FDI fuels Turkey's record-breaking growth

Author: | Published: 3 Nov 2014
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Gokmen Baspinar and Ali Ceylan of Baspinar & Partners explain what is helping Turkey become one of the world’s top 10 economies by 2023


The Republic of Turkey has been one of the world's shining stars for economic development for more than a decade. This is reflected in its economic growth, political stability and ability to attract foreign direct investment (FDI). The Turkish economy grew at an average of five percent per annum between 2002 and 2012. The OECD has forecast 5.2% annual growth until 2017.

The Turkish economy was severely tested over the last decade of growth. It's shown its ability to remain stable and thwart issues that have plagued Europe and other emerging economies. When President Erdogan was prime minister, he predicted that the global financial crisis of 2008 to 2009 would only "touch and pass" the Turkish economy, and that no one should be worried about the troubles shaking the European and US economies. Most experts, however, still had grave concerns. President Erdogan said that the Turkish economy was stronger and would weather the storm. After achieving a 6.8% average growth between 2002 and 2007, Turkey achieved 0.7% growth in 2008, and -4.8% in 2009. These growth rates were not good, but also not bad compared to the eurozone. Then there was a jump to 9.2% and 8.8% growth rates in 2010 and 2011, respectively. Such rates were much higher than the US, eurozone, Japan and other emerging markets. The success story was still in play. President Erdogan had been proven right.

Inbound FDI
Later, when the 2012 eurozone crisis knocked on Turkey's door, the country's population remembered President Erdogan's "touch and pass" quote. Would it be different this time? Turkey's trade volume with the US, which originated the 2008 crisis, was increasing constantly, but was not accounting for a big share of the economy despite alliances to the US in other fields. The US has never been one of Turkey's major trading partners, whereas Europe is by far the country's number one trading partner. When Europe had negative growth rates in 2012 and 2013, Turkey still managed 2.1% and four percent growth, respectively. Some interpreted this as a success, whereas others took it as a failure, comparing these rates with the average growth of other emerging markets (five percent in 2012 and 4.7% in 2013). At the end, whichever view people would like to take, no one can deny Turkey's five percent average growth since 2002.

Based on these figures, the question should be: what did Turkey do right?

As most would know, Turkey suffered a severe economic crisis in 2001 – referred to as Black Wednesday – which ended with the bankruptcy and collapse of 22 banks. Savings Deposits Insurance Fund (SDIF), the relevant government authority, took control of these banks, liquidated some and restructured and sold the rest back into the public market. The cost of these banks to the economy was more than $39 billion. On the 10th anniversary of the 2001 crisis, finance minister Ali Babacan shared the total cost of the crisis with the Turkish public. He noted that there were different ways of calculating the cost of the 2001 financial crisis, but according to their calculations, it amounted to TL 252 billion ($112 billion). At that time, he said:

"In order to pay this huge debt the government had to become indebted to money markets. If there had been no 2001 crisis and if we did not have to pay this debt, the treasury's [Turkey's] total debt would have been TL 381.88 billion lower."

This amount corresponds to almost 25% of Turkey's GDP today – $820 billion. The 2001 crisis was a nightmare for Turkey. The lira lost 40% in one night, and the US exchange rate doubled in one year. Between 2000 and 2001, the stock market shrank almost nine times. These facts are important because the effects of the 2001 crisis have shaped Turkey's economy today – and this is without even mentioning what happened to interest and unemployment rates.

The 2001 crisis was because of banks. It was the financial market. What Turkey did was reform its financial market as a priority. Today, Turkish banks are considered strong and profitable. Foreign investors' interest in the stock market for Turkish banks' stocks reflects this.

"The OECD has forecast 5.2% annual growth until 2017"

As a result of the social impact of the crisis, the AKP (Justice and Development Party) came into power as a one party government. The Turkish electorate seemed to have tired of coalition governments, which were seen as one of the main reasons behind the economy hitting rock bottom. The AKP government stopped populist policies, made serious reforms and even jumpstarted the EU accession negotiations in 2004.

Considering that Turkey applied for EU accession back in 1959, starting negotiations was another boost for the country. AKP has won nine elections since 2002 including parliament and municipality elections, and constitutional referendums. The Turkish population expressed through their vote the view that economic stability requires political stability. So the next question to answer would be how this has affected FDI into Turkey.

As shown in the chart above, Turkey attracted more than $136 billion FDI over 10 years. It also attracted $6.76 billion FDI in the first half of 2014, with a 28% increase compared to 2013. Sixty-eight percent of this came from the EU.

Turkey offers great potential to foreign investors. Its many advantages include a young population, qualified labour force, large domestic market, investment incentives, liberalised regulations, and its strategic location.

There are so many fields that present big opportunities for foreign investors. It is worth touching on some of those that offer the greatest potential.


Turkey is an energy corridor between the eastern and western markets, and has abundant renewable energy resources. Almost 20% of FDI in 2013 was in the energy field. Its rapidly growing economy makes Turkey one of the fastest growing energy markets in the world. It's expanding population and development has caused a rapid increase in Turkey's energy needs. Therefore the government enacted new energy regulations, had the energy market liberalised and the regulations harmonised with the EU.

Turkey plans to have two nuclear plants start operations in the early 2020s. The government signed an agreement with Russia to have one of the plants built in Akkuyu, Mersin on Turkey's Mediterranean coast. It also has an agreement with Japan to have the other nuclear plant built in Sinop, on the Black Sea.

Besides having two nuclear plants, the government has also focused on the renewable energy incentives to utilise the country's high level of resources. Turkey is located in the Mediterranean sun belt and its solar radiation values are similar to Portugal and Spain. Despite this high potential, Turkey is using solar energy mainly for water heating and has no solar thermal plant. Considering the government's goal to reach at least 3000 MW solar energy capacity by 2023, and the incentives given to energy investments, solar energy is one of the main areas offering investment opportunities for foreigners.

Among the renewable sources, Turkey also has very high wind energy potential. According to the OECD, the country has 166 TWh a year of wind potential. Turkey's economically feasible potential is considered to be around 20 GW. However the installed wind power capacity is approximately 14% of total economical wind potential, meaning there is no doubt that wind energy is another area for foreign investors.

The natural biomass potential of the country is estimated to be 372 TWh. The energy resource includes various agricultural residues such as grain dust, wheat straw, hazelnut and different wastes. About 53% of the natural potential, about 198 TWh, is suitable for electricity production, whereas only 0.45 TWh were used as of 2010.

Research and development

Turkey encourages investors to have their research and development (R&D) centres in Turkey. All R&D and innovation expenditures are deductible from companies' taxable profits, provided that the companies making these expenditures are located in an R&D centre and employ at least 50 R&D personnel. Further, 100% of R&D expenditures incurred for eligible projects – being those which are oriented to new technology and knowledge research – are deductible provided that the number of researchers exceeds 500. An extra allowance at half portion of the increase in R&D and innovation expenditures compared to the previous year's expenditures is provided to these taxpayers. There are also other incentives for social security premiums, employees' income tax and stamp duty as well. Multinational companies considering Turkey as an operating centre due to its geographic location may enjoy great benefits in setting up their R&D centres in Turkey. There are also incentives for technology development and free trade zones.


Turkey is the 16th largest pharmaceutical market in the world. Worth $8 billion today, it is reported to expand to $23 billion by 2023, and export figures to reach $8.1 billion. As a sign that investors see this opportunity is that leading pharmaceutical firms Amgen, Recordati and Deva, which hope to reach markets in the Middle East, the Caucasus and North Africa, have increased their investments in Turkey. GlaxoSmithKline has also moved its regional headquarters to Turkey.


With its population of 77 million, Turkey has a huge domestic market for healthcare. After the reforms Turkey implemented in the healthcare sector, the country became very attractive to foreign investors. Investing in this sector became much easier following the recent enactment of a law that emphasises public-private partnerships in proving healthcare services. Investment funds and private equity funds have increasingly invested in hospital chains as well as subsectors such as dentistry, optometry and home healthcare services. The demand for partnerships and acquisitions in the healthcare sector is booming. As a note, one of the biggest single major transactions in Turkey was the sale of Acibadem Hospital chain to the Malaysian state fund, Integrated Healthcare Holdings. The acquirer paid $1.24 billion for 75% of Acibadem's shares. Finally, according to the Investment Support and Promotion Agency of Turkey, healthcare tourism is also playing a key role in attracting foreign investment. Turkish hospitals welcomed 130,000 foreign nationals seeking medical care last year, creating a turnover of about $400 million. The figure is expected to double in 2016 as the government plans tax-free healthcare zones specifically tailored for foreign patients.

Capital markets

Turkey is the 13th largest emerging capital market in the world and has huge potential for foreign and domestic investors. The corporate bond market recorded swift growth to $46 billion in 2014, up from just $3 billion in 2005, a nominal dollar compound annual growth rate (CAGR) of 35%.

Credit Suisse published a report Emerging Capital Markets: Road to 2030 in July 2014 which includes very interesting points about the future of the capital markets in the emerging markets. It would not be exaggerating to state that the forecast about Turkey is more than interesting.

Credit Suisse referred to the Annual World Economic Forum Global Competitiveness Report which charts the progress of financial market development across 148 nations by surveying domestic participants on eight separate concerns. Fifteen of the 20 largest emerging markets have seen their scores for the aggregate financial market development pillar rise in the eight years between the 2006/7 survey and the latest 2013/4 edition. The most significant improvement was observed in China followed by Turkey, the Philippines, South Africa and Saudi Arabia.

According to the report, Turkey had the swiftest equity market capitalisation nominal dollar CAGR between 2014 and 2030 (16.5%). This growth rate includes both the impact of dollar price returns and that of net issuance and inclusions. The Turkish equity market capitalisation is estimated to reach $3 trillion by 2030, making it the world's 10th largest market.

Other potential sources of equity deals (initial public offerings and secondary offerings) are expected to reach $218 billion between 2014 and 2030. Other markets of note, based on the analysis, are India ($375 billion), Saudi Arabia ($258 billion) and Brazil ($250 billion). Collectively, these four markets plus China are expected to account for an estimated 79% (or $ 4,734 billion) of the total emerging market potential deal value between 2014 and 2030 (or 41% of the global total). It is noteworthy that Credit Suisse states that Saudi Arabia (representing a 4.3% share) and Turkey (3.6% share) displace Korea and Russia in the top six country opportunities by total equity capital market deal value.

Recent investments

The Investment Support and Promotion Agency of Turkey recently shared certain foreign investments with public. 3M is investing $500 million in Turkey, which will incorporate sophisticated technology and create highly-qualified employment.

India-based Aditya Birla Group is investing $510 million in Turkey's Adana region for the production of viscose staple fibre, a material that today is not produced in Turkey.

"Solar energy is one of the main areas offering investment opportunities for foreigners"

Dow Chemicals formed a joint venture with Turkish conglomerate Akra Akrilik Kimya Sanayii, part of the Akkök Group. This investment is expected to offer integrated carbon fibre composite solutions to the growing global energy, transportation and infrastructure markets. The total amount of investment in the project, including third-party investments, is expected to reach $1 billion in five years and create employment opportunities.

Sumitomo Rubber Industries, the first local tyre producer in Japan, formed a joint venture with Abdülkadir Özcan Automotive Tyres investing around $500 million in the Central Anatolian province of Çankiri.

Italy's Recordati, a leading name in the European pharmaceuticals industry with a wide range of medicinal products, announced a manufacturing investment of $50 million in Turkey. The plant, to be built in Cerkezkoy Organised Industrial Zone in the Tekirdag Province in northwestern Turkey, will supply drugs for various therapeutic uses, at a rate of 80 million packs a year.

Problems and the future

Although Turkey has much strength in its economy, there are still certain issues that need to be dealt with by the government. The foreign trade deficit is one of the main downsides of the Turkish economy. The government took various measures to reduce the foreign deficit, and as a result it has seen a general decrease. One important note to keep in mind is that oil prices are going down and analysts are of the opinion that this trend will continue. The good news for Turkey is that each $10 decrease in the oil prices brings down the deficit by $4 billion. The other issue is the inflation rate, which reached nine percent this year. One of the other goals of the government is to increase the share of industrial production which is relatively low, 15.3% of GDP.

These downsides are not only known to economists but also to the government. Economy is a science and such issues and problems can be scientifically determined and solutions can be worked out. However, Turkey today is dealing with other issues related to its southern border. These developments are a concern for the entire region, but compared to the rest of the world, they may have a stronger impact on Turkey and its economy. When the OECD announced its growth forecast in June 2012, the Arab Spring was already going on and Syria's civil war had started. Despite these circumstances, the OECD still had a positive opinion on the Turkish economy. What no one foresaw at that time was the emergence of the Islamic State or Isis [Islamic State of Iraq and Syria] or as some including US President Obama call it, Isil (Islamic State of Iraq and Levant).

This is a concern for everyone who has an interest in Turkey. The situation creates uncertainty and obscurity for those who consider investing in the country. But, first of all, it should be remembered that Isis is not a problem just for Turkey, but to the whole world and the region. The region to which Turkey belongs has not lived in perpetual peace during the history of mankind. In other words, Turkey's five percent annual rate growth during the last decade occurred despite the Iraq war, Arab Spring and Syrian civil war taking place. At the same time, Turkey was dealing with domestic issues – the PKK problem. Further, the issues with Israel, Egypt, and Armenia could not also stop Turkey's growth.

Today, Turkey is a country integrated into the global economy. Since 2002 it has become more and more international, with thousands of foreigners having jobs and happily living in Turkey. Multinational companies are opening or moving their regional headquarters here. Foreigners are buying their summerhouses in Bodrum, Marmaris, Fethiye, Antalya rather than Mikonos or Ibiza. Billions of dollars of foreign investment are flowing into the country. There is no way back from the path Turkey has been following. The prevailing and future governments that do not understand this are condemned to step down. There may be times when development slows or remains static. But eventually, one way or another, Turkey has to reach its goal. The people of Turkey are not alone or outcast in the world anymore. They are world citizens. No one should be surprised when Turkey becomes one of the 10 largest economies in the world by 2023. The country has the potential and ability to catch up from the bad times, just as it did in 2010 and 2011.

Turkey will have parliamentary elections within the next eight months. Even if the people of Turkey change the captain of Turkey's ship, the forward trajectory of the country will not change. Will there be some bumps along the road? Most probably, but the direction is only upwards.

About the author

Gokmen Baspinar
Partner, Baspinar & Partners

Istanbul, Turkey
T: +90 (212) 465 66 99
F: +90 (212) 465 36 99
E: gokmen.baspinar@baspinar.av.tr
W: www.baspinar.av.tr

Gokmen Baspinar started his career with a marine company and specialised in protection and indemnity insurance matters. He is one of Turkey's leading lawyers in litigation and real-estate law, and has been involved in all types of real-estate deals. He represents financial investors, developers, end customers and contractors. He also combined his experience in litigation with real estate and today represents a Dutch investor against Turkey before International Centre for Settlement of Investment Disputes (ICSID).

Gokmen is known for structuring deals related to distressed assets and is currently litigating one of the biggest bankruptcy cases in Turkey. He has extensive experience in privatisation deals. He was the lead counsel to the Privatisation Authority at the privatisation of Petkim Petrochemicals, 51% of which was privatised for $2.04 billion. He recently advised a foreign client on the privatisation of the Turkish National Lottery games.

He is a graduate of Ankara University Law School, class of 1998. He received his LLM from the Marmara University Law School, and worked at the European Court of Human Rights in Strasbourg between 1999 and 2001. After working as a partner at one of the biggest law firms in Turkey, in 2010 he decided to set up his own firm with his partners.

About the author

Ali Ceylan
Partner, Baspinar & Partners

Istanbul, Turkey
T: +90 (212) 465 66 99
F: +90 (212) 465 36 99
E: ali.ceylan@baspinar.av.tr
W: www.baspinar.av.tr

After having worked for the Turkish Savings Deposit Insurance Fund of Turkey, Ali Ceylan moved to private practice. During his time with the government, he dealt with the recovery of bankrupt Turkish banks' losses and chased the assets outside Turkey and led international cases related to such assets.

Ceylan advises foreign clients on their acquisitions and corporate matters. He has a wide range of clientele, advising retailers in food and garment sectors, banks, real-estate developers, advertising companies, hotels and factories in different industries. He works on international arbitration cases and is advising various cases before ICSID and the International Chamber of Commerce. In this respect, he has close relations with litigation investors and brokers.

A graduate of Istanbul University Law School, class of 2001, he has an LLM from the International Business Law from the American University, Washington College of Law. Ceylan has been selected among the best lawyers in the IFN Poll 2012 under the Corporate & Commercial category. Ali is a recommended lawyer by Legal500.