Turkey provided an appealing market for investors for more than a decade. It experienced strong economic growth on the back of the many positive economic and banking reforms it implemented between 2002 and 2007. After the global economic crisis of 2008-2009, Turkey continued to attract substantial investment as a relatively stable emerging market with a promising trajectory of reforms and a strong banking system.
Despite this progress, over the last several years, economic and democratic reforms have stalled and in some cases regressed. Starting in 2011, Turkey has seen nine years of gross domestic product (GDP) growth. GDP growth was 7.4 percent in 2017 mainly due to government stimulus programs, but it fell to 2.6 percent in 2018 as the economy entered a recession in the second half of the year. While the Government of Turkey projects 2.3 percent GDP growth in 2019, many economists project negative growth. The International Monetary Fund (IMF) predicts the GDP to contract by 2.5 percent in 2019. According to sceptics, the government’s economic policymaking remains opaque, irregular, and sometimes politicized. These factors contributed to a fall in the value of the lira, in addition to inflation of more than 20 percent and unemployment rates over 13 percent. The state of emergency, which had been in effect since the coup attempt in July 2016, ended in July 2018.
Turkey transitioned to a presidential system in July 2018, following a referendum in 2017 and presidential election in June 2018. The opacity of government decision making, lack of confidence in the independence of the central bank, and concerns about the government’s commitment to the rule of law, combined with high levels of foreign exchange-denominated debt held by Turkish non-financial corporates, have made foreign investors cautious leading to historically low levels of foreign direct investment (FDI).
While there are more than 1,700 U.S. businesses active in Turkey, many with long-standing ties to the country, the number of U.S. companies is relatively low given the size of the Turkish economy. Despite the challenging investment climate, there are still positive growth prospects. Some established U.S. companies have increased investment in Turkey in the technology, consumer goods, and aerospace sectors. According to some businesses, due to economic challenges and concerns about the rule of law, arbitrary detentions, and lack of predictability on the political front, many existing firms slowed new investment, and only a few new firms entered the market in 2018. While there was substantial investment in 2018, investment is projected to continue to slow going forward.
The most positive aspects of Turkey’s investment climate are its favorable demographics and prime geographical position, providing access to multiple regional markets. Turkey is also an island of relative stability and growth potential in a turbulent region, making it a desirable hub for regional operations. Turkey has a relatively educated work force, well-developed infrastructure, and a resilient consumption-based economy.
Reportedly, the most negative aspects of Turkey’s investment climate are geopolitical risk and concern over the deterioration of the rule of law and security environment. Many observers remain concerned about transparency, corruption, and reduced judicial independence. In the past few years, especially after the July 2016 coup attempt, the government apparently marginalized critics, confiscated over 1,100 companies worth more than USD 11 billion, and removed more than 130,000 civil servants, often on terrorism-related charges alleging association with Fethullah Gulen. The political focus on transitioning to a presidential system, cross-border military operations in Syria, the worsening economic climate, and persistent questions about the relationship between the United States and Turkey as well as Turkey’s relationship with the European Union (EU), all may negatively affect consumer confidence and investment in the future.
Turkey’s willingness to make progress on needed structural economic reforms will remain key for the country. Government officials will need to make difficult political choices to liberalize the market to align with the goal of modernizing Turkey’s EU Customs Union agreement, itself impacted by worsening relations with EU member states. The government’s push to require manufacturing and data localization in many sectors also impacts foreign investment into the country. Other import issues include tax reform and the decreasing independence of the judiciary and the Central Bank. Turkey hosts 3.5 million Syrian refugees, which creates an additional economic burden on the country as the government provides services such as education and healthcare to refugees.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||78 of 180||https://www.transparency.org/cpi2018|
|World Bank’s Doing Business Report||2018||43 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||50 of 126||https://www.globalinnovationindex.org/analysis-indicator
|U.S. FDI in partner country ($M USD, stock positions)||2017||$4,300||http://www.bea.gov/international/factsheet/
|World Bank GNI per capita||2017||$10,940||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Turkey acknowledges that it needs to attract significant new foreign direct investment (FDI) to meet its ambitious development goals, as well as finance its current account deficit. As a result, Turkey has one of the most liberal legal regimes for FDI in the Organization for Economic Cooperation and Development (OECD). According to the Central Bank of Turkey’s balance of payments data, Turkey attracted a total of USD 6.5 billion of FDI in 2018, almost USD 1 billion down from USD 7.4 billion in 2017. U.S. FDI to Turkey was USD 446 million in 2018, up from a historically low USD 180 million in 2017, as FDI dropped considerably following the 2016 coup attempt. (Note: Official statistics understate the amount of U.S. FDI in Turkey. The Central Bank of the Republic of Turkey estimated, for example, that in 2013 and 2014 U.S. FDI inflows were 30 percent higher than official statistics. End Note.) To attract more FDI, Turkey needs to improve enforcement of international trade rules, ensure the transparency and timely execution of judicial orders, increase engagement with foreign investors on policy issues, and pursue policies to promote strong, sustainable, and balanced growth. It also needs to take other political measures to increase stability and predictability for investors. A stable banking sector, tight fiscal controls, efforts to reduce the size of the informal economy, increase flexibility of the labor market, improve labor skills, and continued privatization of state-owned enterprises have the potential to improve the investment environment in Turkey.
Most sectors open to Turkish private investment are also open to foreign participation and investment. All investors, regardless of nationality, face some challenges: excessive bureaucracy, a slow judicial system, high and inconsistently applied taxes, weaknesses in corporate governance, unpredictable decisions made at the local government level, and frequent changes in the legal and regulatory environment. Structural reforms that will create a more transparent, equal, fair, and modern investment and business environment remain stalled. Venture capital and angel investing are still relatively new in Turkey, but regulators and new legislation should continue to facilitate greater development of these financing opportunities.
Turkey does not screen, review, or approve FDI specifically. However, the government established regulatory and supervisory authorities to regulate different types of markets. Important regulators in Turkey include the Competition Authority; Energy Market Regulation Authority; Banking Regulation and Supervision Authority; Information and Communication Technologies Authority; Tobacco, Tobacco Products and Alcoholic Beverages Market Regulation Board; Privatization Administration; Public Procurement Authority; Radio and Television Supreme Council; and Public Oversight, Accounting and Auditing Standards Authority. Some of the aforementioned authorities screen as needed without discrimination, primarily for tax audits. Screening mechanisms are executed to maintain fair competition and for other economic benefits. If an investment fails a review, possible outcomes can vary from a notice to remedy, which allows for a specific period of time to correct the problem, to penalty fees. The Turkish judicial system allows for appeals of any administrative decision, including tax courts that deal with tax disputes.
Limits on Foreign Control and Right to Private Ownership and Establishment
There are no general limits on foreign ownership or control. Nevertheless, there are increasing pressures in some sectors for foreign investors to partner with local companies and transfer technology and some discriminatory barriers to foreign entrants, such as on the basis of “anti-competitive practices,” especially in the information and communication technology (ICT) sector or pharmaceuticals. In many areas, Turkey’s regulatory environment is business-friendly. Investors can establish a business in Turkey irrespective of nationality or place of residence. There are no sector-specific restrictions that discriminate against foreign investor access, which are prohibited by World Trade Organization Regulations.
Other Investment Policy Reviews
In recent years, Turkey has not conducted an investment policy review through the OECD. Turkey’s last investment policy review through the World Trade Organization (WTO) was conducted in March 2016. Turkey has not conducted an investment policy review through the United Nations Conference on Trade and Development (UNCTAD). Turkey has cooperated with the World Bank to produce several reports on the general investment climate that can be found at: .
The Republic of Turkey Prime Ministry Investment Support and Promotion Agency (ISPAT) was the official organization for promoting Turkey’s investment opportunities to the global business community and assisting investors before, during, and after their entry into Turkey. Under the new presidential system, the institution has been re-organized and named as the Presidency of the Republic of Turkey Investment Office. Its website is clear and easy to use, with information about legislation and company establishment. ( ). The website is also a resource for foreigners registering their businesses.
The conditions for foreign investors setting up a business and transferring shares are the same as those applied to local investors. International investors may establish any form of company set out in the Turkish Commercial Code (TCC), which offers a corporate governance approach that meets international standards, fosters private equity and public offering activities, creates transparency in managing operations, and aligns the Turkish business environment with EU legislation and the EU accession process.
Turkey defines micro, small, and medium-sized enterprises according to Decision No. 2018/11828 of the Official Gazette dated June 2, 2018:
- Micro-sized enterprises: fewer than 10 employees and less than or equal to 3 million Turkish lira in net annual sales or financial statement.
- Small-sized enterprises: fewer than 50 employees and less than or equal to 25 million Turkish lira in net annual sales or financial statement.
- Medium-sized enterprises: fewer than 250 employees and less than or equal to 125 million Turkish lira in net annual sales or financial statement.
The government promotes outward investment via investment promotion agencies and other platforms. It does not restrict domestic investors from investing abroad.
6. Financial Sector
Capital Markets and Portfolio Investment
The Turkish Government strongly encourages and offers an effective regulatory system to facilitate portfolio investment. There is sufficient liquidity in the markets to enter and exit sizeable positions. Existing policies facilitate the free flow of financial resources into the product and factor markets. The government respects IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions. Credit is generally allocated on market terms, though the GOT has increased low- and no-interest loans for certain parties, and pressured state-owned banks to increase their lending, especially for public projects and electoral priorities. Foreign investors are able to get credit on the local market. The private sector has access to a variety of credit instruments.
Money and Banking System
The Turkish banking sector, a central bank system, is relatively healthy. The estimated total assets of the country’s largest banks are as follows: Ziraat Bankasi A.S. – USD 106.95 billion, Is Bankasi – USD 98.95 billion, Garanti – USD 83.42 billion, Akbank – USD 77.89 billion, Yapi ve Kredi Bankasi – USD 77.14 billion, Halk Bankasi – USD 72.75, Turkiye Vakiflar Bankasi – USD 67.04 billion. (Conversion rate used was 5.47 TL/1 USD). According to the BDDK, the share of non-performing loans in the sector was approximately 4.03 percent as of March 2019. The only requirements for a foreigner to open a bank account in Turkey are a passport copy and either an ID number from the Ministry of Foreign Affairs or a Turkish Tax ID number. The Turkish Government adopted a framework Capital Markets Law in 2012, aimed at bringing greater corporate accountability, protection of minority-shareholders, and financial statement transparency.
The independent BDDK monitors and supervises Turkey’s banks. The BDDK is headed by a board whose seven members are appointed for six-year terms. Bank deposits are protected by an independent deposit insurance agency, the Savings Deposit Insurance Fund (SDIF). Because of historically high local borrowing costs and short repayment periods, foreign and local firms frequently seek credit from international markets to finance their activities. Foreign banks are allowed to establish operations in the country.
Foreign Exchange and Remittances
Turkish law guarantees the free transfer of profits, fees, and royalties, and repatriation of capital. This guarantee is reflected in Turkey’s 1990 Bilateral Investment Treaty (BIT) with the United States, which mandates unrestricted and prompt transfer in a freely-usable currency at a legal market-clearing rate for all investment-related funds. There is little difficulty in obtaining foreign exchange, and there are no foreign-exchange restrictions, though in 2018, the GOT continued to pressure businesses to conduct trade in lira. An amendment to the Decision on the Protection of the Value of the Turkish Currency was made with Presidential Decree No. 85 in September 2018 wherein the GOT tightened restrictions on Turkey-based businesses conducting numerous types of transactions using foreign currencies or indexed to foreign currencies. The Turkish Ministry of Treasury and Finance may grant exceptions, however. Funds associated with any form of investment can be freely converted into any world currency. The exchange rate is free-floating, though the GOT has taken measures to stabilize the lira when it experiences a period of rapid depreciation.
In Turkey, there have been no recent changes or plans to change investment remittance policies, and indeed the GOT in 2018 actively encouraged the repatriation of funds. The GOT announced “Assets Peace” in May 2018 which incentivized the citizens to bring assets to Turkey in the form of money, gold or foreign currency by eliminating any tax burden on the repatriated assets. There are also no time limitations on remittances. Waiting periods for dividends, return on investment, interest and principal on private foreign debt, lease payments, royalties, and management fees do not exceed 60 days. There are no limitations on the inflow or outflow of funds for remittances of profits or revenue.
Sovereign Wealth Funds
The GOT announced the creation of a sovereign wealth fund (SWF) in August 2016. The controversial fund consists of shares of state owned enterprises (SOEs) and is designed to serve as collateral for raising foreign financing. However, the SWF has not launched any major projects since its inception. In September 2018, the President became the Chairman of the SWF. Several leading SOEs, such as natural gas distributor BOTAS, Turkish Airlines and Ziraat Bank have been transferred to the SWF. Critics worry management of the fund is opaque and politicized.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Table 3: Sources and Destination of FDI
|Direct Investment From/in Counterpart Economy Data (2018)|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||$6,534||100%||Total Outward||$3,997||100%|
|The Netherlands||$833||13%||The Netherlands||$1,825||46%|
|“0” reflects amounts rounded to +/- USD 500,000.|
Table 4: Sources of Portfolio Investment
|Portfolio Investment Assets|
|Top Five Partners (Millions, US Dollars)|
|Total||Equity Securities||Total Debt Securities|
|All Countries||$1,152||100%||All Countries||$447||100%||All Countries||$704||100%|
|Cayman Islands||$213||18%||China, P.R.: Hong Kong||$25||6%||USA||$47||7%|