The appeal of the Turkish market to foreign investors is obvious when viewed from the gleaming skyscrapers of Istanbul’s business and financial districts, part of the sprawling city of 15m that stretches in every direction.
A skyline dotted with cranes and streets teeming with people and traffic reflect the dynamism that has given Turkey average annual economic growth of about 5 per cent for the past 15 years. But one new building that looms over the city from the slopes of Istanbul’s highest hill provides a tacit warning of growing political risks.
The Camlica Mosque, with its six minarets and capacity for 37,500 people, is the pinnacle of a nationwide mosque-building spree ordered by President Recep Tayyip Erdogan. But for advocates of a secular and democratic Turkey, the giant structure is a reminder not only of creeping Islamisation, but also of Mr Erdogan’s growing personal authority.
After a failed coup last summer and a subsequent crackdown on the network he suspected of leading it, Mr Erdogan narrowly won an April referendum to expand his executive powers. This has deepened alarm among many international investors about the direction of a country that was, until recently, one of their favourite destinations for capital.
The three main credit rating agencies — Moody’s, Standard & Poor’s and Fitch — have cut Turkish debt to junk status because of the political turmoil and, in the words of Fitch in January, the undermining of “institutional independence”.
Foreign direct investment fell by 31 per cent in 2016 to $12bn, according to the United Nations Conference on Trade and Development, which said the attempted coup had “cast doubt on the country’s political stability and disrupted economic growth”.
Executives from multinational companies and industry analysts say the past year has had a chilling effect on investor sentiment. Two executives running Turkish operations for international groups told the Financial Times that they were facing tough questions from global headquarters about the wisdom of further investment.
“Not many people are looking to expand their positions now,” says one, speaking on condition of anonymity. “Most companies are focused on defending what they’ve got.”
Both executives agree that many in their local workforces are demoralised by recent political developments, threatening to worsen a longstanding brain drain of young secular professionals leaving the country.
“I’ve seen ups and downs but now is the worst I have seen it,” says one long-serving foreign executive.
Not all foreign investors are holding back. Socar, Azerbaijan’s national oil company, has announced plans for $18bn of investment in Turkey by 2020. This would make it one of Turkey’s biggest foreign investors as it seeks to shore up bilateral energy ties. Its projects include the $5.5bn Star oil refinery under construction in Aliaga, near Izmir on the Aegean coast.
Many of the biggest investments in Turkey in recent years have come from Asia and the Middle East, particularly Qatar. This has reinforced a sense of weakening ties with western Europe at a time when long-mooted EU membership for Turkey looks more fanciful than ever.
In the financial sector, a target set by Mr Erdogan to increase the share of interest-free Islamic finance from 5 to 25 per cent of transactions is seen as favouring expansion of domestic and Arab banks at the expense of those from western Europe and the US.
For all the concerns among western investors, several executives and analysts say Turkey remains a bright spot within the portfolios of multinational companies. Economic growth slowed last year to 2.9 per cent, but rebounded to 5 per cent in the first quarter of 2017, compared to the year before.
“Considering the volatile geopolitics in the neighbourhood, Turkey has been very resilient,” says the head of Turkish operations for one international group.
Pessimists say growth is being fuelled by unsustainable government spending and loose credit, which some fear is storing up debt problems. They say the lack of financial transparency and independent regulators adds to the risks.
Optimists counter that Turkey has had financial and political crises before and has always overcome them. Denis Lohest, Turkey head of Engie, the French energy group previously named GDF Suez, says a long-term view has paid off since its first involvement in the country — building a tramway in Istanbul more than a century ago.
Today, Engie generates and distributes electricity in Turkey and Mr Lohest says the group is keen to expand after launching a new energy trading unit and its first retail offering in the past year.
The positive outlook tends to be strongest in consumer industries, which are tempted by rising domestic demand from Turkey’s growing middle class. With a young and growing population of 79m — only 2m less than Germany’s — and with a median age of 31 years, Turkey has the kind of economic dynamism and youthful demographics lacking in the EU, where the median age is 42.
PepsiCo, the US food and drink group, announced plans in December for a new $120m production facility in the western city of Manisa. Meanwhile, Taxim Capital, a Turkey-focused private equity company based in the Channel Islands, in September bought a 40 per cent stake in a fast-growing restaurant chain called Big Chefs.
These companies are betting that demographic and social forces driving economic growth will cut through the political headwinds. “Turkey is young and dynamic and the people are innovative,” says Mr Lohest. “It is still an incredible opportunity.”