Recovery of Turkey's FDI accelerates (1)

According to the table below, Turkey's IFDI surge, which accelerated in 2004, reached its peak in 2007. IFDI's slump by 12 percent in 2008 accelerated in 2009 as it shrank by 57 percent. The slump in Turkey's IFDI reflected the sharp decline in global FDI since 2007. Turkey had been fortunate to ride the upward global FDI trends since 2004, which reflected the favorable high growth-low inflation conditions around the world. However, with the outbreak of the global crisis, followed by the Great Recession, and as major multinational companies cut back on both domestic and foreign investments, FDI outflows from leading source countries plummeted.

Turkey's IFDI began to recover in 2010, as it rose 7 percent, boosted by a 40 percent rise in real estate investments. Its recovery accelerated in 2011, surging 76 percent despite a 19 percent decline in real estate investments. This recovery, led by brown field FDI in the financial, energy and manufacturing sectors, was much faster than that in global FDI, which decelerated to 10 percent in 2011 after rising 24 percent in 2010. But Turkey's level of IFDI in 2011, 71 percent of which came from the EU, was still 28 percent below its peak reached in 2007.

What are the chances for Turkey's accelerating IFDI to continue its resurgence in 2012? They depend on both external and domestic factors, as was the case with the initial surge. According to the UN Conference on Trade and Development's (UNCTAD) latest “Global Investment Trends Monitor,” issued last month, although the prospects for global FDI in 2012 continue to improve, they remain guarded due to the fragile world economic recovery. Based on preliminary estimates, global outward FDI (OFDI) rose 17 percent in 2011 to $1.66 trillion, exceeding the pre-global crisis level but 25 percent below the 2007 peak (the Organization for Economic Cooperation and Development [OECD], however, estimates global OFDI to have risen 10 percent in 2011 to $1.55 trillion). Cross-border mergers and acquisitions accounted for all the increase, with green field projects showing no increase. Developed countries, led by the EU, the US and Japan, accounted for $1.23 trillion of global OFDI, an increase of 25 percent over 2010. Their share of global OFDI rose to 74 percent in 2011 from 69 percent in 2010. Although OFDI from developing countries fell 7 percent to $357 billion, Turkey's OFDI rose 68 percent from $1.5 billion to $2.5 billion between 2010 and 2011, favoring locations in North Africa, West Asia and Iran. So, Turkey registered in 2011 a much faster recovery than the global recovery in both IFDI and OFDI.

The 88-page “World Investment and Political Risk” report issued by the World Bank Group's Multilateral Investment Guarantee Agency (MIGA) last December found that despite heightened global risk perceptions stemming from the sovereign debt crisis in the eurozone and the political crisis in the Middle East and North Africa, the corporate respondents surveyed were “cautiously optimistic” about their investment plans for 2012. More confident about the next three years, three-quarters planned to expand in developing countries despite their perceptions of growing political risk, defined as “the probability of disruption of the operations of companies by political forces and events, whether they occur in host countries or result from changes in the international environment.” Political risk in host countries stems not only from uncertainty over the actions of governments but also from the instability created by minorities and separatist movements. Respondents were especially concerned about the risk of expropriation (regulatory takings, creeping expropriation and outright nationalization) reflecting “resource nationalism.” The most recent example is Argentina's nationalization, this month, of YPF, the country's biggest oil company and a subsidiary of Spanish energy giant Repsol.

I will continue my discussion next week of Turkey's accelerating IFDI recovery, focusing on recent domestic policies and the developments driving them.