Turkey | Business As Usual Despite Turmoil

Turkey’s geographic and economic position in the middle—between East and West, developing and developed—has made it a hub for multinationals.

On October 30, Turkey’s president, Recep Tayyip Erdoan, Georgia’s prime minister, Giorgi Kvirikashvili, and Azerbaijan’s president, Ilham Aliyev, inaugurated a new 513-mile train line connecting their three countries. The line will connect Kars, Tbilisi and Baku and has a freight capacity of 6.5 million tons a year (rising to 17 million by 2034).


It will not only boost mutual trade, it will also halve the time it takes for goods to travel to and from China to about 12–15 days—supporting Ankara’s strategy of looking east for more business. Kazakh prime minister Bakhytzhan Sagintayev and Uzbek prime minister Abdulla Aripov were also on hand at this breakthrough moment for the region.

“This is the missing link between European and Asian transport corridors,” Turkey’s transport minister, Ahmet Arslan declared at the opening ceremony.

Three days later, deputy prime minister Mehmet imek announced he would co-chair an economic summit in Brussels on December 7–8 with his EU counterparts. He said relations with the 28-member group were recovering after recent strains.

“The summit is going to send a very strong message that Turkey remains anchored to Europe,” said imek. “We continue to believe that upgrading the customs union between Turkey and the EU is mutually beneficial, and we hope that we’ll be back on track with issues such as the customs union.”

This is the contemporary Turkey paradox: that business goes on as usual despite historic turmoil. On one hand, headlines about the war in neighboring Syria; worsening tensions with the Kurds and between the government and its opponents; and recent high-profile diplomatic spats with the EU, Germany and the US—all taking place as Erdoan works to reshape the political system—suggest that Turkey is in the midst of unprecedented, challenging times. On the other hand, away from the headlines, Turkey is getting on with mundane matters like boosting trade and investment with both eastern and western partners.

paul gamble
Gamble, Fitch: Rising incomes and employment and the fact Turkey is well integrated into global supply chains support the investment environment.

The fact Turkey has continued to grow much faster than expected—thanks in part to continued government stimulus—has further reinforced its investment appeal. In November, the EBRD upgraded its forecast for 2017 growth to 5.1% (slowing to 3.5% in 2018); while in October, the IMF substantially revised its initial forecast of 2.5% to 5.1%, saying Turkey had shown faster growth than other parts of Europe.

Observers opine that much of what Erdoan and other senior figures of his Justice and Development Party (AKP for the Adalet ve Kalknma Partisi) say—particularly in the fractious times that have dominated since last year’s failed coup attempt and the closely fought referendum over shifting Turkey from a parliamentary toward a presidential system—should be taken with a pinch of salt.

“There is a large element of saber rattling and playing to the [domestic] crowd, but things always stop short of the tipping point,” says Roger Kelly, the EBRD’s lead economist in Istanbul.

Erdoan and his allies are under no illusion how important the EU, as Turkey’s biggest trade and investment partner by far, is to their “Vision 2023” strategy, whereby Turkey becomes a global top-10 economy, with a GDP of $2 trillion and per capita income of $25,000.

Key to this is Turkey retaining its appeal to multinational companies who provide a crucial part of FDI, currently standing at around $186 billion, with $6.5 billion added in the first half of 2017. FDI is seen as key to helping Turkey finance its large current account deficit. Despite all the political noise, there has been no sign of investors heading to the exits.

“Rising incomes and employment and the fact Turkey is well integrated into global supply chains  support the investment environment,” says Paul Gamble, head of emerging Europe sovereign ratings at Fitch Ratings, “particularly for multinationals already active there.”

The list of large multinationals in Turkey is long and diverse, many boosting their presence with new projects aimed at both the domestic market and neighboring ones, with Turkey’s key geographic location and rapidly improving transport links part of its attraction. Some multinationals are focusing attention on Turkey’s increasingly wealthy, nearly 81-million-strong population; others are focusing more on investments that are clearly aligned to the country’s long-term economic priorities.

In the first category, P&G, PepsiCo, Coca-Cola, Unilever and Vaillant have all been active, launching new greenfield investment projects aimed at increasing capacity and/or new product lines.

charles robertson
Robertson, Renaissance Capital: The next wave of European investment expansion will lap the shores of Turkey and the Southern Mediterranean.

However, most activity has been in the second category. Over the past few months, Siemens won a $1 billion wind-power contract to construct a 1,000 MW power plant and wind turbines in a consortium project that will boost wind-energy production by 17% by end 2019—part of Ankara’s plan to boost energy diversification and reduce dependence on imports. Known worldwide for its electronics, Bosch, a major producer of white goods in Turkey and a key provider of equipment in projects such as Istanbul’s Eurasia tunnel, announced in July it was investing a further $184 million in Turkey and now employs over 17,000 workers here. With the revival of tourism a national priority, Marriott International, which already has 26 hotels in Turkey, announced in October that it will open 11 more over the next three years (doubtless encouraged by figures showing tourism recovering strongly: Earnings in the third quarter were up almost 38% on 2016, reaching $11.8 billion).

The most significant investments continue to be in the auto industry, with Turkey keen to consolidate its position in the global auto production chain.

Auto companies with a substantial presence in Turkey include Renault, Toyota and Ford Otosan; and with key markets recovering from the recent downturn, production has never been higher. The Automotive Industry Association says volume is up 18% in the year to September, to 1.2 million vehicles, while exports rose 24% to over 984,000 units.

“We can confidently talk about [Turkey’s] continuing appeal [to] traditional multinationals, mainly from Europe and the US, which have an increasing number of lines of operation in Turkey,” says Arda Ermut, president of the Investment Support and Promotion Agency of Turkey (ISPAT).

Ermut says investments have also been rising from such countries as Qatar and Azerbaijan, whose national oil company, Socar, owns some 51% of Turkey’s leading petrochemical company, Petkim. Socar is the majority shareholder in the Trans-Anatolian Natural Gas Pipeline now under construction, which will link Turkey to Azerbaijan via Georgia in much the same way as the recently opened railway line.

However, Ermut insists the priority will remain multinational investment, with the government keen to attract it to less developed areas like the southeast. By the end of 2016, this region had attracted some 2,500 new projects, or 17% of the total, and is now the subject of a new development plan.

“Incentive schemes have been designed [to] make these regions more attractive. … As investment projects increase, we expect an acceleration in growth and development in this region,” he says.

The EBRD has been supporting multinational investment, particularly where there are “additionalities” that have a positive impact on the broader economic environment. In April, it provided Ford Otosan with a €150 million ($164 million) loan to boost the production of commercial vans and help in the training of young people and women, with higher employment of both a long-term objective for the government and the EBRD. The bank’s cooperation with Ford Otosan, which is co-owned by Ford and Koç Holding, goes back to 2010, reflecting the group’s key position within Turkey’s economy.

With such large, established investments, observers say Turkey is well placed to consolidate its appeal to multinationals—particularly among companies already here.

kelly roger
Kelly, EBRD: There is a large element of saber rattling and playing to the [domestic] crowd, but things always stop short of the tipping point.

“Turkey has built up a good name for itself over the past 10–15 years with a well-educated and well-priced workforce,” says Kelly. “[It] has become a big producer for the wider region and for Europe itself.”

This appeal has become stronger as wages and currencies rise in such countries as Romania and Bulgaria—and Poland, Hungary, Slovakia and the Czech Republic.

“In this context, Turkey has become more attractive for multinational companies, relative to its neighbors,” Kelly says.

Charles Robertson, global strategist at Renaissance Capital, says high employment levels across Central and Eastern Europe are pushing wages up and forcing multinationals to look at Turkey and elsewhere.

“We think the next wave of [European] investment expansion will lap the shores of Turkey and the Southern Mediterranean.

 Governments should prepare for this by prioritizing political stability and pro-FDI reforms,” Robertson says.

In the longer term, as well as ensuring that it maintains an attractive business environment, Turkey will need to move up the value chain or risk losing investment to such countries as Egypt, which is again attracting multinationals’ interest.

Bahadir Kaleaasi, CEO of TÜSIAD, Turkey’s leading business group, says the government can help by focusing on “higher-quality growth” and easing factors that might depress investment.

“Turkey isn’t rich in such things as natural resources; but its strengths are that it is the Eurasian Gateway to the EU, a member of the Customs Union with more than 50% of the EU’s regulations already operating, high levels of productivity and excellent product quality,” says Kaleaasi.

He admits, however, that domestic and international tensions have shaken things up over the past two years. “We need to normalize the domestic security position and bring the state of emergency to an end,” Kaleaasi says. “The current dilemma—whether to prioritize security or freedoms—should be settled in favor of the latter.” He suggests that Ankara should also reaffirm its application to join the EU. “Multinational investors to date have been smart, rational and forward-looking,” he adds. “We need [policies] to make sure they continue acting this way.”