Turkey has been one of the world's biggest recipients of FDI in the past 10 years. While the country's FDI growth took a hit during the financial crisis, inflows have largely returned. Attracted to consistent economic growth, favourable demographics and an investor-friendly climate, there are plenty of reasons why foreign companies are flocking to the country.

However, Turkey’s current account deficit in February sat at a massive $4.2bn, close to 10% of GDP. While this figure has declined sizeably, it is still making investors nervous. And some investors have pointed out that the deficit is so large that the government is actually depending on FDI to finance it. 

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Current account conundrum

Turkey’s finance minister, Mehmet Simsek, does not shy away from the deficit problem and insists that the government has a plan in place to resolve the issue both with short-term and long-term measures. Such steps have included a tighter monetary policy designed to limit domestic demand and a new foreign investment incentive regime aimed at reducing imports and expanding export capacity.

“The current account deficit has narrowed but not in a very pronounced way, mainly because of weaknesses in the euro and high commodity prices,” he says. “It is true that Turkey is relying on foreign investment, but one-third is financed through non-debt creating inflows, which is long-term FDI. Of course, the current account deficit is a cause for concern, but that’s why we have a strategy in place. But if you take the situation into context, I think we’re in decent shape.”

Mr Simsek, who holds UK citizenship and was educated at the University of Exeter, points to new measures the Turkish government is taking to encourage FDI and make Istanbul a regional financial centre. These include a revamp of the tax regime, which will make it more appealing to manage investment funds from Turkey and encourage foreign companies to launch greenfield projects in less developed areas.

Rise in R&D

Mr Simsek is particularly interested in boosting Turkey’s research and development capabilities, which he believes will have the most advantageous knock-on effects for the rest of the country's economy. He explains that over the past five years, the Turkish government has invested heavily in this area and is now offering companies attractive incentives.

“Right now there are strong incentives to do R&D in this country,” says Mr Simsek. “If you have a large-scale operation here, you get up to 225% tax credit, meaning if you spend $100, you get $225 tax reduction. You also get up to 90% exemption from corporate tax. The bottom line [is that] there are huge incentives already in place for companies to do R&D here. That’s why 118 companies have established major R&D centres in this country.”

Arguably just as important as Turkey's current account deficit is the challenge the government faces with its Kurdish population in the east of Turkey. In May there were clashes in the south-eastern city of Tunceli. Again, Mr Simsek is frank about the situation, and invokes a personal story in his reasoning. 

“There is a pro-Kurdish party that thrives on violence,” he says. “But I’m ethnically a Kurd and I’m minister of finance. We have almost 60 to 70 members of parliament who are ethnically Kurd. I’m not here from my connections. My parents were illiterate and they were farmers. So it’s not like I’m accidentally here. The less developed the region, the more likely that [the pro-Kurdish] party thrives on support. As people stay in poverty and illiteracy, the better the base for [the party]. And we’re trying to change that. Across the board in that region we are trying to create jobs and improve education.”