Bad governance, xenophobia dim Turkey FDI outlook

Foreign direct investment (FDI) inflows into Turkey totalled $7.7 billion (6.3 billion euro) last year, the country’s investment office said.  Turkey draws the least FDI/GDP for a country of her size, thanks to the ceaseless xenophobic rantings of the Erdogan government, endless conflict with EU and USA, now with Arab countries; and of course almost complete abolishment of rule of law in favor of Mr. Erdogan’s temper. The diminishing flows of FDI have massively negative consequences for the future of the Turkish economy.

 

In the fourth quarter of 2020, FDI inflows reached $3 billion, representing a share of 40% of the FDI amount for the entire year, the investment office said in a statement last week.

 

The institution provided no comparative figures but according to data from the United Nations Conference on Trade and Development (UNCTAD), FDI flows to Turkey declined by 35% to some $8.4 billion in 2019.

 

In December alone, FDI inflows increased by an annual 31% to $1.3 billion.

 

The investment office noted that while the traditional FDI inflows continue to originate from Europe, which has a 53.8% share in total, Turkey is now seeing higher FDI inflows from USA, the Middle East and Asian countries having respective shares of 14.1%, 7.1%, and 6.5% in total FDI in 2020.

 

Italy, USA, the Netherlands, the UK and Luxembourg were the top five countries of origin of FDI inflow into Turkey.

 

Turkey’s share in global FDI inflows, which amounted to $859 billion last year, grew to 0.9% from 0.6% in 2019, according to the latest data published by UNCTAD.

 

At the beginning of last year, before the outbreak of the coronavirus, Turkey’s then finance minister Berat Albayrak said that the country aims to attract some $15 billion in FDI in 2020.

 

 

The sum mentioned above in gross, that is outbound investment by residents and corporates is not counted.  Turkey’s premier commercial lender İs Bank’s research department complete the picture.

 

“In December, 836 million USD net capital inflow was recorded in foreign direct investments item. In this period, direct investments made by non-residents in Turkey became 1.3 billion USD and reached the highest level since November 2018.. 38.4% of that amount stemmed from net real estate investments. In 2020, net direct investments decreased by 26.8% compared to the previous year and became 4.6 billion USD. When looking at the distribution of nonresidents’ direct investments by sector in Turkey, in 2020 insurance and financial activities as well as information and communication sectors stood out”.

 

To make matters worse, most of these inflows are actually real estate purchases by non-residents, which are good from the perspective of balancing the Balance of Payments, but do little to add to output or employment.

 

Turkey is a low-savings country, which results in any fixed investment boom triggering a sudden and sizeable widening of the current account deficit.  These deficits are almost entirely covered by bank loans or bond issues by the private sector, and hot money flows.

 

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Needless to say, these inflows are extremely time- and country-risk variable, not sufficient to sustain a prolonged capex boom, which is what made China, South Korea and Taiwan the powerhouse that they are today.

 

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Given low cash generation capacity of Turkish corporates, attracting FDI is the only feasible means of accelerating Turkey’s potential output growth, which is currently measured as 3.5% by IMF.

 

However, unlike financial flows, FDI is  very long-term and irreversible commitment to a country. Multinationals need a safe, even and transparent business environment to bring in capital and technology. This is not the case and shall not become the case as long as the Erdogan regime is in power. Essentially, Turkey doesn’t have a court system to adjuvate complicated intellectual property theft lawsuits, or foreseeable tax and regulation regimes. While foreign investors are treated kindlier than domestics, arbitrary liens on corporate assets, backward-looking tax investigations and of course confiscations scare the Western multi-national that perceives impenetrable risk when present in Turkey.

 

Ankara’s endless tussles with US and EU is also scaring away FDI, because Developing Nations taking revenge at FDI coming from a rival country is a very common story.

 

Erdogan had   promised a Reform Package, which along with human rights would also enhance transparency and provide for an even playing field for international investors. It appears to have been delayed.  No one knows why.

 

Without FDI, and large Turkish corporations reluctant to sink more money into their own countries, in case they, too, are targeted by capricious President Erdogan, Turkey is doomed to low growth.

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.