Turkey

Executive Summary

Turkey has been an appealing market for investors over the last 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 2007, Turkey continued to attract substantial investment as a relatively stable emerging market with a promising trajectory of reforms and a strong, safe banking system. Over the last five years, however, economic and democratic reforms have slowed or in some cases regressed. Growth has also slowed since 2011, and in 2016 was only 2.9% – outpacing some G-20 countries but less than half its 6.1% growth in 2015, and well below Turkey’s historical average. This presents a major challenge for Turkey to meet its ambitious goal of becoming a top ten economy in the world by 2023, the centenary of the founding of the Turkish republic, not to mention providing jobs for a burgeoning population. Additionally, investor sentiment has been hit by a series of major terror attacks, the July 15, 2016 attempted coup, the uncertainty surrounding an April constitutional referendum, and the ongoing “State of Emergency.”

The Turkish market is generally under-penetrated by U.S. businesses and presents many investment opportunities due to its solid economic fundamentals, although its investment climate is increasingly mixed and worsening in some areas. Some established U.S. companies recently increased their investments in Turkey in certain sectors such as technology, consumer goods, and aerospace. However, due to the deteriorating economy and lack of predictability on the security and political front, many existing firms have held off on new investments, and only a few new firms entered the market in 2016. The most positive aspects of Turkey’s investment climate are its favorable demographics and prime geographical position, providing access to multiple regional markets. It is also an island of relative stability and growth in a turbulent region, making it a desirable location for regional operations. Turkey also has a relatively educated work force, developed infrastructure, and a resilient consumption-based economy.

The most negative aspects of Turkey’s investment climate are geopolitical risk and widespread concern over the deterioration of the rule of law and security environment. Many international observers remain concerned about transparency, corruption, and reduced judicial independence. Over the past year, especially after the July 15 coup attempt, the government marginalized critics, confiscated over 850 companies worth $10 billion on terrorism charges, and purged over 100,000 civil servants. The political focus on transitioning to a presidential system, renewed questions over the future of the EU-Turkey relations, the tense security situation, and continuing “State of Emergency” are expected to negatively affect consumer confidence and investor spending going forward.

Key issues to watch include whether or not Turkey finally makes progress on needed structural economic reforms. In order to do so, 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 potentially impacted by worsening relations with the EU. Another key issue to watch is the government’s push to require manufacturing and data localization in many sectors, but particularly pharmaceutical and IT. Other issues include tax reform and the worsening independence of the courts and the Central Bank. Turkey’s hosting of three million refugees and political tensions with Russia and EU countries will also create additional economic burdens on the country.

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