Feel the love in Turkey

To say that Istanbul’s business community is nervous would be an over-statement. At the same time, the security situation does tend to loom large in conversations in Turkey’s historic capital.  On the way to lunch at a waterfront restaurant on the Bosphorus, a local banker points out the Raina nightclub, scene of a deadly terrorist attack on New Year’s Eve. 

A partner at an international law firm cheerfully tells me I should have nothing to worry about if I stay away from tourist sites – then shows me where a bomb went off outside her office last year. 

A friend in the media commends me on my choice of hotel, noting that it is next to a metro station with a direct link to Ataturk airport. “If anything goes wrong, go straight down there and get on a train,” she advises. (For the record, this is not a popular suggestion. The consensus view is that one of the safest places to be at a time of crisis is inside an international hotel with the now ubiquitous security scanners and armed guards.)

What all agree on is that the wave of terrorist attacks over the past year, not to mention July’s failed coup, have made some people very nervous about visiting Turkey. 

“We are not inviting European and US guests to Istanbul at the moment,” says one local banker.

But if individual travellers are timid, foreign firms seem to be quite the opposite. Locals report that, while some private equity funds have been deterred by the recent turmoil in Turkey, strategic investors are as eager as ever to put cash to work in the country.

Foreign direct investment flows may have dipped in the immediate aftermath of the coup attempt – “last year was effectively an eight-month year from a business perspective,” says one Turkish banker – but have since recovered their former vigour. 

Companies already on the ground in Turkey are upping their investments, while a plethora of new players are appearing on the scene from both Europe and, increasingly, Asia. Recent M&A deals have featured Japanese, Korean, Chinese and Malay firms on the buy side. 

Part of this enthusiasm is down to simple demographics. Any country with a population of 80 million, GDP per capita of close to $10,000, low labour costs and a common border with the European Union will clearly have attractions for foreign investors. 

The recent collapse of the lira has also boosted in-bound flows by attracting global bargain-hunters, say locals, as has the increased willingness of Turkish entrepreneurs to monetize their holdings. 

“People are worried, so are more prepared to sell,” says one banker. “It’s all helping to close the valuation gap.” 

While strong fundamentals and low prices are clearly important, however, a good chunk of the credit for maintaining FDI flows has to go to the Turkish authorities. 

This viewpoint may seem surprising, and perhaps unpalatable, to those whose view of president Recep Tayyip Erdogan and his AK Party is entirely taken from the western media. Recent coverage of Turkey has focused heavily on the government’s post-coup crackdown. Regular reports of mass arrests, property confiscations and torture claims have sparked outrage among international readers and exacerbated volatility in Turkish markets.

This is not to say that any of this is wrong, or indeed unjustified. It has long been abundantly clear that Erdogan is an authoritarian leader with little respect for democratic institutions, political opposition or a free press. One thing that is also clear, however, if less widely publicized, is that he understands the importance of foreign investment for Turkey’s economy and, by extension, for the AKP, which has built its power base on its ability to deliver growth.

“For Turkey to grow it needs funds, and with a current account deficit that means external funds,” says a Turkish banker. “That means we need to keep international investors happy with their investments here. This government understands that better than any government in the history of the republic.”

This is borne out by AKP’s track record. In its 14 years in power, the party has indeed rolled out the red carpet for foreign investors, regularly implementing legislative and regulatory reforms to improve the operating environment in Turkey, as well as offering lavish incentives and assistance. 

It has also taken great care not to unnerve them. Locals in Istanbul note that, while the post-coup investigations have extended into many parts of the Turkish economy, companies with foreign capital and connections have been left well alone. 

Similarly, despite regular diatribes by Erdogan against profiteering by banks and a mysterious “interest rate lobby”, AKP has been careful to take no action that could seriously damage the Turkish banking sector – much of which, it may be noted, is foreign-owned. 

“This rhetoric – it’s all showbiz,” says a local banker. “It’s playing to the masses.” 

With a perhaps infelicitous choice of phrase, he adds: “The government knows that doing anything against foreign investors in Turkey would be the equivalent of shooting itself in the head.”

That may be little comfort to the dozens of journalists currently languishing in Turkish prisons – but it might be to jittery emerging-market fund managers.