Germany’s foreign minister has sent shockwaves through the community of foreign investors active in Turkey by publicly questioning the state of the Turkish rule of law. Ankara is walking a thin line in its continued efforts to crack down on alleged members of the Gülen movement of Fetullah Gülen, the self-exiled imam whom Ankara considers the mastermind of July 2016’s failed coup, and the Kurdistan Workers’ Party (PKK), and has not spared the business community.
“One cannot advise to invest in a country if there is no longer legal certainty there and even companies are being accused of supporting terrorists,” German foreign minister Sigmar Gabriel said on July 20, referring to a blacklist of dozens of German companies supposedly under investigation by Turkish authorities for ties with such organisations.
Ankara rushed to rebut straight away. “German companies are not subject to investigations into terrorist financing by Turkish authorities,” German newspaper Handelsblatt quoted deputy prime minister Mehmet Simsek as saying on July 21. Turkish interior minister Süleyman Soylu reiterated the message in an official call with his German counterpart, Thomas de Maizière, hinting at a “communications problem” that eventually caused the list to be wired to Interpol in May, as a spokesperson for the German government told a news conference on July 24.
This diplomatic rift once again brings to light the hazardous nature of Ankara’s purge of alleged members or supporters of terrorist organisations, but also political posturing by German politicians ahead of general elections in September, and thus overshadows the foreign investment achievements of an economy that seems to have turned the page on the lows of 2016.
On the list
The war of words between Germany and Turkey hit the headlines when international media outlets citing government sources reported that dozens of German companies are suspected by Turkish authorities to have ties with organisations like the Gülen movement or the PKK. The list featured, among others, German manufacturing powerhouses BASF and Daimler. Their involvement comes as president Recep Tayyip Erdoğan intensifies his efforts to cleanse the country of internal destabilising forces through a state of emergency that has been renewed four times since it was first established in the aftermath of the failed coup.
Once a prominent ally of president Erdoğan, Mr Gülen has been living in self-exile in the US since 1999, from where he heads an influencial religious and social movement that Ankara now accuses of trying to undermine Turkish institutions - the international community has never backed Turkey on this. On the other hand, the PKK has embodied the revolutionary fringes of the 20mn Kurdish community in Turkey since the 1980s, and is labelled as a terrorist organisation by, among others, the NATO, the EU and the US. The ongoing purge against alleged members of these and other organisations has already led to the firing of some 145,711 state officials, teachers, academics and military personnel and the arrest of another 56,658, most of whom are still awaiting trial, according to TurkeyPurge.com. At the same time, 965 companies with a total value of Tl41bn ($11.32bn) suspected of links with these organisations have been turned over to the Savings Deposit Insurance Fund, deputy prime minister Nurettin Canikli confirmed in July.
Despite the efforts by Turkish authorities to play down the effective reach of the blacklist of German companies suspected of terrorist links, “this crisis will erode the already fragile investor confidence across the board”, says Florian Otto, head of Europe research at global risk consultancy Verisk Maplecroft.
“The fact that the Turkish government could even consider blacklisting Germany companies with no links to the Gülen movement not only demonstrates how politicised Turkey’s business environment has become but also how little importance is given to the protection of individual and corporate rights. Investors from countries which have a serious disagreement with Turkey are at risk. This includes other nations hosting Turkish asylum-seekers, such as Belgium.”
Germany is Turkey’s largest trade partner and one of its most important sources of foreign investment. It accounted for more than 14.7% of Turkish foreign trade in 2016, according to government figures, and German companies made up 12.6% of the overall greenfield foreign investment announced between 2003 and 2017, according to fDi Markets, an FT data service. But German foreign minister Mr Gabriel is now warning off German investors from doing business in Turkey, and has even threatened to review export credit guarantees by state export credit agency Euler Hermes and investments made by European institutions such as the European Investment Bank (EIB).
A stabilising environment?
Still, there are elements that suggest that Mr Gabriel’s statements should not be taken at full face value.
“There is a lot of political rhetoric related to elections in September,” says Timothy Ash, senior emerging market strategist at BlueBay Asset Management. Incumbent chancellor and leader of the Christian Democratic Union/Christian Social Union Angela Merkel is facing up to competition from a number of candidates from rival parties, particularly Martin Schultz, head of the Social Democratic Party, who is challenging Ms Merkel’s attitude towards Turkey and the migrant crisis and has the support of Mr Gabriel.
“Perhaps we will not see the worst outcome in terms of threats coming true,” adds Mr Ash. “There will be people in Brussels trying to moderate and create compromise deals The music around Turkey-Germany-European Union relations is not very good, but it has not been very good for a period of time. It’s unlikely we will see a seismic change in investment strategy from foreign investors.”
At the same time, Turkish authorities have firmly challenged doubts over the strength of the country’s rule of law as they try to reassure foreign investors.
“German investments in Turkey are fully guaranteed by the domestic and international laws as well as by the Turkish government, which views FDI as an important component of its economic development,” says Arda Ermut, head of national investment promotion agency Ispat.
“No German company is under any investigation. In fact as the investment agency we are in close contact with them and facilitating their investments in Turkey […] I have been working with the agency since its establishment and during my more than 10 years of experience, we have always kept the investment relations separate from bilateral political issues, and never allowed such issues to jeopardise the investments.”
After falling by 43% in 2016, when the country had to deal with the failed coup but also bloody terrorist attacks by the PKK and Isis and the Syrian refugee crisis, FDI has been on the rise again in the first half of 2017. FDI inflows (equity capital only) grew to $3.6bn between January and May, up by 65.2% from the same period of 2016, according to figures from the central bank. Investment from EU members like the Netherlands and Spain make up big parts of that increase, but so do emerging partners in the Gulf: Qatari companies invested $541m in the country in the first five months of the year, which is already more than in any previous full year on record and highlights the country’s eastward shift championed by Mr Erdoğan himself, who was in the Gulf to mediate the Qatar crisis on July 23-24.
“There is definitely nervousness among investors. They prefer a calmer internal political situation,” says Mr Ash. “However, two things continue to underpin investment. First is the durability of the Turkish economy, its ability to continue to growth despite all the troubles. A second factor is that the AKP party has been in power since 2002 and throughout all that period it showed itself to be a pro-business party. This is a party that wants to do business, and the assumption is that it will go back to that. People are trying to see through the shocks and the political noise and they assume that whatever the constructional setup will be going forward the country will be open to foreign investment.”
The FDI rebound, combined with a strong internal demand boosted by fiscal and credit incentives, shored up growth in 2017. GDP expanded at 5% in the first quarter of the year and the government expects economic growth to continue at that pace throughout the year. At the same time, the Turkish lira stabilised at around 2.50 against the US dollar after plummeting in the last quarter of 2016. April’s referendum, which saw a slim 51.4% of the voters approve a constitutional reform introducing a presidential system, gives Mr Erdoğan plenty of room to stick to his assertive approach to domestic security, but also economic reforms ahead of the general elections slated for November 2019 and perhaps reassuring foreign investors.