By Edward Attwood
Virtually none of Turkey's extensive foreign direct investment stems from the Gulf. Are GCC investors missing a trick?
Virtually none of Turkey's extensive foreign direct investment stems from the Gulf. Are GCC investors missing a trick?
While indulging in their favourite hobby of reading papers in the street cafes of Beyoglu, well-to-do Istanbulites will no doubt have noticed that references to their country have been cropping up in the international news pages more and more frequently of late. This trend culminated recently in the Iran nuclear initiative, co-authored by Brazil, which involved the Islamic Republic sending some of its enriched uranium abroad in order to avoid yet another round of sanctions from the UN Security Council. Although the idea was quickly dismissed out of hand by a sceptical US, Turkey's waxing sphere of influence, buoyed by a growth in a number of indices, has clearly been focused rather more on its eastern rather than its western borders.
"Turkey has a very positive demographic picture - birth rate is above replacement and there is a relative abundance of people entering the labour force," points out Amsterdam-based demographics expert Richard Hokenson. "Right now, the European Union [EU] needs Turkey far more than Turkey needs the EU, as continental Europe especially faces declining labour forces and would be delighted to attract a strong workforce from Turkey."
But it's not just the number of people in the country that is proving most attractive. "We have the fifteenth biggest economy in the world, and a population of 72 million people - crucially with a median age of 28," explains the multi-faceted Hakan Ferhatoglu, chairman of securities firm Ata Invest Dubai and a member of the executive committee of the Turkish-UAE Business Council. "65 percent of Turks are under the age of 35, and two years ago we produced 450,000 graduates from 145 universities. It's really a very highly educated society."
On the macroeconomic side, Turks are getting justifiably bored of the ‘sick man of Europe' tag being trotted out every time their country is mentioned. These days, however, that nineteenth-century sobriquet should more realistically be directed towards Turkey's neighbour across the Aegean. While uncertainty in Greece has brought the dreaded double-dip recession back onto the agenda, the latest data from the Turkish Statistical Institute (TurkStat) showed that the country's last quarter 2009 GDP surpassed expectations to post an impressive six percent growth. Those figures were driven - encouragingly - by household and government consumption and led forecaster IHS Global Insight to revise its 2010 GDP prediction "towards five percent" from 3.6 percent previously.
Compare those sorts of figures to those being forecast for countries in the eurozone - a place in which Turkey is still working towards, at least ostensibly - and the strength of the economy seems self-evident. Look even further afield, and you'll note that a projected growth of five percent is the envy of some Gulf countries; just last week, UAE economy minister Sultan Bin Saeed Al Mansouri put local growth at around three percent. So why, when Gulf companies peer abroad for investment, is Turkey often overlooked?
"Every year, we get between $10-15bn of foreign direct investment but if you set aside investment in the telecoms business from the Hariri family and a Kuwaiti group's interest in a major mall, there hasn't been much investment from the Gulf," Ferhatoglu continues. "But there's been a lot of talk. We've represented various parties through our investment banking company, including local banks and some other entities. But for one reason or another, they did not close or they are being stalled because of the crisis."
As Ferhatoglu points out, it's hard to see why GCC investors haven't been tripping a path to Turkey's door. Many of the Gulf's sovereign wealth funds, in particular, have tended more towards traditional markets, although one could argue that those maturer markets haven't yielded the returns some may have hoped. Perhaps the most high-profile example of this is the Abu Dhabi Investment Authority (ADIA's) hefty stake in Citigroup, the value of which fell significantly during this recession. Over in Qatar, investment vehicles Qatar Holding and Qatari Diar have spent the last six months being linked to entities in Indonesia, India and China - not to mention targets in more established countries like France, Germany and the UK. Any mention of Turkey has thus far been muted.
But the Ata Invest Dubai chairman hopes that this year will be different. "Investment is coming back and there's definitely more interest," he explains. "So far, we're looking at potential investment of $3-4bn from the Gulf this year. I don't know how much of it we'll close, but we're looking at large-scale deals that will have repercussions on both ends."Ferhatoglu's work to attract interest from the Middle East is symptomatic of what some see as a shift in focus from West to East. This is unsurprising, given the EU's apparent lack of interest in welcoming what would be its sixth biggest economy - and second-largest member by population - to its ranks. Foot-dragging over membership has been blamed on a number of issues, but has touched especially on the ongoing wrangling over Cyprus and fears over immigration.
"Maybe it's a missed opportunity for Europe," says Jane Kinninmont, the Economist Group's associate director for Middle East & Africa. "You could make that argument increasingly because Turkey is a high-growth economy. In terms of growth, it would make a lot of sense to have it in the EU. Until 2009, it was the Eastern European member states that were growing fastest, but that's not happening now. It makes sense that the newer entrants help to drive growth but French and German fears are partly cultural, but based on anti-immigration sentiment."
The analysis that the Turks need the EU labour market to soak up its abundant workforce makes sense right now, but that argument will also diminish over time as the country's economy develops and there are more opportunities at home. It all adds up to that perception that the nation's axis is tilting perceptibly towards the east.
"Western markets are growing more slowly than those of the Middle East and Central Asia; right now Azerbaijan is a huge market for the Turks," Kinninmont continues. "And they've put a large amount of investment into northern Iraq as well - supposedly most of the companies operating in the Kurdish region are Turkish or Iranian. It's a very smart use of soft power."
But Ferhatoglu does not see the EU imbroglio as forcing Turkey to look elsewhere for business. "Everybody tries to put countries in blocs; we're seen as part of Europe, part of Eastern Europe, a Mediterranean country, a Middle Eastern country and an Asian country," he smiles, diplomatically. "Yes, we've been part of the EU customs union since 1996 and we're still trying to become a fully fledged member. And by the time they invite us, we may choose not to become one."
So could Europe's loss be the Middle East's gain? Certainly, Turkey's diplomatic overtures - as underlined by its headline Iranian initiative - have found more fecund ground in the region. The now-long-ruling AK (Justice and Development) party has a more Islamic stance than its predecessors, which initially provoked a degree of soul-searching in a nation that has so far been tightly harnessed to its secular constitution. But while fears of religion permeating to deeper levels of the state have so far proved unfounded, there is no doubt that from the ideological standpoint, the Turkish government now has more in common with the Gulf states than ever before. Prime minister Recep Tayyip Erdogan is reputed to visit Saudi Arabia frequently to perform umrah privately, while also taking the time to bolster connections in that market.
No less significant was the fact that Erdogan made some late changes to his schedule to become the most prominent guest head of state at the World Future Energy Summit in Abu Dhabi in January this year. While Turkey is investing heavily in renewable energy, the prime minister's presence at one of the UAE's high-profile summits underlined firstly his close ties with the Abu Dhabi royal family and secondly the ever-growing importance of Turkey as an energy hub.
"We have recently realised significant projects such as the Baku-Tbilisi-Ceyhan crude oil, the Baku-Tbilisi-Erzurum natural gas, the Blue Stream natural gas pipelines and the Turkey-Greece natural gas interconnector," Erdogan told the assembled crowd in the UAE capital. "With the same approach, our efforts are continuing with respect to the Nabucco natural gas pipeline, which envisages carrying Caspian and Middle Eastern natural gas to Europe via Turkey; the Samsun-Ceyhan oil pipeline, developed to alleviate the maritime traffic in the Turkish Straits, and the Turkey-Greece-Italy natural gas pipeline."
Those seven drafts will see Gulf commodities passing through Turkey to reach Europe, which makes the country vital strategically. But it has little resources of its own on that front. "We need to invest $130bn in energy in Turkey by 2023 - just to keep up with demand," Ferhatoglu says. "We are energy dependent and our growth is naturally dictated by that. When the price of energy and commodities go up, we hurt. When the prices of commodities go down, we are happier - like in this crisis. Of course, it's the way other around in the GCC, which is a great hedging instrument in terms of diversification. Turkey should really be in everybody's portfolio."The completion of the Dubai Metro in September last year catapulted one Turkish contracting company - Yapi Merkezi - to local prominence as a member of the mainly Japanese construction team. "Our contracting industry is now the second-biggest in the world after the Chinese in terms of the numbers of firms in the top 200 companies," continues Ferhatoglu. "Other Turkish contractors are involved in other areas, whether its superstructures, infrastructures, industrial buildings, housing - basically whatever is needed can be supplied, potentially in collaboration with local counterparts."
One area that does appear to be garnering some solid interest from the Gulf is property. And no wonder, given that PricewaterhouseCoopers earmarked Istanbul as the top-ranked city in Europe for real estate investment this year.
"One of the attractions about Istanbul is the housing shortage; it's a big, big city and at present there's a requirement for 250,000 homes a year," says Stuart Johnson, new business manager for Experience International, a UK-based agent that specialises in offering investment property in emerging markets.
"That's a big shortfall. On top of that you have a lot of locals moving from the city to the suburbs, as well as a big movement from other parts of Turkey towards Istanbul. Add those points to the fact that the number of households are growing because people are leaving home earlier, and far more mortgages and payment plans are being handed out, and you surely can see why the country is such an attractive market."
Unsurprisingly, perhaps, Johnson indicates that the biggest gains are to be won off-plan, although that's a phrase that is still causing palpitations in the Gulf. But GCC investors are apparently thick on the ground, with Experience International indicating that fifteen to 20 percent of Istanbul property buyers hail either from the Gulf or Pakistan.
"The highest value off-plan property we've sold was a $400,000 three-bed duplex top-floor new build to a Gulf customer paying cash," the agent continues. "And if you're looking for pure investment opportunities, suburbs such as Beylikduzu offer a ten percent yield."
Elsewhere, there also appears to be more Gulf tourism heading towards Turkey as well. Although Turkish Airlines, Emirates and Etihad (which began its Istanbul service a year ago) were not able to release data to support the theory that traffic between the two locations is growing, the growing number of direct flights does point to that notion. But the numbers are still minor compared to interest from other regions.
"There are 28 million tourists visiting Turkey, but only a few hundred thousand come from the Gulf," Ferhatoglu remarks. "But now it's changing due to more flights, and the fact that Turkish television series are broadcast in the Gulf, which helps the public understand our lifestyle better."
The Ata Invest Dubai boss clearly hopes that 2010 will prove something of a tipping point in terms of Gulf interest.
"We share a common heritage with this region," Ferhatoglu states. "And now we are rediscovering one another. We had tilted too much towards the West, but Turkey, demographically, geographically and politically is in the middle of these many geographies and surroundings."