lebanon’s Bank Audi, which in August completed a $350 million capital increase, supported by the European Bank for Reconstruction and Development and International Finance Corp, part of the World Bank.

“This capital increase has provided us with additional financial flexibility to expand financing in the real estate sector, fund large-scale infrastructure projects and increase access to finance for SMEs, one of our target customer groups,” says Özkaya.

And the government has taken steps that it hopes will shore up confidence in both the short and long term, and thus improve the FDI outlook. These include a budget for 2017 with fiscal policy aimed at boosting growth, and delineating a number of areas for specially targeted investment. Some 10 billion lira (US$3 billion) is to be spent in Turkey’s poorest 23 eastern-southeastern provinces, with another $7 billion for transportation and $4.4 billion for education and agriculture.

Ankara is also pressing ahead with plans to turn Istanbul into a global financial center and launch a new sovereign wealth fund to help stabilize markets and finance infrastructure projects. It is also instituting a new, transparent, project-based incentive system, similar to those put in place by Japan after World War Two and South Korea in the 1980s, to encourage investment into a range of sectors, including petrochemicals, metallurgy, defense, energy, health and IT. These steps probably won’t be enough to significantly encourage more FDI while the current negative domestic outlook continues, but they at least demonstrate awareness of the need to shore up investor confidence.  And the government will have been reassured by the public statements made by long-term investors here—including GE, Ford, Citi and Intel—about their commitment to Turkey following the July coup attempt.

Observers agree the long-term FDI outlook is good. 

“Once geopolitical tension in our region eases in upcoming years, we believe that Turkey will once again be an attractive country for FDI thanks to its long-term strong fundamentals and potential,” says Özkaya.

William Jackson, Turkey analyst at Capital Economics, a London-based consultancy, agrees, pointing to the well-educated population and strong entrepreneurial culture. “Turkey will be in a good position,” he argues, “if the government can just get the basics right.”


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