Why is Turkey falling behind in attracting FDI?
Turkey has a severe current account gap problem. The gap has recently decreased to 6 percent of the country's GDP, but this has mainly been caused by the plunge in oil prices. As Turkey is dependent on foreign sources in energy, its energy bill is now decreasing. But this is not the cure to the problem. The Turkish economy continues to be fragile against global currency shocks with the existing structure.
Three things play a great role in reducing this gap: Increasing savings, reducing consumer loan growth, and attracting more FDI.
I will be brief in elaborating why savings are so small in Turkey. The most recent figures show that Turkey’s savings amount to approximately 14 percent of the GDP. This is one of the lowest among emerging markets, compared to China with almost about 50 percent or Malaysia with around 30 percent, according to IMF data. South Africa and Brazil have similar low saving rates as Turkey, making them very fragile against currency shocks.
This is not a surprise, as countries recording a current account deficit tend to have strong imports, low savings rates and high personal consumption rates as a percentage of disposable incomes.
Turkish people want to save money, but they cannot, as demonstrated by a number of studies. Almost half of Turks believe that the economy will go bad in the next 12 months, but very few think this will affect their household income negatively, according to an AvivaSA saving trends study conducted in 12 countries.
The most concerned people for their debts are from Turkey, but Turkish people also save some of the least amounts of money, according to the same study.
Additionally, Turks still favor an interesting investment strategy: Buying gold and hiding it somewhere safe – usually under the mattress. It is believed that thousands of tons of gold are held under the mattresses of Turkish residents as a form of personal savings, and therefore kept out of the banking system.
Although the government has taken several steps to cool down loan growth in Turkey since 2013, there has been no significant decrease in consumer loan growth. The dimensions of the consumer loans that appear in the form of consumer credit as houses, vehicles and general-purpose personal finances - and as cash credit through credit cards - still exceeded 345.5 billion Turkish Liras ($148 billion) as of September 2014, and when inflation is taken into account there was only a 1 percent decline compared to the previous year.
This dilemma brings us to the third point: Is Turkey still attractive for foreign direct investors?
The recent figures show that, unfortunately, it is not.
Turkey lured record high FDI in 2007 at around $22 billion, followed by $19.8 billion in FDI in 2008. Actually, the dramatic increase started in 2006 with over $20.2 billion in FDI in 2006, according to the figures from the Central Bank. The figures cooled to around $8.5 billion both in 2009 and 2010, at the height of the global economic crisis. Turkey’s FDI then jumped again to $16.1 billion in 2011, but started to decrease in the following years: $13.2 billion in 2012, $12.9 billion in 2013 and $6.8 billion in the first half of 2014.
The jump starting in 2006 cannot be explained by political stability only, as the country has been ruled by the same party since then. We need to seek other reasons to find why the FDI inflow to Turkey is falling.
A recent and increasingly predominant strand of studies argues that, apart from the improved economic and political stability achieved over the last decade, the beginning of accession negotiations with the EU in 2005 significantly contributed to boost FDI, as a recent World Bank Working Paper showed this year, titled “How Regional Integration and Transnational Energy Networks Have Boosted FDI in Turkey [and May Cease to Do So].”
So as long as Turkey does not return to the road of making structural reforms to adopt European Union regulations in the economy and judicial system, the country will fall behind in luring FDI.
Let me conclude with a brief comparison between Turkey and one of the relatively new EU members in terms of attractiveness for FDI. Poland, which started to lure a significant amount of FDI after its accession to the EU was launched, like Turkey, is one of the most attractive countries in Central and Eastern Europe, at 31 percent according to the EU’s 2014 European Attractiveness Survey. Conversely, Turkey is one of the least attractive countries on the list, at only 6 percent.