Turkey Still Lures Foreign Investment Despite Emerging Markets Woes

Short-term risks have not dimmed the country’s economic prospects. That may explain why FDI from Asia and Gulf nations is surging.

Turkey is having a tough time on the foreign direct investment (FDI) front, a difficulty it shares with other emerging markets right now.

In the first half of 2015, inflows were some $6.3 billion, down almost 10% year-on-year. And 2014 was hardly a stellar year compared with the pre-crisis era when Turkey was the flavor of the month for international investors. Many Western companies seem to be stepping back: In early September, French energy group Total announced plans to sell its service station network to Turkish conglomerate Demirören for €325 million ($364 million). And reports continue to circulate that HSBC is keen to sell its Turkish banking operations, with Dutch rival ING and Qatar National Bank both cited as potential buyers.

And yet, despite these signs, the overall picture is still encouraging, says Arda Ermut, the new head of Ispat, the Investment Support and Investment Agency of Turkey.

“Turkey has been receiving a considerable amount of FDI in manufacturing sectors that have the potential to limit [its] current-account deficit and increase value-added production. And Turkey has managed to diversify its FDI sources by expanding its source base with Asian and Gulf countries,” he says.

Indeed, a glance at the statistics show that although 40% of FDI is from EU countries, inflows from Asia and the Gulf are rising fast, reaching 38% of the total in the first half of 2015, with the $1.7 billion invested almost three times the $631 billion invested in the same period in 2014.

Ermut attributes this to improvements in the investment environment that have taken place over the past few years. Setting up a business in Turkey before 2003 took about 38 days; now it takes just six. The OECD’s FDI Regulatory Restrictiveness Index has identified Turkey as one of the biggest reformers in liberalizing and opening up investment to international companies; a recent survey by consultants A.T. Kearney suggests Turkey is among the world’s top 22 most attractive investment destinations.

International financial institutions continue to put money into the country. With sanctions against Russia continuing, Turkey is now the EBRD’s largest country of operation, with a total loan portfolio worth over €5 billion. Investment in small and medium-size enterprises, infrastructure and energy remain key priorities, as do projects that boost innovation and corporate governance. The bank recently opened an office in Gaziantep, in southeast Turkey, as part of an ongoing strategy aimed at diversifying investment into the regions; it is also focusing on projects that boost female and youth employment.

“Despite short-term risks, the long-term potential of Turkey remains considerable,” says Bojan Markovic, lead regional economist in Istanbul for the EBRD.

Ispat’s Arda Ermut says reforms aimed at improving the investment environment and thereby boosting overall FDI will continue.

“The Priority Transformation Programs cover reforms in 25 priority areas, including more than a thousand actions at the macro and micro level. The process has just started and will continue. Turkey is constantly following developments and adjusting and reforming its business environment,” he says.