FDI in Turkey Still a Hard Sell


Economic News

22 Jul 2010
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As Turkey pursues a strict regimen of fiscal belt-tightening and structural reforms, Foreign Direct Investment (FDI) languishes in the malaise of existing political and economic uncertainty and bureaucratic strictures. Nevertheless, FDI is crucial if Turkey is to pull itself out of its worst recession since World War II, in which the economy shrunk by almost 10% last year.

Under the current $16bn package backed by the International Monetary Fund (IMF), Turkey must make reforms to its economy, and the country’s most recent letter of intent promises to clear a maze of bureaucratic obstacles to ease foreign investment. Turkey is awaiting a $1.1bn tranche of the agreement, to be released in June. The disbursement will depend on the assessment of a visiting IMF delegation, currently in the country for two weeks of inspections.

Turkey’s efforts to bring inflation under control - the standard by which the country’s reforms are judged - was cut short in February 2001, when Turkey was hit by its worst crisis in over 50 years and the Turkish Lira lost about half of its value. Inflation currently stands at around 53%, with a year-end target of 35%.

The hospitalisation of the country’s Prime Minister Bulent Ecevit on May 17th for a fractured rib and an inflamed vein in his leg raised the spectre of early elections and triggered a 5.4% dive on the Istanbul stock market. Financial markets fear elections would wreck the latest IMF-backed accord as Turkey struggles to pay down its enormous debt load.

To make matters more delicate, the country’s Economy Minister Kemal Dervis, who is widely credited with steering the country toward calmer economic waters, conspicuously broached the issue of early elections.

According to Basak Kizildemir, the regional coordinator of Foreign Economic Relations Board (DEIK), an umbrella organization of Turkish and foreign businesses, Dervis’s remarks are not a threat to stability.

Turkey has a "post-phobia of elections; the business community and the public used to fear elections, but now the variables in the economic system are in place," Kizildemir said.

"Investors are the missing leg in the economy," says Kizildemir. "We encourage capital, but in practice investors don’t come. Malta had more investors last year."

Low investor capital inflow confounds supporters of European Union candidate Turkey’s economic recovery.

According to Johannes Linn, a regional vice president with the World Bank, Turkey lags behind many other smaller countries with less liberal economies.

Despite making strides in structural reform and investment promotion, Turkey has not done enough to promote FDI, Linn said at a conference on improving Turkey’s investment climate earlier this year.

"Turkey’s size, location and dynamic population should make it an ideal destination for foreign investment. However, foreign investment has been very low by international and even regional standards," Linn said.

In the 1990s, FDI inflow to Turkey was a meagre 0.5% of Gross Domestic Product, compared to 4% in Hungary and 2% in Poland.

Despite disappointing foreign investment figures, there are new deals in the pipe.

Cadbury Schweppes plc announced on February 21st that it had agreed to acquire a 51% stake in Kent, Turkey’s biggest sweets manufacturer, and a majority equity interest in its distribution arm Birlik. According to the deal, the British confectionery and soft drinks maker agreed to buy Kent from the Tahincioglu family for £67m ($95.84m) in cash and assumed debt.

Kent has a 66% share in the packaged sugar confectionery market. Turkey’s total confectionery market is valued at £634m ($900m). Kent exports to 66 countries across the Middle East, the Balkans, Russia and Central Asia.

"Partnership with Kent provides a strong platform in a key emerging market with direct links to adjacent regions where we successfully operate such as Africa, the Middle East and Russia," John Sunderland, CEO of Cadbury Schweppes, said of the deal.

Yakup Tahincioglu, chairman of the Kent Board, said that his company was attracted to Cadbury Schweppes’ management expertise and access to foreign markets.

"Cadbury Schweppes’ strong management, brand expertise and global route to market gave us the confidence to take this major step," Tahincioglu said.

Subject to regulatory approval, the transaction is expected to close the second quarter of 2002.

Meanwhile, in Turkey’s beleaguered banking sector, a deal between Turkey’s Alternatifbank and France’s Credit Agricole Indosuez could be completed by the end of the summer, said Tuncay Ozilhan, CEO of Anadolu Group, which owns Alternatifbank.

Speaking recently on CNBC-e, Ozilhan said he was confident an agreement could be reached by August. He said that Credit Agricole would acquire a 51% share in Alternatifbank, with the Turkish bank keeping a hand in management.

In a long-awaited deal, Turkey's Koc Holding and Italy's Unicredito Italiano SPA have signed a deal forming an equal partnership in Turkey. The deal, Turkey's first in the financial sector since the crisis hit, is subject to government approval in Turkey and Italy. The new company, which will be under the control of Koc Financial Services Group, will have operating assets of $330m.

The car manufacturing industry, dominated by joint ventures, has seen Turkish companies selling their stakes to their foreign partners, which are better placed to ride out lulls in the economy.

Anadolu Group said in April that it had sold its stake to partner Honda for $37m. That deal comes after Sabanci Holding sold its 25% stake in a venture with Toyota for $49.2m in October of last year.

Central to Turkey’s deal with the IMF is the sale of the national fixed-line telecommunications company. The initial scheme, restricting the role of prospective foreign investors in the management of Turk Telekom, attracted little investor interest.

Transportation Minister Oktay Vurul said Thursday after meeting the visiting IMF delegation that details of Turk Telekom’s privatisation would be completed by June.

The government has launched efforts to change laws blocking the sale of the state concern, Vural said, adding that he expected the draft law to be debated in Parliament in October.

Meanwhile, a draft law designed to trim the bureaucracy and regulations that foreign investors must contend with has been sent to the cabinet for approval. The bill would end the requirement that money brought into the country for the purpose of investment be approved. Additionally, according to the drafting committee, foreigners would be given international standards of rights.

Once the bill is approved it will be sent to Parliament for debate and eventual voting. Turkey has promised the IMF, which is demanding the changes, that the bill will reach Parliament in May.

A second bill would streamline the process for foreign investors forming companies in Turkey, which currently entails 19 stages of approval. The proposed bill would pave the way for the formation of a "one-stop-shop" and approval of applications on the day they are submitted.

For these steps to lure FDI, however, behaviours need to change, observers have said.

The IMF has said Turkey must do more to root out corruption, which many observers consider endemic in the Turkish business climate.

"Investors need transparency, an environment that ensures fairness and a stable macro environment," said Dervis in a recent interview with the International Herald Tribune.

Turkey is betting on a windfall down the road, says Kizildemir.

"The results will be seen over the years. But next year won’t be a bed of roses."

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