The flow of foreign direct investment (FDI) into Turkey picked up in the second half of 2013, and while the full-year figures were down, it appears external factors, rather than any cooling of the local economy, were the primary cause.
Data from the Central Bank of Turkey (Türkiye Cumhuriyet Merkezi Bankası, TCMB) show FDI inflows fell 5.3% last year, easing back from $10.7bn in 2012 to $10.1bn. The year-end result was short of the $15bn-20bn forecast by Turkey’s International Investors’ Association early last year, as well as the $12.4bn it predicted in a mid-year review. While construction and real estate, sectors that traditionally have seen strong investment, both recorded sharp falls, the energy sector saw strong interest on the back of some large-scale privatisations, generating FDI of $2.5bn, up 24.7% on 2012.
Although the full-year results were down on the performance on 2012, they nonetheless represented a turn-around from the first five months of 2013, when FDI declined more than 35% compared to the prior year. Analysts attributed the fall largely to weak economic performance in the US and Europe, the latter of which accounted for 63% of FDI in 2013 and 74% in 2012.
Could do better, says IMF report card
FDI inflows improved in the second half of the year but Turkey is still underperforming relative to its potential, according to the IMF. In its most recent Article IV consultation staff report, released in December 2013, the international lender said Turkey’s FDI stock stood at slightly more than 20% of GDP, placing it among the lowest of its G20 emerging market peers. The country also scores low in terms of its FDI flows, which were equivalent to 1.6% of GDP in 2012.
“This is disappointing considering the potential offered by the country’s location, as well as its large and growing domestic market and favourable demographics,” the IMF wrote in its report.
The Fund encouraged Turkey to do more to attract FDI and tilt investment inflows towards the tradable sector, though the report concluded by saying, “Authorities are aware of the need for more efforts to improve the business and investment environment, and to boost competitiveness in order to increase Turkey’s share in FDI.”
Government confident on FDI
There have been concerns that the ongoing political tensions, which broke out into protests last June and have simmered ever since, may discourage foreign investors. The TCMB data suggest that the summer disturbances had a minimal impact, but it is too early to tell if there will be any adverse effect as a result of the corruption allegations that emerged in mid-December.
The initial data for 2014 look promising, with FDI reaching $841m in January, compared to $580m a year earlier. However, inflows have historically shown a high degree of monthly variation, suggesting that it could be well into the second half before any reasonable estimate for the whole year can be made.
The government has been at pains to reassure investors that tensions in the political arena and on the streets will not have an adverse effect on the economy. Speaking at a G20 summit in Australia in late February, Ali Babacan, the deputy prime minister, said while some investors may have trouble understanding the political complexities of Turkey, others are continuing to direct funds into long-term projects in the country.
One fact that could slow FDI in 2014 is the scaling back of Turkey’s privatisation programme, with many of the most valuable assets, such as energy generation and distribution networks, already sold off. Potentially this year’s biggest offering will be the operating rights for the state lottery for a 10-year term, though a previous attempt to close an auction fell through after bidders failed to meet the $1.16bn minimum asking price.
With presidential elections set for early August, coming on top of the March 30 municipal polls, it is quite likely that the government’s attention may be drawn away from the privatisation programme, at least until well into the third quarter. This may mean fewer opportunities for investors in the meantime as they wait for the dust to settle from the electoral cycle.