Why investing in Turkey is still a good idea

Published 04.06.2016 00:11
Updated 04.06.2016 13:53

The AK Party management feels that the post-Washington consensus type regulatory capitalism based on international capital flows, credit-led growth and service orientation has reached its natural limits

It is almost impossible not to be shocked by the sheer speed of the perceptive change that affects the future prospects of a country in international markets and public opinion. Turkey is a clear case in point. Divergences with the Western world on specific foreign policy issues such as the civil war in Syria, the refugee problem, the repatriation agreement or domestic leadership transformations within the ruling Justice and Development Party (AK Party) are easily interpreted as signs of a looming economic crisis or recession. International credit rating agencies, hedge funds and financial insurance companies might give exaggerated responses to minor hick-ups, thereby influencing the overall investment climate and capital flows to Turkey. When you consider that the Credit Default Swap (CDS) figures that roughly explain the risk premium of an individual country for investors has reached the level of 260 and increased around 10 percent over the course of last month alone, you might very well speculate that Turkey is definitely headed for a crisis.But do the facts on the ground confirm worsening perceptions of Turkey in international markets? We believe not. To start with, at a time when both developed and developing economies are struggling to keep their growth momentum, with the notable exceptions of India and Indonesia, Turkey is set to grow between 3.5 percent and 4 percent over the course of 2017 and 2018. Unlike major emerging economies such as Brazil and South Africa, Turkey is not suffering from a substantial budget deficit and the public sector borrowing requirement is particularly low. Therefore, fiscal discipline is being maintained despite all the ups and downs of electoral politics, social volatilities and debates surrounding the proposed presidential system. When it comes to monetary policy, the Turkish Central Bank enjoys full instrumental independence, unlike Brazil, and the governance structure of the Bank seems to have produced better synergy with President Recep Tayyip Erdoğan and the new government led Prime Minister Binali Yıldırım.

Yıldırım has a more technocratic and project-oriented mentality compared to his predecessor Davutoğlu and is perfectly aware that his basis for sustained political legitimacy could only come from speeding up bureaucratic processes required for major investment decisions, swiftly completing ongoing public infrastructure projects and initiating new ones with the widest potential social impact. The implication: it is still wise to invest in Turkey as there is political stability for the foreseeable future and ample opportunities for economic expansion.

As far as discussions on the developmental model are concerned, it is true that the AK Party management feels that the post-Washington consensus type regulatory capitalism based on international capital flows, credit-led growth and service orientation has reached its natural limits. At a time of shrinking international liquidity and persistent economic stagnation, the only viable path for sustained growth and wider socio-economic development seems to be realizing a track-change towards some form of "neo-developmentalism" based on increased domestic savings, renewed emphasis on manufacturing production and exports, attempts to expand modern infrastructure and upgrade the technology content of the whole economic framework. The fact that this strategic shift has begun to be perceived as inevitable for long-term political stability means that there will be substantial opportunities for international investors who have the capacity and tenacity to act in priority areas of structural transformation.

Turkey attracted $144 billion worth of foreign direct investment (FDI) over the last decade, and the necessity of structural transformation in the coming years requires a continuation of FDI inflows, especially in high-technology sectors such as aviation, nanotechnology, genetics, fiber optics, robotics, biotechnology, software, medical equipment and defense industries. Political commonsense instructs us that the frequent changes in government we have witnessed since June 2015 are now over and the 65th government under Yıldırım will manage the country until 2019 with a predominantly growth and investment oriented agenda. Therefore, political risks evaluated in a rather exaggerated fashion by the credit rating agencies and financial observers are bound to follow a stable downward trend. Those companies and international investors who believe in Turkey's future and take an early stake in the new "development narrative" are bound to gain disproportionately from the process.

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