Turkey Foreign investment has been going down and the lira has already fallen to record low.
Turkey’s appeal as a destination for foreign direct investment has been put to the test in recent months by a host of geopolitical challenges, security threats and internal tensions.
This summer’s failed coup attempt and subsequent crackdown against the perceived enemies of President Recep Tayyip Erdogan has only added to a mounting sense of instability.
THE COUNTRY’S TEMPTININGLY LARGE DOMECTIC
The country’s temptingly large domestic market, low costs and convenient location straddling Europe and Asia, have made it historically attractive to foreign investors. It has won more than $232bn in total FDI since 2003, compared with $68bn for the whole of neighbouring south-east Europe, according to data from Unctad, the UN’s trade and development arm.
But headline inflows to Turkey have ebbed in the first nine months of 2016, according to Turkey’s central bank, which reported $7.1bn between January and September this year, compared with $13.3bn over the same period in 2015.
THIS DECLINE, THOUGH STEEP IS NOT UNIQUE TO TURKEY
This decline, though steep, is not unique to Turkey. Unctad expects a 15 to 20 per cent global decline in FDI in 2016. “We do not expect any repercussions in Turkey’s FDI flow [as a result of the coup],” says Ismail Ersahin, deputy executive director of the Istanbul-based World Association of Investment Promotion Agencies (WAIPA). “Quite the opposite. We expect FDI figures to gain momentum in the last quarter of 2016.”
Deputy Prime Minister Mehmet Simsek expressed a sanguine view at a WAIPA event in Istanbul in October: “Headline-wise, clearly the news story remains a mixed picture to negative,” he said. “Of course there will be economic fallout, and that is already reflected in our medium-term economic forecasts. [But the fallout] is likely to be limited and shortlived.”
Multinational companies making greenfield investments — classified as on-the-ground investments involving the creation of a physical facility with new local headcount in a foreign country, or the significant expansion of existing facilities — have shown some patience with Turkey’s troubles.
MULTINATIONAL COMPANIES MAKING GREENFIELD INVESTMENTS
After a dip in 2014, the number of greenfield projects announced or launched in Turkey and the total estimated capital investment in those projects rebounded in 2015, according to fDi Markets, an FT data service. There were 157 greenfield projects in 2015 totalling $6.1bn, compared with 108 worth $5.6bn in 2014.
As of the end of October, fDi Markets has tracked 89 projects worth $3.6bn that have been announced or launched this year. Seventeen of those announcements came after July’s coup attempt and among them was the US-based food and beverage giant PepsiCo, which last month announced plans to open a new $120m food production facility in the eastern city of Manisa, employing 350 people initially and more than 500 by 2022.
Henry Loewendahl, the Turkey-based chief executive of FDI consultancy Wavteq, expects that foreign investment related to the tourism and real estate sectors in Turkey will continue to fall until long-term security has been restored.
The continuation of Turkey’s EU integration process is another important precondition. Many companies use Turkey as an export platform for the EU, taking advantage of its customs union with the bloc.
The non-binding vote by the European Parliament last week, calling for the freeze of accession talks, has put that process under threat.
“The vote will increase the political risk premium of investing,” Mr Loewendahl says. “Given Turkey is such an important market for EU business, we don’t see significant risks to the customs union, but if accession negotiations are formally frozen, export-oriented FDI may shift to central and eastern Europe and other countries like Morocco.”