Turkey has long been the darling of the international financial institutions (IFIs). The European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC) have invested €40bn between the three of them in the country to date. The EIB alone has invested some €25.8bn since 2000.
That investors have remained bullish on the Turkish economy despite the political instability and security threats of the past two years has long left many analysts scratching their heads. But there are early signs that this is about to change. At a press conference during the EBRD annual meeting held in Nicosia, Cyprus, EBRD president Sir Suma Chakrabarti said that he expected his development bank’s investments in Turkey to drop this year.
He told journalists: "Turkey is our largest market. I am pretty sure it will still be our largest market this year. We did €1.9bn last year in investment. I would be doubtful if we get near the €1.9bn mark this year, because the political context [....] has an impact on market sentiment.”
Chakrabarti added that he was quite sure that the EBRD’s investment in Turkey would climb above the €1bn threshold this year, but that there was the question of “how investors will partner with us".
The EBRD chief’s comments were made after the multilateral lender cut its growth forecast for Turkey for the second time since November. In an updated economic prospects report published on May 10, it presented a weakened outlook that would mean the Turkish economy growing by 2.6% this year, down from 2.9% in 2016 and far down on the average 7.1% seen between 2011 and 2015. The economic descent can partly be attributed to a big drop in tourism receipts and investment amid anxieties generated by terrorist attacks and geopolitical risks in the region.
Whether you believe in the veracity of the narrow Yes vote in Turkey’s April 16 referendum or not (opposition parties plan to challenge it in the European Court of Human Rights having had no joy with domestic courts), President Recep Tayyip Erdogan now has official sanction to build an executive presidency with sweeping powers. But it is what he will do with those powers that investors are rather unsure of.
IFC denies relocation rumours
IFIs, of course, have long diplomatically resisted the public expression of concerns about the political developments and worsening security situation in Turkey. However, amid the country’s economic struggles and apprehension among investors, multilateral lenders are perhaps beginning to follow some market tendencies. On May 12, the World Bank Group’s International Finance Corporation (IFC) strenuously denied a claim from a source spoken to by bne IntelliNews that given the security worries in Turkey, it is working to relocate some of its staff from Istanbul to a newly-opened regional office in Vienna and to other regional offices.
The IFC went so far as to call the speculation "misinformation" but the very fact that the rumours are swirling around demonstrates the level of anxiety and jitters affecting investors when it comes to Turkey.
With a staff of over 200, IFC's Istanbul office is second in size only to the private sector lender's Washington headquarters. The decision to open another regional office in Vienna amounts to a significant step for the lender, which has long praised the importance of Turkey in its operations. How significant is the question.
In denying the speculation, an IFC spokesperson sent an email stating: "Turkey is IFC’s second largest country of operations globally, with a $5bn portfolio. In the current fiscal year, IFC plans to provide close to $1bn in long-term investments on its own account, in addition to short-term trade finance, and through mobilisation of funds from our partners, supporting Turkey’s private sector and public-private partnerships.”
It added: “IFC will be adding another operational hub in Vienna to service the Europe, Middle East and North Africa (EMENA) region. IFC’s Istanbul hub will remain IFC’s largest office in the EMENA region and one of the largest offices globally with over 150 staff."
Can hardly complain
The IFC may be determined to express its continued confidence in Turkey, but the Turkish government can hardly complain if other investment entities or investors quail at staying or arriving there. The purges that followed the failed coup that took place in July last year have been hugely intimidating.
An enormous amount of people from the public and private sectors, and other areas including civil society, the judiciary, the police and the armed forces, who have alleged links to the Gulenists - the organisation Erdogan and ministers claim orchestrated the attempted putsch - have been fired, arrested or both. What’s more, over 800 Turkish firms, worth some $10bn, have been seized.
Also discouraging are many economic indicators and ratings. In 2016, foreign direct investment (FDI) in the country plunged by 44% y/y to $12.3bn, according to the economy ministry. By now, all three ratings agencies have downgraded the country’s sovereign credit rating to junk. Turkey’s $720bn economy is also struggling with high inflation, a large current account deficit and high unemployment.
Fighting back in the face of all these political and economic challenges, the Ankara government has pledged to carry out much-needed but long-delayed structural reforms to regain the confidence of foreign investors in what is the world’s 18th largest economy.
Moreover, Turkey also announced several measures to boost economic activity in the wake of the failed bloody coup that damaged consumer confidence. The government, for instance, pledged to extend up to TRY250bn (€64bn) in credit guarantee fund loans to private companies and cut taxes on white goods and furniture. Moreover, it set up a sovereign wealth fund to finance mega infrastructure projects.
It must be said that these efforts do appear to be paying off to some extent. The country’s GDP grew by 3.5% y/y in the final quarter of 2016, after suffering a contraction of 1.3% y/y in Q3.
The government, meanwhile, has defended the introduction of the executive presidential system by arguing that it will bring more political stability and better, swifter management of the economic affairs. It also says that the stronger government will help the authorities to reduce security threats. Better times, it insists, are ahead.