ECONOMY

Turkey election results seen as boosting investment flows

ANKARA – Turkey has a stronger hand in the competition for foreign direct investment (FDI) to sustain its rapid economic growth after the reform-minded, pro-EU Justice and Development Party (AKP) won a fresh mandate to rule alone for the next five years. The AKP, which presided over Turkey’s transformation from a financial basket case into one of the world’s best-performing emerging market economies between 2002 and 2007, won a landslide victory in Sunday’s parliamentary election. Financial markets have rallied this week in the belief that the election result will consolidate Turkey’s economic and political stability and keep the country moving on a reformist track toward eventual European Union membership. Investors interpreted the result as giving clear backing to the party most favorable to foreign investment, but without making the AKP – which has Islamist roots – so strong as to provoke the army, THE guarantor of Turkey’s secular system. «There is no remaining obstacle to inflows of more FDI. Opposition parties that were not very warm to FDI and proposed restrictions on foreign ownership failed in the elections,» said Oyak Investment chief economist Mehmet Besimoglu. Analysts predict another $20 billion FDI in 2008. Turkey attracted $14 billion FDI in the first four months of 2007 and hopes to reach $20 billion by the end of the year. FDI stood at a record high $20.2 billion in 2006, for which EU countries accounted for 83.5 percent. By comparison, Turkey attracted only about $850 million IN FDI annually in the 1995-2000 period, when political instability and red tape discouraged potential investors. Though it is still dwarfed by emerging superpower China’s $70 billion, Turkey last year performed well in the competition for FDI, seen as a key factor for raising income levels in cash-hungry developing nations. Among Turkey’s chief rivals for FDI flows, EU member Poland attracted $13.92 billion FDI and Hungary $6.14 billion in 2006. Liquidity Analysts believe that Turkey will lure more FDI as long as global liquidity remains ample and commodity prices stay high, creating cash mountains in oil-rich countries. «Here the capital is scarce and money is cheap abroad. Also Kazakhs and Arabs want to hold real assets for the future and not keep all their money in the form of portfolio investments,» Besimoglu said. Much FDI stems from privatization of large state companies, such as land-line operator Turk Telekom and oil refiner Tupras, and the number of assets that can be sold is limited. «An important part of foreign direct investment in the last two years stems from privatization transactions, which will not be as frequent as they were in the past,» said Garanti Bank’s head of research Ali Ihsan Gelberi. The sale of Denizbank and Finansbank to European banks and the purchase of mobile phone operator Telsim by Vodafone boosted FDI in Turkey last year. Financial services alone accounted for almost 40 percent of all FDI into Turkey. The government is now expected to kickstart the privatization of cigarette maker Tekel, the national lottery and electricity distribution grids, as well as large state lender Halkbank and sugar factories, but has yet to fix timetables. Economists say Turkey is well-placed to attract more FDI because of its EU candidacy, its proximity to Middle Eastern markets, a growing pool of young domestic consumers and fast-rising income levels. «I believe that acquisitions by foreigners will speed up in the private sector (after the public sector) and then green-field investments can come in the future,» Gelberi said, predicting $20 billion in FDI in 2008. One factor that could hamper investments is Turkey’s large informal economy, estimated at around 26-27 percent of gross national product. This hurts foreign firms in competition because they have to register and pay taxes. Turkey’s large textiles industry is one where informal operations are widespread and foreigners avoid investment. However, analysts said energy would be a leading sector for FDI in the coming years as Turkey steps up its efforts to become a hub between the energy-rich Caspian region and European markets and also liberalizes its own internal market. Ankara hopes to attract up to $12 billion in FDI for new hydropower plants alone in the near future. The government has pledged to fight the informal economy through tax reform, including cuts in some tax rates.