Viewed from afar, Turkey is an obvious target for long-term foreign investment. The country has a large, young population, increasing purchasing power, a well trained work force, and low penetration rates for many consumer and industrial products. On top of this, it has a customs union with the EU and is well located to serve the Middle East as well as Europe.
Yet the actual amount of net foreign direct investment (FDI) does not reflect these oft-repeated attractions. In 2008, for example, net FDI in Turkey was $17.2bn. By 2012 that amount had dropped to $8.4bn. To the end of August 2013, the number was ever lower, at $5.7bn against $6.9bn in the same period the previous year.
The government’s ambitious targets for FDI received a blow in August when Taqa, the Abu Dhabi National Energy Company, withdrew from a planned $12bn investment to develop Turkey’s abundant lignite reserves.
Neither party gave a clear reason for the withdrawal. The Gulf press, however, blames the abrupt withdrawal on deteriorating political relations with the UAE following Turkey’s continued strong support for the Muslim Brotherhood after it was overthrown in Egypt last summer.
Turkish officials had high hopes that this project would help reduce the annual imported energy bill of about $55bn. Two planned nuclear power plants – one Japanese and one Russian – should help cut that cost, but it could be 2023 before the first is operating.
In addition to the decline in FDI, Turkey has had difficulty attracting high-value-added technology investment. The World Economic Forum’s Global Competitiveness Report gives a hint as to why high-tech companies may prefer Asia to Turkey.
In the higher education and training category, for example, South Korea ranks 22nd, while Turkey languishes in 65th place. In the innovation and sophistication category South Korea is 20th and Turkey 47th.
A western banker who had just left a meeting with large European companies said their big issue with Turkey was: “Lack of respect for the rule of law. The legal playing field is not perceived as level and there are too many arbitrary decisions. The slowdown in FDI for Turkey is not just an emerging market phenomenon caused by [US Federal Reserve] tapering. The year was already slow, long before the concerns about the Fed’s actions.”
One Istanbul energy expert cites the problems of inefficient bureaucracy common in emerging markets. “Even as a Turk, I don’t see any consistency, predictability from the state. Badly drafted laws and opaque regulations leave the door open to negative judicial decisions. Constantly changing regulations cost time and money,” he says.
Western bankers say the changed global financial landscape has made financing many projects problematic. “Basel III has forced many banks to pay much closer attention to their capital, and they are not so interested in financing mega-infrastructure projects such as Istanbul’s third airport,” says one.
A consultant recently returned from Europe and the US adds that the changed political perception of Turkey has made some potential investors cautious.
“After the Gezi protests and the strong government reaction against anyone associated with the protests, there is some renewed concern about stability in Turkey. Many companies wonder which way Turkey is going and have decided to delay a final investment decision,” he says.
Ata Koseoglu, president of strategy and business development at Sabanci, a leading Turkish conglomerate, concedes the slowdown in FDI, but notes that, in addition to the continued strong pace of domestic M&A, there have been a number of large deals with foreign partners.
He mentions in particular the $3bn sale of two electricity distribution companies to Enerjisa (Sabanci’s joint venture with the German energy company Eon) and the $1bn sale of Yapi Kredi Sigorta to Allianz. FDI will also be strengthened by the planned $5.3bn Star Refinery on the Aegean coast, a joint venture involving Socar, Azerbaijan’s state oil company.
These projects indicate Turkey can still attract significant foreign investment in the long term.
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