Date: Mon, December 9 2019
Author: Justin Keay
Turkey continues to attract foreign direct investment. Economic matters are looking brighter despite the political unrest and criticism from trading partners. Performance of second-quarter came in better than expected, prompting two leading forecasters to increase their growth forecast for the year. Fitch now predicts the economy will contract just 0.3% in 2019, versus the 1.1% contraction prediction before, while The European Bank for Reconstruction and Development (EBRD) predicts a decline of just 0.2%. Both parties are positive about Turkey’s growth outlook for the next two years.
EBRD reported in the latest annual forecast, “Credit growth, fiscal stimulus and rising consumer confidence”, implying GDP will rise 3.1% in 2020 and 3.6% the following year causing a positive hype in the economy for the following year.
Meanwhile, increasing authoritarianism is undermining democratic institutions; and the army’s incursion into northern Syria to push back Kurdish fighters weakened the balance of power in Turkey’s war-torn neighbour.
However, the threat of new US sanctions lifted and a wider danger to Turkey’s economy appears to have eased. Adding on, an undeniable positive aspect for Turkey has been foreign direct investment (FDI). The latest Global Investment Report by Unctad, released last summer, discovered that FDI into Turkey last year rose by 13% at a time when global FDI, battered by geopolitical fears, fell by same figures.
In 2018, Turkey signed approximately 40 international investment agreements, more than other countries and became the largest recipient of FDI in West Asia. This year, FDI had increased 6.3% to $12.4 billion as of late October, led by companies from Azerbaijan, Qatar and the UK.
These reports imply that many investors are discounting present realities and instead taking the long view based on Turkey’s strategic location, its young and generally well-educated workforce and its considerable potential as it elevates toward a high value-added economy from is middle-income trap.
Much of Turkish FDI comprises of joint ventures with large Turkish conglomerates such as Sabanci and prioritizes in revolutionizing the economy towards increased knowledge-based and value-added investments, says Arvid Tuerkner, managing director for Turkey at the EBRD. Although unclear at present, the longer-term prospects are positive, he says. “I’m sure Turkish FDI will overcome this current difficult phase,” he predicts. “We are seeing strong companies in Turkey who are investing, not just our clients but elsewhere.”
One such project is Volkswagen’s planned $1.4 billion investment in a new car plant in the western city of Manisa, expected to turn out 300,000 cars annually and create 5,000 jobs. Although a final decision about building the plant is still pending, a few key investments this year includes Azerbaijani energy company Socar’s planned $600 million injection into the $6.3 billion Star oil refinery, which has the capacity to process 10 million tons of crude oil a year, boosting Turkey’s long-term energy security.
Turkey has also been working on creating a conducive environment for foreign FDI. It has consistently improved its position in the annual World Bank Doing Business survey, progressing from 60th place out of 190 countries in 2017 to 43rd in 2018 and 33rd this year. It has some 100 special economic zones, mostly outside East Asia, and the Development and Investment Bank of Turkey (TKYB) has announced plans to establish sub funds supporting development in key areas of the economy, including technology, venture capital, machinery and agribusiness. With assets of more than $3 billion, TKYB has moved its headquarters from Ankara to Istanbul and says it will play an active role in aiding the government’s objectives for Vision 2023.
However, close observers say that for Turkey to maintain its appeal, it needs to continue to improve the business environment. Agonizing deficiencies range from the general in terms of improving transparency and speeding up the judiciary process for resolving commercial disputes to the very specific. Ermut noted that other key FDI sectors are, information technology equipment, communications equipment and software (ICT) and insurance.
The government has prioritized ICT as key to avoiding the middle-income trap, and it has attracted approximately $16 billion in FDI to Turkey. Finance and insurance have attracted around $52 billion in investment since 2005, much of it lured by the reforms popularized in the early years of the century.
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