bne -

Analysts have started bickering over Turkey's potential to raise FDI in 2012, illustrating the challenge of attracting long term investment inflows.

Turkey has the potential to attract $26bn in foreign direct investment inflows in 2012, according to a November 22 report from BGC Partners. The bloated number made analysts such as Tim Ash, head of emerging markets research at the Royal Bank of Scotland, "smile."

Ash insists that "there is almost no chance that Turkey could get FDI up to $26bn in 2012 ... this is higher than the $20bn annually they were getting in 2006/07, when the previous privatisation programme was in full swing and global markets were in the goldilocks mood." $15bn is a far more likely level for next year he says, whilst predicting about $12bn in 2011.

BGC provides some of the most frequent and insightful commentary released on Turkey, and in all fairness chief-economist Ozgur Altug had capitalized 'POTENTIAL' in his report, as if wanting to check the winks and head scratching the number was likely to produce.

"It is worth noting that we assumed that the government will provide investment incentives to attract Greenfield FDIs and pass the bill about reciprocal agreements in the real estate sector, which will boost real estate purchases," Altug writes. "But if the situation in the EU gets worse, the FDI prospect of Turkey could be affected negatively as well."

It's not difficult to read between the lines here. In recent years FDI has increased dramatically in Turkey. However, the country is likely to experience a short-lived recession next year as domestic demand - a key driver of recent growth - slows, and Eurozone troubles are felt throughout the region.

Some might see this an ideal time for positioning ahead of what is expected to be more sustainable growth in the coming years. No one doubts the opportunities for investment in Turkey, but foreign investors have been wary about putting money into the country due to its frequent boom and bust cycles and past political instability.

Shorter-term portfolio investment has been the preferred method for foreigners then, yet this could very quickly change in the coming years if the government maintains a focus on privitisation and important structural changes needed in the economy.

If successful, this could help with Turkey's massive current account deficit, with BGC suggesting its raised FDI forecast can help alleviate some of the pressure. "Financing of the deficit will be key in 2012," Altug says. "In our base case scenario, we foresee that FDI inflows will finance around 20% of the deficit in 2012 against around 15% in 2011, while this coverage ratio was 65% in the 2005-2009." That would see the deficit drop to $60bn in 2012, or about 7.8% of GDP, compared with an estimated $78bn current account deficit in 2011, or 10.2%

Such figures would likely be welcomed by most Turkish economists, who remember the years of hyperinflation and booms followed by messy downturns.