Turkey 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. Turkey saw nine years of gross domestic product (GDP) growth between 2011 and 2018. 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. While the Government of Turkey originally projected 5.0 percent GDP growth in 2020, the COVID-19 pandemic has dramatically slowed economic activity and the majority of economists project a growth rate that is negative or near zero for the year. In April 2020, the World Bank lowered its economic growth forecast for Turkey to 0.5 percent for 2020, while the IMF predicts a contraction of 5 percent.
The government’s economic policymaking remains opaque, erratic, and politicized, contributing to a fall in the value of the lira. Inflation reached more than 11 percent and unemployment over 13 percent by the end of 2019. The COVID-19 crisis will likely lower inflation due to reduced demand, but will put upward pressure on the unemployment number.
The government’s push to require manufacturing and data localization in many sectors and the recent introduction of a digital services tax 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 3.7 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, online broadcasting, tax collection, and payment platforms. In particular, ICT and other companies report 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.
Turkey transitioned from a parliamentary 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 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 banks and corporates, 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 2018-2019 investment flows from the United States and the world drop by 21 percent and 17 percent, respectively. Although there are still positive growth prospects and some established companies have increased investments, near-term projections indicate that foreign investment will continue to slow.
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 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.
In the past few years, the government has increasingly marginalized critics, confiscated over 1,100 companies worth more than USD 11 billion, and purged more than 130,000 civil servants, often on tenuous terrorism-related charges alleging association with Fethullah Gulen, whom Turkey’s government alleges was behind the 2016 coup attempt. 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.
|TI Corruption Perceptions Index||2019||91 of 180||https://www.transparency.org/
|World Bank’s Doing Business Report||2019||33 of 190||http://www.doingbusiness.org/
|Global Innovation Index||2019||49 of 129||https://www.globalinnovationindex.org/
|U.S. FDI in partner country ($M USD, stock positions)||2018||4,656||http://apps.bea.gov/international/
|World Bank GNI per capita||2018||10,420||http://data.worldbank.org/indicator/