What foreign investors want in Turkey is clear

The government has recently been holding a series of meetings with foreign investors in a bid to recover Turkey’s deteriorated perception. Following Prime Minister Binali Yıldırım’s meeting with the executives of Turkey’s German companies, Economy Minister Nihat Zeybekci is also expected to hold a broader meeting with foreign capital.

In my opinion, holding such meetings will be of little importance unless investors’ worries are properly addressed. The biggest advantage of these meetings is the opportunity they present to listen to investors’ worries and complaints first hand. 

What is important is whether or not the foreign company representatives are sincere: Do they clearly communicate the real problems to the government or not? The impression I get is that they generally talk about problems with the government, but naturally they abstain from going into details.

Among the political problems that foreign investors refer to in meetings with Prime Minister Binali Yıldırım are Turkey’s belligerent language in various political relations and extensions to the state of emergency. They indicate that the uncertain atmosphere created by emergency rule constitutes a disincentive for doing business.

President Recep Tayyip Erdoğan, however, says “foreigners cannot cite the state of emergency as a reason [for not doing business].” 

So the basic difference between the government and foreign investors is about the state of emergency. But there is currently no political will for finding a compromise.

Among the subjects that they cannot talk openly about is the tough attitude developed toward Turkey in European countries of late. There is a serious reaction in Europe regarding Ankara’s way of ruling. Citizens in European countries are cool on their companies making investments in Turkey during this period, but it is difficult for foreign company executives to explain this to the Turkish government. I am not sure whether they tell the ruling authorities in Ankara that they cannot find qualified personnel to employ in the country because of this perception abroad. But I have personally witnessed them in private conversations saying that such a problem is growing bigger and bigger in business.

In brief, the political problems visible in foreign capital’s view of Turkey have grown to such an extent that it is now affecting the economy. It will remain difficult to attract foreign capital for direct investment until the state of emergency is lifted. Foreign capital only becomes possible if companies are given very profitable, long-term guarantees.

The worries of short term foreign capital that Turkey’s economy relies on, often called “hot money,” are different. Do not pay much attention to the government’s messages that “interest rates must be reduced.” Currently, high interest for hot money is still being given, so hot money flows are continuing, particularly in bonds. 

The Central Bank chairman recently stated that the foreign share in bond stocks will keep multiplying. This means that the Treasury will keep giving even higher interest, considering the Treasury’s increasing financial needs. If the Central Bank can prevent extreme currency fluctuations by keeping interest high, then there will be no problem for hot money. It can return easily back to its country without losing much value after the exchange, which earns short term interest income.

But it is doubtful how long hot money flows into Turkey will continue. The Central Bank seems to be very optimistic on this question, but real problems will start if the U.S. Federal Reserve starts moving to reduce liquidity and increase interest rates, starting in October.