(Investment) Exodus: Investors and Presidents
There were many things to emphasize about Turkey’s March Balance of Payments (BoP) statistics, which were released by the Central Bank and the Turkish Statistical Institute on May 12.
For one thing, at $5 billion, the current account deficit turned out to be higher than expectations of $4.3, rekindling fears that the narrowing of the deficit had come to an end. Even though I continue to expect a milder rebalancing than the consensus, I would not jump to that conclusion, as the difference stemmed mainly from lower-than-expected shuttle trade and services income.
Others emphasized what I call “unidentified financing objects,” or UFOs, which are officially called net errors and omissions (NEOs). At $4.3 billion, NEOs had registered in February their largest figure since September 1998. That number was revised up to $4.6 billion, crowning that month as the month with the largest NEOs.
Still others emphasized the continuing decline in portfolio flows. Interestingly, hot money did not decrease, as the fall in portfolio inflows was more than replaced by the rise in foreigners’ deposits at banks. However, foreign direct investment (FDI) continued its decline, falling from $5.4 billion annually in February to $4.8 billion in March.
Despite all these highlights, each of which would warrant a separate column, all the research reports and columns I read ignored the most important aspect of the data, which is related to FDI. Before sharing my secret with you, I should tell you that analysts usually report FDI as a net figure - the difference between foreigners’ investment in Turkey and Turks’ investment abroad, which is called outward direct investment (ODI). For example, during the past 12 months, FDI was $11.7 billion, while ODI turned out to be $6.9 billion - with the difference being $4.8 billion.
A statistic I really like is the FDI/ODI ratio, which incidentally hit its lowest point since the 2001 crisis in March. The decline in this ratio could be because of the fall in FDI or the rise in ODI. We can actually see both in the data; While FDI has been falling, despite significant investment into the real estate sector, ODI has been on the rise.
Government officials would tell you the former reflects global conditions, while the latter is proof of the strength of the Turkish economy and firms. Interestingly, both FDI and ODI’s moves commenced around the same time; FDI began its slow and steady decline in the spring of 2014, soon after the graft scandal and local elections, while ODI surged during the summer and fall of the same year.
Fellow Hürriyet Daily News columnist Güven Sak, who made use of the same statistic recently, believes the fall in FDI and the rise in ODI are symptoms of the same malaise. After noting that “Turks do not want to invest in the future of their country,” he goes on to state that “it is the rule of law, or the lack thereof.” Interestingly, economy tsar Ali Babacan has been making the same point regularly.
Director Ridley Scott showed how the pharaoh and his army suffered from the wrath of God in “Exodus: Gods and Kings.” Even if he manages to become an all-powerful president by changing the constitution, Recep Tayyip Erdoğan will suffer from the exodus (and wrath) of investors, Turkish and foreign alike.