With its 81 provinces and a population of nearly 80 million inhabitants, Turkey continues its state of emergency imposed under President Tayyip Recep Erdoğan after a planned coup in July, 2016. The attempted overthrow of Mr. Erdogan, by a faction of the Turkish Army, was said to be blamed for the putsch. Though failed, the violence predetermined how Turkey would proceed via Erdogan in the future to prevent further upheavals seen that July. Today, the outcomes of governmental acts have long-term consequences to democratic principles particularly freedom to protest and protect speech, basic tenets of a freely elected and democratic society. Using its emergency powers does question the country’s leadership role in the eastern region of Europe and global image to the outside world. Its stability as a NATO member as well as its prospects joining the EU too comes into question. In addition, extending a state of emergency has a parallel affect regarding foreign investments within an unstable environment, i.e. companies and or countries pulling out from Turkey.
While Erdoğan insists he remains committed to the goal of eventual membership in the EU, he has made clear that he does not intend to let that objective interfere with other priorities, namely, the pursuit of expanded political power at home and what he deems to be Turkey’s national interests abroad. Erdogan feels the state of emergency is needed to deal with ongoing security threats; and, while the President doesn’t seem bothered image wise by a potential extension, this type of instability may negatively impact foreign capital inflows further fracturing new investment opportunities from the outside.
Erdogan’s government re-structure through a referendum back in June, 2017 will change the constitution from a parliamentary style to a presidential form of government consolidating more power to this president in 2018. It abolishes the office of the prime minister while decreasing the powers of Turkey’s parliament. These moves coupled with a more authoritarian disposition from Mr. Erdogan has fractured the nationalistic bloc causing consternation amongst political parties ultimately setting up Meral Aksenar, former interior minister, to challenge the AKP/Erdogan in the 2019 elections(now there’s a chance snap elections will take place this summer). This may have more implications to new investment strategies, and; yes, political instability will continue to develop and unfortunately flourish due to Erdogan’s attempt to reign in critics.
A potential extension of state of emergency for the seventh time erodes government transparency and confidence, and the Turkish government’s rule of law. Since an extension will soon be discussed in Ankara, the question of political stability and policy initiatives promoting economic growth invariably are linked to upticks of foreign investments and portfolios to the nation. While stability versus instability is a main topic of discussion, Turkey’s GDP has grown over 7 per cent in 2017 making the nation an attractive investment center. Not bad for a country with all the volatility described.
Policies Relevant to Investing Strategies and Market Opportunities
Political instability can dampen the attractiveness for direct investment while the need for enhanced security, the issue of domestic uncertainty, and populist spending measures, too, may generate financial market volatility affecting capital inflows. Yet, Turkey, with its strong domestic market and growing economy, remains an attractive point to foreign investors. For instance, over the past year, FDI increased over 50 per cent where both European, Asian and Middle Eastern countries have become key to Turkey’s success as an investment hub.
These successes may be attributed to central government policies. One in particular is The Turkish Commercialization Code(TCC). Enacted in 2012, the code enables foreign investors to decide whether to partner or not to partner with Turkish businesses with respect to new ventures in the country.Also of interest to those companies and countries viewing Turkey as an investment center is the opportunity to obtain Turkish citizenship and its combined benefits, such as the access to all Schengen Zone countries. On that note, Turkey has signed bilateral agreements with other countries for the protection of foreign investments. One in particular is Japan, which in recent years has invested over $200,000,000 in Turkey in the automotive, consumer electronics, energy and food sectors. As an aside, compared with other countries, Japan did not withdraw or disinvest from Turkey after the attempted coup nor did they remove funding regarding risks related to terror, open borders, and Erdogan’s crack down on dissidents. Despite the risks involved, Turkey remains attractive to countries wanting to tap into its market of nearly 80 million people. In addition, along with household spending, the country’s economy has grown giving fodder to Japan’s foresight to remain a player in investing and commercial development, job and wage creation.
Bilateral agreements steady the course in future investment opportunities. Japan is a perfect example to how and why these agreements help sow new commercial relations where both countries benefit from these activities.
Tax incentives to entice new business development, both externally and internally, include generous tax breaks, tax reductions and exemptions from import duties to Turkish businesses. These initiatives, for instance, have helped incentivize domestic defense projects within the country which is trying to increase home-grown defense programs such as building unmanned aerial drones, a defense linchpin that many in the Turkish military and civilian leadership see as essential in fighting asymmetric battles against countries like Syria or Iraq.
Regarding economic relations, Free Trade Agreements (FTAs) mark poignant milestones between Turkey and other nations looking to develop new markets in each other’s countries. For example, both the Erdogan regime and nations like Singapore, Algeria, and Serbia to name a few, have benefited through mutual investments. In Algeria, for instance, both countries signed a number of agreements particularly related to the petrochemical sector. Algeria’s state-owned energy company SONATRACH and Turkey’s Rönesans and Bayegan energy firms agreed on a $1 billion investment. Cooperation on agriculture too was signed between the agriculture ministers of the two countries to continue the notion of bilateral investments.
Economic Conditions
Turkey’s economy will be influenced by consumers being a bit more cautious than the previous several years. Compared to last year, consumer credit slowdowns are expected to determine Turkey’s economic outlook for 2018-2020. 2017 saw debt fueled spending. Ensuing years not so much buying via credit; in addition to a slow down credit wise, account deficits and inflation pose downside risks to growth. Yet, Turkey remains one of the world’s top 20 economies due to steady growth and pragmatic fiscal policies.
Yet a dichotomy exists: political risk and monetary policies have impeded the Turkish economy particularly in reference to high inflation rates which hover close to 10.50 per cent. As of January, 2018, inflation did not come down to single digits and remained at 10.2 percent.
Central governments budget balance last year saw TL 47.4 BN or $13BN+ deficit projection. With respect to GDP growth, it is expected to be .80 percent end of Q2/18. In general GDP growth is projected to trend around 1.00 percent in ensuing years.
While business investments will help the country develop new markets for its people, unemployment is still projected to be between 9.9 percent to 10.2 percent in 2018. Gaining the upper hand to overcome high unemployment will take a continuing recovery and new measures to lower the unemployed and create new jobs. Job growth in the country will be driven by the industrial, services and construction sectors.
The Turkish lira, which has struggled in recent months on political concerns as well as worrying inflation has lost over five percent of its value against the dollar since January. This may portend to what Turkey and Erdogan, specifically, are facing in the future.
