HomeReportsBureau of Economic and Business Affairs2019 Investment Climate Statements…Turkey

# 					2019 Investment Climate Statements: Turkey			

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													Executive Summary											

                -  Executive Summary 
                -  1. Openness To, and Restrictions Upon, Foreign Investment   
                -  2. Bilateral Investment Agreements and Taxation Treaties   
                -  3. Legal Regime   
                -  4. Industrial Policies   
                -  5. Protection of Property Rights   
                -  6. Financial Sector   
                -  7. State-Owned Enterprises   
                -  8. Responsible Business Conduct   
                -  9. Corruption   
                -  10. Political and Security Environment   
                -  11. Labor Policies and Practices   
                -  12. OPIC and Other Investment Insurance Programs   
                -  13. Foreign Direct Investment and Foreign Portfolio Investment Statistics   
                -  14. Contact for More Information   

## Executive Summary

Turkey provided an appealing market for investors for more than a decade.  It experienced strong economic growth on the back of the many positive economic and banking reforms it implemented between 2002 and 2007.  After the global economic crisis of 2008-2009, Turkey continued to attract substantial investment as a relatively stable emerging market with a promising trajectory of reforms and a strong banking system. 

Despite this progress, over the last several years, economic and democratic reforms have stalled and in some cases regressed.  Starting in 2011, Turkey has seen nine years of gross domestic product (GDP) growth. GDP growth was 7.4 percent in 2017 mainly due to government stimulus programs, but it fell to 2.6 percent in 2018 as the economy entered a recession in the second half of the year.  While the Government of Turkey projects 2.3 percent GDP growth in 2019, many economists project negative growth. The International Monetary Fund (IMF) predicts the GDP to contract by 2.5 percent in 2019. According to sceptics, the government’s economic policymaking remains opaque, irregular, and sometimes politicized.  These factors contributed to a fall in the value of the lira, in addition to inflation of more than 20 percent and unemployment rates over 13 percent. The state of emergency, which had been in effect since the coup attempt in July 2016, ended in July 2018.  

Turkey transitioned to a presidential system in July 2018, following a referendum in 2017 and presidential election in June 2018.  The opacity of government decision making, lack of confidence in the independence of the central bank, and concerns about the government’s commitment to the rule of law, combined with high levels of foreign exchange-denominated debt held by Turkish non-financial corporates, have made foreign investors cautious leading to historically low levels of foreign direct investment (FDI).   

While there are more than 1,700 U.S. businesses active in Turkey, many with long-standing ties to the country, the number of U.S. companies is relatively low given the size of the Turkish economy.  Despite the challenging investment climate, there are still positive growth prospects. Some established U.S. companies have increased investment in Turkey in the technology, consumer goods, and aerospace sectors.  According to some businesses, due to economic challenges and concerns about the rule of law, arbitrary detentions, and lack of predictability on the political front, many existing firms slowed new investment, and only a few new firms entered the market in 2018.  While there was substantial investment in 2018, investment is projected to continue to slow going forward. 

The most positive aspects of Turkey’s investment climate are its favorable demographics and prime geographical position, providing access to multiple regional markets.  Turkey is also an island of relative stability and growth potential in a turbulent region, making it a desirable hub for regional operations. Turkey has a relatively educated work force, well-developed infrastructure, and a resilient consumption-based economy. 

Reportedly, the most negative aspects of Turkey’s investment climate are geopolitical risk and concern over the deterioration of the rule of law and security environment.  Many observers remain concerned about transparency, corruption, and reduced judicial independence. In the past few years, especially after the July 2016 coup attempt, the government apparently marginalized critics, confiscated over 1,100 companies worth more than USD 11 billion, and removed more than 130,000 civil servants, often on terrorism-related charges alleging association with Fethullah Gulen.  The political focus on transitioning to a presidential system, cross-border military operations in Syria, the worsening economic climate, and persistent questions about the relationship between the United States and Turkey as well as Turkey’s relationship with the European Union (EU), all may negatively affect consumer confidence and investment in the future.

Turkey’s willingness to make progress on needed structural economic reforms will remain key for the country.  Government officials will need to make difficult political choices to liberalize the market to align with the goal of modernizing Turkey’s EU Customs Union agreement, itself impacted by worsening relations with EU member states.  The government’s push to require manufacturing and data localization in many sectors also impacts foreign investment into the country. Other import issues include tax reform and the decreasing independence of the judiciary and the Central Bank.  Turkey hosts 3.5 million Syrian refugees, which creates an additional economic burden on the country as the government provides services such as education and healthcare to refugees.

*Table 1: Key Metrics and Rankings*