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 and spending of over USD 100 billion in central bank foreign reserves caused Turkey’s economy to grow by 1.8 percent in 2020 despite the pandemic, though high inflation and persistently high unemployment have been exacerbated. This year growth is expected to be around 3.5 percent with significant downside risks.
Despite recent growth, the government’s economic policymaking remains opaque, erratic, and politicized, contributing to long-term and sometimes acute lira depreciation. Inflation in 2020 was 14.6 percent and unemployment 13.2 percent, though the labor force participation rate dropped significantly as well.
The government’s push to require manufacturing and data localization in many sectors and the introduction of a 7.5 percent digital services tax in 2020 have negatively impacted foreign investment into the country. Other issues of import include tax reform and the decreasing independence of the judiciary and the Central Bank. Turkey hosts 3.6 million Syrian refugees, which creates an additional economic burden on the country as the government provides them services such as education and healthcare.
Recent 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. In particular, ICT and other companies report Government of Turkey (GOT) pressure to localize data, which it views as a precursor to greater GOT access to user information and source code. Law #6493 on Payment and Security Systems, Payment Services and e-money Institutions, also requires financial institutions to establish servers in Turkey in order to localize data. The Turkish Banking Regulation and Supervision Agency (BDDK) is the authority that issues business licenses as long as companies 1) localize their IT systems in Turkey, and 2) keep the original data, not copies, in Turkey. Regulations on data localization, internet content, and taxation/licensing have resulted in the departure of several U.S. tech companies from the Turkish market, and has chilled investment by other possible entrants to the e-commerce and e-payments sectors. The laws potentially affect all companies that collect private user data, such as payment information provided online for a consumer purchase.
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. Increased protectionist measures add to the challenges of investing in Turkey, which saw 2019-2020 investment flows from the world drop by 3.5 percent, although investment flows from the United States increased by 135 percent.
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.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2020||86 of 180||https://www.transparency.org/cpi2019|
|World Bank’s Doing Business Report||2020||33 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2020||51 of 131||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2019||3,333||https://www.bea.gov/sites/default/files/2020-07/dici0720_0.pdf|
|World Bank GNI per capita||2019||9,690||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|