Turkey is hoping that 2024 will see an increase in foreign direct investment (FDI) inflows after years of political and economic challenges, which dimmed the nation’s attractiveness to international investors and companies. 

During Recep Tayyip Erdoğan’s first 15 years at the helm of the country (first as prime minister from 2003 to 2014 and then as president from 2014), Turkey recorded impressive economic growth and FDI. However, since a failed coup in 2016, a major constitutional change in 2017 and the beginning of unconventional economics starting in 2018, the country’s fortunes began to change. Turkey’s economy began to suffer. Many analysts blamed Mr Erdoğan’s unconventional economic and monetary policies for these stumbles.

This affected FDI inflows. Turkey’s FDI levels peaked in 2007 at $22bn and again in 2015 with $19.3bn, according to Yased, an independent business association representing international investors in Turkey. However, since 2016, FDI into the country has been on a downward trajectory. In 2023, it attracted $10.6bn in FDI inflows, compared with $13.7bn in 2022, according to Yased.

Return to orthodoxy

Since the presidential elections of May 2023, Turkey has engaged in notable foreign policy shifts and reverted to orthodox economic policies.

President Erdoğan appointed Mehmet Şimşek, a well-respected figure, as finance minister. He also named Hafize Gaye Erkan, a former Wall Street banker, as central bank governor (until her abrupt resignation in February 2024). These appointments were important indicators to illustrate Ankara’s commitment to orthodox economic policies.

In a bid to tame inflation, the central bank hiked interest rates from 8.5% to 15% in June 2023. This marked the first interest rate increase since March 2021. It has since continued aggressive monetary tightening by raising interest rates to 50% in March 2024. 

To boost structural reforms, the Coordination Council for the Improvement of the Investment Environment (YOİKK) published its Action Plan in March 2024. The plan includes the establishment of a National Emission Trading System and enhancing infrastructure for 5G and digital transformation.

It also features amendments to the Turkish Data Protection Law, which are a key limit test for foreign companies. The changes, which will be effective from June 1, make it easier for international firms (such as telecom and technology companies) to transfer specific types of personal data abroad, thereby reducing costs. The amendments seek to harmonise with certain aspects of the EU’s General Data Protection Regulation and could make Turkey a more attractive tech destination.

“This amendment holds paramount importance for international investors in Turkey,” says Engin Aksoy, chairperson of Yased. “Moreover, the amendment will contribute to the digital transformation of the economy. Notably, this amendment was the inaugural action outlined in the YOİKK 2024 Action Plan, an emblematic commitment of the government to fostering an investment-friendly environment conducive to innovation and progress.” 

In debt we trust

On March 8, Fitch upgraded Turkey’s credit rating to B+ from B. Fitch cited overall macroeconomic policy as well as indicators such as a significant decline in inflation, lower current account deficits and stronger liquidity buffers.

International fixed-income investors are encouraged by Turkey’s improving credit story. The government has managed successful bond issuances, which were well subscribed. Furthermore, the country’s sovereign wealth fund successfully sold its maiden bond in February 2024.

Similarly, local and global equity investors have poured money into Turkish stocks since 2023’s presidential elections. In February 2024, the Financial Times reported that the Borsa Istanbul all-share index was up 24% in US dollar terms since the start of 2024, thanks in large part to a tech rally. This made Turkish stocks among the best performing in the world.

However, while financial flows are slowly returning, analysts say greenfield FDI investments need a longer period of stable macroeconomic policies.

Charlie Robertson, head of macro strategy at FIM Partners, an emerging and frontier markets-focused asset manager, says that FDI into manufacturing plants has a 10- to 15-year horizon, and only happens after three years of macro stability.

“[So] after the mess Erdoğan caused over 2021-23 in particular, it is likely to be 2026 at the earliest that Turkey attracts significant FDI,” he says. “Portfolio investors can come and go within a week so many have already come back to Turkey thanks to Şimşek and his team.”

One UAE-based fixed-income portfolio manager, who requested anonymity, explains that the sole ingredient for successful, long-term FDI inflows is a well-functioning economic and political regime that does not erode project economics in both local currency and foreign exchange terms.

“These ingredients take time and effort to materialise and take multi-partisanship commitment to sustain,” he says. “Turkish policy’s credibility will take time to rebuild as it has been eroded over many years of unorthodox decision-making.”

Economy still going cold

Turkey’s $900bn economy faces challenges including runaway inflation, which reached 68.5% in March 2024, a depreciating currency, a challenging business environment and the reconstruction costs from February 2023’s devastating earthquake. 

Political risk could be brewing too. The local elections on March 31 2024 resulted in opposition parties gaining control of municipalities and major cities including Ankara and Istanbul. 

While the result handed Mr Erdoğan and his AKP party their biggest defeat in two decades, analysts are sceptical that this will have an impact on economic policy-making. 

“It won’t affect macroeconomic outlook, as evidenced also by the absence of any market reaction in either direction on the week opening”, says Serhat Suha, senior fellow in strategic studies at Trends Research & Advisory, an Abu Dhabi-based geopolitical advisory firm. “The effects will be on the political rather than economic front. The electorate gave a strong signal that Mr Erdoğan should stick to orthodox economic policies and prioritise meritocracy instead of nepotism.”

Bridging the Gulf with FDI

Turkey’s major FDI investors are the likes of the US, UK, Germany and Netherlands. Mr Aksoy notes that EU-27 countries stand out as the primary contributors, commanding a substantial 59% share of FDI inflows, underscoring the robust economic relations Turkey maintains with its European counterparts. He adds that non-EU member European countries contribute 10% to the FDI mix, while the US, the Middle East and Central Asia contribute 9%, 8% and 8%, respectively, reflecting Turkey’s expanding economic footprint across regions.

Turkish authorities are particularly keen to attract investment and trade from the oil-rich Gulf monarchies like the UAE and Saudi Arabia.

Since 2021, Ankara has initiated a rapprochement with former regional foes Abu Dhabi and Riyadh after years of rivalry over political differences. 

However, despite political proclamations on both sides, this has so far not led to much-needed greenfield investment. 

“There was news of interest from the Gulf into some Turkish assets like Fina Energy, İzmir Port, highways, railways and offshore wind farms, but capital inflows to Turkey are still mostly in the form of portfolio investments plus swap agreements between central banks, rather than equity shares, let alone greenfield investments,” says Mr Suha.

Turkey will also have to do more to compete against Gulf states which are looking to attract FDI as part of their diversification efforts.

“What I find curious is that Turkey wants investment from the Gulf in some of the same areas that the Gulf themselves are now investing in,” says Mr Robertson of FIM Partners. “[For example] Erdoğan is seeking investment in tourism from Saudi, when Saudi wants to invest in its own tourism story. Meanwhile the UAE is focusing more on a key country like Egypt, leaving just Qatar and potentially Kuwait as potential investors in Turkey.” ν

Hassan Jivraj is a freelance journalist based in London

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This article first appeared in the April/May 2024 print edition of fDi Intelligence.