Turkey experienced strong economic growth on the back of the many positive economic and banking reforms it implemented between 2002 and 2007, and it weathered the global economic crisis of 2008-2009 better than most countries, establishing itself as a relatively stable emerging market with a promising trajectory of reforms and a strong banking system. However, over the last several years, economic and democratic reforms have stalled and by some measures regressed. GDP growth was 2.6 percent in 2018 as the economy entered a recession in the second half of the year. Challenged by the continuing currency crisis, particularly in the first half of 2019, the Turkish economy grew by only 0.9 percent in 2019. Turkey’s expansionist monetary policy pushed Turkey’s economy to grow by 1.8 percent in 2020 despite the pandemic, though high inflation and persistently high unemployment have been exacerbated. In 2021, Turkey’s GDP grew 11 percent year-over-year (YOY), the highest growth rate in ten years. However, this year growth is expected to be around 3.3 percent, but with significant downside risks. The spending of over USD 100 billion in foreign reserves in a vain attempt to stop the lira’s devaluation, and unorthodox monetary policies that have fueled inflation have left Turkey vulnerable to external shocks.
Despite recent growth, the government’s economic policymaking remains opaque, erratic, and politicized, contributing to long-term and sometimes acute depreciation of the Turkish lira. In September 2021, the Central Bank of Turkey embarked on a series of rate cuts that lowered the key interest rate by 500 basis points, leaving real rates deeply negative. Inflation in 2021 was 48.7 percent and unemployment 11.2 percent, with a slight recovery in labor force participation (52.9 percent).
Macroeconomic instability and the government’s push to require manufacturing and data localization in many sectors have negatively impacted foreign investment into the country. Turkey has maintained its 2020 digital service taxes but agreed to a plan to rescind the tax once pillar one of the OECD Inclusive Framework on a global minimum tax is implemented. Other issues of importance include tax reform and the decreasing independence of the judiciary and the Central Bank.
Laws targeting the Information and Communication Technology (ICT) sector have increased regulations on data, social media platforms, online marketing, online broadcasting, tax collection, and payment platforms. ICT and other companies report Government of Turkey (GOT) pressure to localize data, which the GOT views as a precursor to greater access to user information and source code. Law No. 6493 on Payment and Security Systems, Payment Services, and E-money Institutions also requires financial institutions to establish servers in Turkey to localize data. The Turkish Banking Regulation and Supervision Agency (BDDK) is the authority that issues business licenses if companies localize their IT systems in Turkey and keep the original data (not copies) in Turkey.
Regulations on data localization, internet content, and taxation/licensing have chilled investment by other possible entrants to the e-commerce and e-payments sectors. The laws affect all companies that collect private user data, such as payment information provided online for a consumer purchase.
In 2020, a law requiring social network providers (SNPs) that serve more than one million users in Turkey to appoint a domestic representative entered into force. The SNPs in-country representatives are obliged to accept service of documents from the Information and Communication Technologies Authority (ICTA), which mainly requests removal of content on the grounds of articles 9 and 9/A of local Law No. 5651. The SNP’s country representative must be a Turkish citizen or a legal person registered in Turkey, and easily accessible to local users.
The immediate impact of the COVID-19 pandemic on the economy was sharp, but Turkey managed to contain the number of COVID-19 cases relatively effectively with targeted lockdowns and thanks to its strong health-services infrastructure. The tourism sector, which generates demand for products and various service sectors, was particularly affected. The GOT provided support to protect corporate liquidity, employment, and household incomes. Government investment incentives were refined during the pandemic to attract FDI and encourage green investments. The pandemic exacerbated structural challenges related to high unemployment and the country’s widespread informal economy, which hit the informal sector workers and the self-employed the hardest. While there has been progress in creating quality jobs over the past 15 years, the number of jobs decreased after both the 2018 financial turmoil and because of COVID-19.
Turkey ratified the Paris Agreement in 2021 and continues to make progress on its green initiatives. Turkey’s FDI incentive packages are updated regularly, and in 2021 they were altered to include more incentives targeted at green projects as identified by the Ministry of Industry and Technology.
The opacity and inconsistency of government economic decision making, and concerns about the government’s commitment to the rule of law, have led to historically low levels of foreign direct investment (FDI). While there are still an estimated 1,700 U.S. businesses active in Turkey, many with long-standing ties to the country, the share of American activity is relatively low given the size of the Turkish economy. Investment inflows in 2021 were USD 14.1 billion, an increase of 19 percent from 2019 and the highest rate in the last five years. However, real estate acquisition by foreign nationals accounted for 41 percent of the total inflows in 2021 with USD 5.8 billion, and equity capital inflows were the biggest slice of the FDI pie with USD 7.6 billion. Increased protectionist measures continue to add to the challenges of investing in Turkey. Progress in combatting corruption is also necessary for many of the GOT’s current and future policies to work effectively.
Turkey’s investment climate is positively influenced by its favorable demographics and prime geographical position, providing access to multiple regional markets. Turkey is an island of relative stability in a turbulent region, making it a popular hub for regional operations. Turkey has a relatively educated work force, well-developed infrastructure, and a consumption-based economy.
|TI Corruption Perception Index||2021||96 of 180||http://www.transparency.org/research/cpi/overview|
|Global Innovation Index||2021||41 of 132||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2020||$5,814||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2020||$9,050||https://data.worldbank.org/indicator/NY.GNP.PCAP.CD|