Three investment risks in Turkey

If the question was asked three weeks ago, the answer you might get from foreign observers of the investment environment in Turkey would be related to the possibility of a unilateral Turkish military operation into Syria.

Not any longer. After the Turkish artillery began opening “reciprocal fire” against targets in Syria following the Munich framework for a “ceasing of hostilities,” it was clear that the Turkish government would not get involved in any ground operation in Syria outside NATO or the U.S.-led coalition anti-Islamic State of Iraq and the Levant (ISIL), to be on the safe side.

But now the major investment risks - according to representatives of foreign investors, global monetary institutions, and diplomatic observers - can be summed up as follows:

1) A change in Turkey’s monetary policy. Observers say the first thing they are curious about is who is named the next governor of the Central Bank. The term in office of Erdem Başçı expires on April 19. Başçı has in recent years been subject to criticism, mainly by Turkish President Tayyip Erdoğan and cabinet ministers, for not lowering interest rates as much the political authorities want. Erdoğan has repeatedly challenged the independence of the Central Bank, but Başçı has managed to avoid bigger blows by making small adjustments. 

Başçı’s re-appointment is always possible, but even if he is reappointed it may not mean there would be no change in monetary policies, which could pave the way back to inflationary policies. An additional problem within the Central Bank is that the terms of some of its Monetary Board members expire almost at the same time as Başçı’s.

2) More terrorist attacks in western Turkish cities. Terrorist acts like the January suicide attack by ISIL in Istanbul that killed 11 German tourists, or the attack in Ankara by the outlawed Kurdistan Workers’ Party (PKK) – claimed by the Turkish government to be in cooperation with the People’s Protection Units (YGP) in Syria – that killed 29 military employees, could negatively affect the trust in Turkey’s security environment. This would also be a risk for the country’s investment environment.

3) The risk of government involvement in the management of private companies. After the appointment of trustees to the boards of a number of companies accused of supporting the network of Fethullah Gülen (an Islamist ideologue living in the U.S. who was once Erdoğan’s close ally) within the government and media, the current question marks over the future of İş Bank have apparently made international investors uncomfortable. 

This debate started when Erdoğan’s presidential adviser on the economy, Yiğit Bulut, said the government should take over the biggest bank in Turkey, İş Bank, because of the minority shares held by the main opposition Republican People’s Party (CHP) ever since the founding of the Turkish Republic (as the CHP was the country’s founding party). Following these remarks, the bank’s shares plunged and the government was forced to make a statement that there was no such plan. It appears that foreign investors are now monitoring whether the government may take action against any private company operating in Turkey for political reasons through court decisions. This is exacerbated by the ongoing debate in the country on court independence.