Foreign investors in Turkey feel the heat

MDN İstanbul

The political developments that began with the launching of a massive corruption probe in Turkey on Dec. 17 took on a whole new dimension when new corruption claims took place late February. Speculations and allegations hardly affected to whole economical development and financial structure
of the country

The dollar, which skyrocketed to TL 2.39 after the start of the Dec. 17 graft probe had gone down back to TL 2.15, but the new voice recordings sent it back up to TL 2.22, while the interest rate soared to 11.20 percent. Given that local elections are scheduled at the end of March which will further increase political tension, the exchange rate and the interest rate are likely to go up again. But what do large multinational corporations think among all this dust that has been raised?

Foreign companies affected
adversely
Analysts note that foreign investors are increasingly feeling the effects of the political turmoil and they are worried that the country might not grow as multinational companies had expected it to. Like other developing economies, Turkey was negatively affected by the Fed’s change of its quantitative easing policy, but Turkey has been also seriously hurt by political instability at home. In addition to the corruption scandal, the fall in the value of the lira and some credit rating agencies’ downgrading Turkey’s outlook have brought the risk of a sharp downfall in the economy. Western companies that operate in Turkey which recently announced their fiscal statements for 2013 have said they will continue to invest in Turkey, but also noted that the current situation is negatively affecting their performance.

Turkey perceived as risky
country

US motor company Ford F.N. and ElringKlinger AG, a Germany-based automotive supplier, both have made statements indicating that the fall in the lira was eating into their profits. Because foreign producers are heavily dependant on parts manufactured abroad, a weaker lira increases the import prices of these products. British mobile operator Vodafone was quoted in a Reuters report stating that its revenue growth in Turkey fell by 80 percent as of Q3 2013 in comparison with the same quarter the previous year because of tougher regulations and price pressure.
According to the same report, Austrian oil group OMV, said the economic volatility was challenging the very profitability of its Petrol Ofisi gas station and lubricants unit. Joe Kaeser, Chief Executive of German engineering group, Siemens, told investors in late January that his perception of Turkey had shifted from being a market that was “peachy” for businesses that sell infrastructure, energy and health care equipment, to one where he now grouped the country among riskier plays like Ukraine,” according to the report. He was quoted as saying: “If you had asked me a year ago or two years ago about Turkey, I would have told you this is the place to be.”
“In the meantime we do see that those geopolitical impacts have been spreading uncertainty also into the economic development,” he added.
Kasper Rorsted, CEO of detergent maker Henkel, which is building a factory in Turkey, said while the weaker lira did force his company to cut prices, such fluctuations were common in emerging markets and that his eye remained on the long term.
“The high inflation you right now have in Turkey with a big devaluation of the Turkish lira you have to deal with it,” said in a television interview with Reuters Insider.

‘Turkey has entered middle
income trap’

Analysts note that European companies’ commitment to Turkey is partly thanks stagnant markets at home. But the view that Turkey is experiencing a temporary blip and that growth and demand will recover to the vigorous levels seen in the 2000s is too optimistic, according to Fadi Hakura, Head of Turkey Project at think tank Chatham House.
Hakura told Rueters: “Turkey has entered the middle income trap. Without fundamental reform, such as upgrading its institutions for governance and its human capital [through better education], Turkey will likely see growth of only 2 to 4 percent over the long term,” he said, adding the country enjoyed around 5.2 percent growth since 2002.
Hakura said such fundamental reform currently looked unlikely and consequently, the authorities were likely to continue to rely on existing measures such as higher interest rates and lending restrictions to tackle the country’s balance of payments problems. Such measures are bad news for companies seeking to tap the Turkish consumer. “Consumer-based businesses will not likely enjoy the same revenues and profits in the future that they have experienced over the last decade,” Hakura said.

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