The Outlook of Foreign Direct Investment
- December 04, 2014
- Oguz Erkol
Turkey is running a large current account deficit and is a big borrower from abroad as the deficit roughly accounts for 6% of the country’s total GDP and short-term foreign debt stock hits $130 billion. Under such circumstances foreign capital would suppress the rising concerns around the country’s debt. However, Turkey seems to be less attractive to consistently high foreign direct investments leaving the country less able to deal with the stress on its financial system.
The sharp decline in oil prices will ultimately help Turkey to narrow its deficit but in the long-term Turkey needs sustainable tools to finance it, and that sustainability requires the financing quality. What is more lower oil prices could lead the deficit above 5% of GDP which means the country may still have some substantial headwinds to face arising out of its deficit.
As it is well known, foreign direct investments is the solution to this monstrous problem. The question then arises as to how successful Turkey is to attract these investments (see the chart below). At first glance, it may appear unsuccessful to do so, but looking again, the main reason that causes such huge differences in inflows to country is the weakness in Europe. Many European countries have had their own problems since the financial crisis and many businesses as well as banks in the region are struggling with the slowdown. Therefore the current economic situation in the continent is not conducing Europeans to look at investing in emerging countries.
When it comes to make a peer comparison, Turkey cumulatively is the worst performer with regard to attract foreign direct investment inflows alongside with Indonesia among major emerging countries since 2005. According to the data compiled by the OECD, a total amount of $131 billion is invested in Turkey by foreigners, while the foreign direct inflows to other member of BIITS is averagely $275 billion during the same period.
Despite the above-mentioned gloomy developments, Turkey still has the ability to offer important value to many investors across the globe. For instance, Turkish ministry of energy recently started offering healthy incentives for power generation from renewables which is an area with high potential. Additionally, the near future hold some remarkable privatizations in store, including Borsa Istanbul, Halk Sigorta and Halk Emeklilik, the insurance and private pensions companies; Igdas, the natural gas distribution company; Botas, the petroleum and natural gas pipeline and trading company; toll roads and bridges; horseracing and Spor Toto, a lotto company.
Turkey needs to tip the scales in its favor in foreign investments to be able to overcome the financing issue. Turkey has valuable resources to ease the problem, but also is facing headwinds mostly due to rising global risk aversion.