Following the surprise re-election of Recep Tayyab Erdoğan as president of Turkey, the country has engaged in economic and foreign policy shifts that analysts say could prompt a return of foreign direct investment (FDI) to its borders.
Within weeks of his new mandate after winning a tightly fought election, Erdoğan appointed a new finance minister and central bank governor. These appointees are seen by many as a sign that Turkey is moving towards a more orthodox economic approach. Indeed, steps have already been taken to reverse the unorthodox monetary and economic policies of the past five years.
Post-election, Turkey has also adjusted its foreign policies. This includes the endorsement of Sweden’s membership of Nato. In exchange, President Erdoğan has called on European leaders to restart talks regarding Turkey’s prospective EU membership, a long-held ambition of Ankara.
Turkish authorities have also sought to improve relations with former foes Saudi Arabia and the United Arab Emirates (UAE) to attract trade and investment.
Nonetheless, Turkey’s $900bn (Tl24.33trn) economy faces several challenges, including runaway inflation, a widening current account deficit and a significantly depreciated currency. It is also still coming to terms with February’s earthquakes, which claimed an estimated 50,000 lives and left millions homeless.
A new economic path for Turkey or a post-election honeymoon?
Turkey experienced significant economic growth and FDI activity during the first 15 years of Erdoğan’s reign (first as prime minister and then as president). Since 2018, however, the country’s economy has suffered, with many economists blaming the president’s unconventional economic and monetary policies for these problems.
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However, in a post-election shift, Erdoğan appointed Mehmet Şimşek as the country’s new finance minister. Şimşek, who served as finance minister and deputy prime minister between 2009 and 2018, is known to be a supporter of orthodox policies and is widely respected by investors and financial markets.
Similarly, the Turkish president named Hafize Gaye Erkan, a former Wall Street banker, as central bank governor. In a further shakeup, he appointed three new deputy central bank governors, all of whom are supporters of mainstream economic thinking.
These appointments signal a retreat from the unorthodox policies of the recent past and a return to more conventional economic policymaking. Swift changes are already taking place. The central bank hiked interest rates from 15% to 17.5% in July. This came after it raised rates from 8.5% to 15% in June, marking the first interest rate increase since March 2021.
To further shore up public finances, as well as cover pre-election spending and support earthquake reconstruction efforts, authorities introduced a series of fiscal measures including increasing VAT and corporate tax rates as well as raising fuel duties.
“If Şimşek stays in charge of the Ministry of Finance, carries through necessary reforms and maintains fiscal and monetary discipline, then Turkey can attract more FDI into productive sectors such as high-tech, manufacturing, energy and agriculture,” says Serhat Suha, senior fellow in strategic studies at Trends Research & Advisory, an Abu Dhabi-based geopolitical advisory. “The direction seems positive thus far.”
Although there is optimism, particularly among overseas equity investors who have been pouring record flows into Turkish equities, analysts say it will take time for FDI investors to return to Turkey.
Chris Celio, senior economist and strategist at ProMeritum Investment Management, a London-based emerging markets hedge fund, believes that in order for new FDI to come into Turkey, these policy settings need to be improved over an extended period of time.
“I think FDI investors will want to see a longer period of policy continuity given the history of pivots,” he says. “Investors will also be concerned about the foreign exchange rate and need to be sure their assets do not lose value in hard-currency terms.”
Erdoğan seeks to rebuild bridges with Europe
In addition to a return to a more conventional approach to economics, Turkey has also recalibrated its foreign policy since May’s elections.
Erdoğan has sought to improve relations with the West, and in particular Europe. This was demonstrated by Turkey's endorsement of Sweden’s accession to Nato and Erdoğan's calls to restart EU membership talks.
Turkey's ambitions to join the EU started in 1987. It became an eligible candidate in 1999 and began negotiations to join one of the world's largest trade blocs in 2005. However, talks have stalled over the years, and in 2018, the European Council put accession talks on hold after concerns over issues including human rights and judiciary independence.
“Turkey should redouble efforts to start negotiations with EU on a new and expanded customs union,” says Atilla Yesilada, country advisor at Global Source Partners, a business management consultancy. “Although the progress of these talks remains to be seen, exports could rise and FDI could slowly return to the country.”
European countries continue to be the source of much investment in Turkey. In 2022, for example, Germany was the largest foreign investor in Turkey with 58 projects, followed by the US with 38, the UK with 23 and Italy with 18, according to GlobalData figures.
However, Celio says that when it comes to European or other G7-type FDI in Turkey, it will take a longer to materialise. “Inbound FDI slowed materially over recent years due to unorthodox policymaking,” he says. “However, I think FDI could pick up over the coming years if President Erdoğan consistently improves Turkey’s diplomatic relationship with Europe and the macro-outlook improves."
Turkey still courting Gulf FDI
While Erdoğan's attentions have most notably been pointed towards the West since his election win earlier in the year, Turkey is also still keen to attract trade and investment from oil-rich Gulf countries, namely Saudi Arabia and the UAE. Ankara’s outreach efforts with Riyadh and Abu Dhabi began in 2021.
In the past few years, Gulf nations (including Qatar) have provided Turkey with important credit lines. This included currency swap agreements with the UAE in January, as well as $5bn (SR18.75bn) deposit from Saudi Arabia into the Turkish central bank's coffers in March.
To boost ties further, Erdoğan embarked on a Gulf tour in July, visiting Qatar, Saudi Arabia and the UAE.
During his visit to Saudi Arabia, Riyadh agreed to buy Turkish-manufactured drones. The kingdom also pledged investments in energy, defence and communication sectors.
In the UAE, Turkey signed several bilateral deals worth an estimated $51bn. Among the most notable were an agreement between ADQ, the Abu Dhabi state-investment company, and the Turkish finance ministry to fund up to $8.5bn (Dh31.22bn) of earthquake relief financing bonds to support reconstruction efforts.
Suha notes that unlike European FDI into Turkey, FDI from the Gulf mostly comes in the form of investment in equity shares; in other words, buying profitable companies.
"Details of framework agreements or memoranda of understanding signed during the most recent trip are undisclosed," he says. "[But] based on what we know so far, it seems that the UAE is moving its investment up the value chain into healthcare, technology, mobility and clean energy sectors."
These agreements follow the ratification of a bilateral trade deal between Ankara and the UAE in May. Under the pact, both sides aim to increase bilateral trade to $40bn over the next five years.
Yesilada adds that the rapprochement with Riyadh and Abu Dhabi will not only prompt FDI but also trade opportunities for Turkish companies. "Both countries lifted their implicit ban on Turkish companies bidding for lucrative contracts on mega-projects,” he says.
For example, in June, Aramco, the Saudi oil behemoth, reportedly met with 80 Turkish contractors to discuss participating in projects worth $50bn in the kingdom.
While Turkey will welcome such lucrative developments in trade and investment, analysts say that Gulf investors will likely prioritise profits over politics.
“There are obvious advantages for both sides to improve the trading and investment relationship,” says Celio. “However, as we have seen in other countries such as Egypt, the Gulf Cooperation Council is likely to put commercial considerations ahead of geopolitics when it comes to FDI. So, if it makes good business sense, they will invest in Turkey.”
Will FDI return to Turkey under Erdoğan?
Initial signs of Turkey's post-election recalibration are encouraging. However, it remains to be seen if Erdoğan will continue to support this new trajectory or revert to his unconventional economic policies. At the same time, Turkey’s economic headwinds will mean that its more orthodox policies will take time to bear fruit.
In the foreign policy space, Ankara’s pivot to the West will likely be well received by Turkey’s core trading partners. Possible EU talks could prompt European companies to re-consider entering Turkey as well as support Turkish exports.
Similarly, warming relations with Gulf countries will help attract important FDI as well as trade opportunities for Turkish involvement in Gulf states' mega-projects.
Nonetheless, Erdoğan has a reputation for being unpredictable, and concerns in the West over issues such as human rights abuses will not go away based on a charm offensive that has lasted a few months. Foreign investors will likely wait and see if the post-election changes that Turkey has witnessed are truly meaningful, and only then make their move.