Last year, foreign direct investment flows to Turkey decreased 16.5% year-on-year to $7.7 billion. The finance sector was the most preferred by foreign investors, attracting $1.39 billion. The information and communication industry was second with $1.37 billion in investments. In geographical terms, the largest portion of foreign direct investments to Turkey accounted for Italy ($977 million), followed by the USA ($798 million) and the U.K. ($693 million). Major deals included the acquisition of the U.K. investment fund Metric of a 30% stake in Turkish drugmaker Sanovel for $200 million and the purchase of a 10% share in the Turkish stock exchange Borsa Istanbul by the Qatari state Investment Authority.
“The decrease in the FDI in Turkey was at a slower pace than the global figure despite the pandemic,” said Burak Dağlıoğlu, President of the Investment Office of Turkey. According to the U.N. Conference on Trade and Development, last year, global FDI dropped 42% to $859 billion. And yet, over the last 5 years, FDI inflows in Turkey have declined more than twofold from $18.9 billion in 2015.
In Israel, the foreign investment inflow, on the contrary, was on the rise, except for 2019 when the FDI volume dropped from $21 billion to $19 billion. In the period from 2015 to 2020, foreign investments in Israel have increased from $11.3 billion to $24.7 billion. This 30% growth was driven in part by mergers and acquisitions. For example, the U.S.-based technology giant Nvidia acquired Israeli chipmaker Mellanox in a deal worth $6.9 billion. Read: Israel’s Market Overview
Advantages of Investing in Turkey
Turkey is a G20 member and the 18th largest economy in the world. The country has a strategic geographical location, connecting Asia and Europe, a young skilled workforce, and a population of over 80 million people. Turkey is a leading producer of agricultural products, textiles, motor vehicles, consumer electronics, and home appliances. Over the last 10 years, Turkey has invested heavily in major energy and infrastructure projects, including renewables, and is a net exporter of oil and gas. At present, there are 63 operational technology development zones designed to support R&D activities, 258 organized industrial zones, and 18 active free trade zones. Moreover, Turkey has decided to extend its specialized free zone program that focuses on ICT activities to other technology-intensive activities. Within this initiative, Ford is building a $2.6 billion facility for commercial vehicle and battery assembly in the Kocaeli industrial zone. The investment project will benefit from customs duty exemption, VAT exemption, VAT refund, tax deduction, and other forms of support.
The Turkish government provides attractive incentives to investors and offers opportunities to get citizenship through investment. Foreigners may be eligible for Turkish citizenship when they make a fixed capital investment of at least $500,000, buy at least $500,000 worth of government bonds, or a property worth a minimum of $250,000. The World Bank estimates that Turkey’s GDP will grow by 8.5% in 2021 but is expected to slow down in the next two years to 3% and 4% in 2022 and 2023, respectively. Inflation will stay high but is forecast to decline from 17.7% this year to 13% in 2023. After tourism and export sectors recover, the country’s account deficit may narrow to 3% of GDP.
“Turkey’s economic and social development performance since the early 2000s has been impressive, leading to increased employment and incomes and making Turkey an upper-middle-income country. During this time, Turkey rapidly urbanized, maintained strong macroeconomic and fiscal policy frameworks, opened to foreign trade and finance, harmonized many laws and regulations with European Union (EU) standards, and greatly expanded access to public services,” the World Bank analysts say.
Turkey has achieved good progress on vaccination coverage, which has helped increase domestic demand. The major growth drivers include increasing private investments and service consumption. Exports have been supported by a recovering demand and a national currency depreciation. Another contributor to the country’s exports growth is an opportunity to gain market share in European countries as exporters from Asia are facing supply chain and logistic difficulties.
In August, Turkey’s Foreign Direct Investment Strategy for 2021-2023 was published. According to the document, the government has set the target of enhancing Turkey’s FDI performance both in terms of quantity (reaching 1.5% of the global FDI market) and quality (increasing knowledge-intensive investments). The program stipulates, among other things, an investment promotion campaign focusing on quality FDI, improving the supply of industrial land to investors, and developing the transportation, logistics, digital, and ICT infrastructure.
On November 30, Turkish President Recep Erdogan called on foreign investors to make long-term investments in the country. “It is time for foreign investors to make long-term investments [in Turkey]. Those who have made long-term investments in Turkey have always won, and they will keep winning,” he said in a televised interview. The President stressed that the government was lowering the account deficit on a monthly basis and expected to post an account surplus in 2022. Erdogan also said that the country’s economy was forecast to expand by 10% or more by the end of 2021.
Turkish Stock Market
In October, Turkey’s market posted one of the best performances in the world, Bloomberg reports. The Borsa Istanbul 100 Index has increased more than 7% last month, despite the rising inflation to approximately 20% and a diplomatic skirmish between Ankara and its Western allies. The recovery of Turkey’s market reflects the thriving consumer economy and the good performance of domestic companies that are surpassing analysts’ expectations in profit.
Bloomberg has identified five factors that have helped Turkey market’s growth: a weak lira, a revival of the domestic industrial sector, reduced selling pressure, increased activity of local buyers, and cheap stocks. Local buyers have rushed into the market, investing in domestic equities as a way to protect their funds from inflation. Reuters notes that it is normal for emerging economy stock markets to rally when the country experiences difficulties because locals view equities as a safe asset. The companies often increase prices to make up for higher inflation or take advantage of the weak national currency to export their goods more profitably. Large foreign investors, on the contrary, are on the losing side in such situations because they need to convert their returns into dollars or another currency, which means a huge fall in value. In 2021, investors have withdrawn around $1.3 billion from Turkish equities and foreign ownership has dropped to record lows of 41%. This has reduced the selling pressure and now any small buying can boost the market.
Exporters and foreign-exchange earners are the ones who are benefiting most from a weak lira. Another segment that has contributed to the market growth is industrial manufacturers. These companies are now enjoying a rising demand after the ease of COVID-19 restrictions and a revived business activity. They are also taking advantage of supply shortages that have hit countries all over the world. “Operational profits of companies are quite good, especially exporter industrial companies are in good shape,” said Burak Cetinceker, a money manager at Strateji Portfoy.
Last month, the Turkish lira hit new lows against the euro and US dollar, with inflation hovering near 20%. This is mainly due to the low interest rates and the government’s monetary policies aimed at supporting the economy and employment. Since the beginning of this year, the Turkish lira has lost 40% of its value and is by far the worst-performing currency in emerging markets. In November, the lira’s depreciation propelled exporter-dominated stock in Turkey’s market to its best month in more than a decade. Among the best-performing companies, there are the steel producer Iskenderun Demir, also known as Isdemir (ISDMR.IS), and glassmaker Sısecam (SISE.IS). Isdemir, like another steelmaker Erdemir (EREGL.IS), which is one of Turkey’s largest companies, is part of Oyak Mining Metallurgy Group.
In the third quarter, Isdemir’s net profit surged 657% year on year to 3 billion lira, while Sisecam's profit reached 1.35 billion lira, surpassing market expectations by 6.5%. Rising profits in the industrial sector are starting to attract foreign investors. Over the week ending November 19, foreign investors purchased $384 million worth of Turkish stocks, after recording their biggest weekly inflow in this year with $480 million as of November 12.
Investment Opportunities in Turkey
The most interesting opportunities for investment in Turkey include the construction and infrastructure sectors, energy innovation, financial services, agri-food and agricultural technologies, chemical and automotive industries.
Agri-food
As of 2019, Turkey ranked first in Europe in agricultural production and 10th in the world. The country is the world’s largest hazelnut exporter and is one of the global leaders in the production of dried figs, raisins, dried apricots, and honey. It is one of the largest exporters of agricultural products in Eastern Europe, North Africa, and the Middle East. From 2002 to 2020, Turkey’s exports of agricultural products have increased by 408%, while the agriculture sector has been growing at a rate of 2.5%. According to the US Department of Agriculture, the most in-demand product categories in Turkey are fish and seafood, processed fruits and vegetables, and snacks.
The private company Kilic Deniz, the largest aquaculture company in the Mediterranean region, specializing in fish production, has a revenue of $649 million. Ulusoy Un Sanayi ve Ticaret A.S. (ULUUN.IS) with a revenue of $300 million produces and sells wheat flour, bread, biscuits, and noodles. Anadolu Efes (AEFES.IS) is a producer of beer and non-alcoholic beverages that operates in Turkey, Russia, Europe, Central Asia, and the Middle East. Last year, the company’s net sales revenue increased 15.9% year on year, while EBITDA was up by 25.5%.
Automotive
Turkey ranks second in commercial vehicle production in Europe and 15th in global automotive production. Thirty of the top 50 global suppliers have production facilities in Turkey, while the total investment volume of global brands in the country’s automotive industry has reached $15 billion since 2000. From January to October of 2021, passenger car sales increased 2.2% to more than 475 thousand units, while light commercial vehicle sales were up by 13.2% to more than 139 thousand.
The Turkish automotive manufacturing company Ford Otosan (FROTO.IS) is the biggest commercial vehicle production center of Ford in Europe. Founded in 1959, the company has a market capitalization of $7 billion and a production capacity of 455,000 commercial vehicles. Ford Otosan is a joint venture between Ford Motor Company and Koc Holding, with each holding 41% of the shares. Tofas Turk Otomobil Fabrikasi A.S. (TOASO.IS) manufactures and exports passenger and commercial vehicles. Over the last year, its stock price has increased threefold from 30 liras to 90 liras per share.
Chemicals
Turkey ranks second in plastic production in Europe and 7th in the world. The country is also Europe’s 5th largest producer of paint and is among the 10 biggest fertilizer consumers in the world. Turkey ranks second in net petrochemical and polypropylene imports globally, after China. In the market of rubber and plastic products, the largest manufacturer is Brisa Bridgestone (BRISA.IS) with production-based sales amounting to more than 3.35 billion Turkish lira. Established as a joint venture of Sabancı Holding and Japan’s Bridgestone Corporation, the largest tire manufacturer in the world, the company produces and sells tires for automobiles, buses, and trucks in Turkey. In addition to its leading position in the Turkish market, Brisa is also among Europe's biggest top seven tire manufacturers.
The leading petrochemical company in Turkey is Petkim (PETKM.IS) with 20% of the market share in the country and more than 20 processing units nationwide. The Turkish market represents approximately 60% of the company’s sales, while the remaining portion of sales is exported, primarily to Europe. In October Fitch Ratings upgraded Petkim's long-term issuer default rating to ‘B+’ from ‘B’.
Energy
Turkey ranks 5th in the European electricity market and 4th in global geothermal power generation capacity. The country is the fourth-largest gas consumer in Europe. Over the last two decades, the total installed capacity of Turkey’s electricity generation infrastructure has increased from 31.8 GW to 95.9 GW and is expected to reach 110 GW by 2023. The country positions itself as a regional leader in the area of renewable energy and has set new targets. “Turkey has experienced the fastest surge in energy demand among OECD countries. According to studies, this trend will continue in the medium and long term,” said Mustafa Çelebi, Vice-Chair of Turkey's Energy Market Regulatory Authority. Nevertheless, the country’s energy sector is still highly reliant on fossil fuels such as oil and gas that cover as much as 88% of Turkey’s energy needs.
The renewable energy generation facilities benefit from the government’s General Investment Incentive Scheme, which provides for exemption from VAT and customs duties for equipment used in such power plants. Irrespective of the region where investment is to be made, projects that meet certain capacity requirements and the minimum investment amount receive support according to the scheme. Based on the data provided by the Electricity Transmission Company, investments in Turkey’s clean energy sector amount to $66 billion, with hydropower facilities accounting for the largest portion of investment ($35 billion with 31,441 MW of installed capacity). Nevertheless, hydropower production has declined significantly because of droughts that have been drying up water reservoirs and rivers. Wind power is the second-largest sector in Turkey’s clean energy production, with a capacity of 10,014 MW and investments of approximately $13 billion.
Türkiye Petrol Rafinerileri A.S. (TUPRS.IS) has a leading position in the Turkish petroleum market and controls most of the country’s refining capacity. Fitch Ratings estimates that Türkiye Petrol has a significant growth potential despite short-term challenges such as demand loss amid the coronavirus pandemic. In November, the agency revised its outlook on Turkiye Petrol Rafinerileri A.S.’s ratings, from negative to stable, which reflected improved margins. One of the company’s strengths is the “ability to access and process cheaper, heavier and sour crudes from a number of suppliers''.
In April, the media reported that the Istanbul Stock Exchange would list five renewable energy companies that decided to take advantage of the rising investor interest. The İPO of Aydem Yenilenebilir Enerji (AYDEM.IS) is said to be the biggest one in Turkey in the last 3 years. The company plans to raise $160 million and use the proceeds to repay the debt incurred for investments. Aydem Yenilenebilir Enerji’s portfolio includes 1 GW of hydroelectric plants and wind farms. Other recently listed companies include Galata Wind Enerji A.S. (GWIND.IS) with a portfolio of wind and solar power plants, Margün Enerji (MAGEN.IS) that operates solar power facilities of a total of 118 MW, and Biotrend Enerji (BIOEN.IS) that owns 110.43 MW of biogas and 43.6 MW of biomass plants. Girisim Elektrik (GESAN.IS) has hundreds of projects in more than three dozen countries and is engaged in the construction of a 1 GW solar power plant in the Turkish city of Konya.
Information and communication technologies (ICT)
The ICT sector is an essential part of Turkey’s economy, with a total market value of nearly $27 billion. Turkey exports software, hardware, equipment, and services to the EU (80% of all exports), MENA, Asian, and North American regions. In 2020, the country’s ICT sector grew by 22% year on year, surpassing market expectations of 5-10% for the year. The information technologies software subsector accounted for the largest portion of total exports ($1.2 million). “In the coming years, we project that cloud computing, 5G-and-beyond connectivity technologies, artificial intelligence, big data, cyber security, and blockchain technologies will be effective on the industry,” said Mehmet Fatih Kacir, Deputy Minister of Industry and Technology.
The ICT sector, especially 5G, is considered a priority sector by the Turkish government. In June, Nokia and Türk Telekom (TTKOM.IS) signed an agreement with Arcelik to deploy the first commercial 5G private wireless network in Turkey. Arçelik (ARCLK.IS) is a leader in the home appliance industry, which is 57% owned by Koç Group and has 20% of shares in free float. The Turkish government supports investments in the ICT sector through incentives that put a special emphasis on research and development. In particular, investors enjoy reduced tax rates for their incomes (50-90%), while all R&D expenditures are deducted from the tax base. For investment loans, a certain portion of the interest share will be covered by the government.
Infrastructure & Real Estate
Turkey offers lucrative investment opportunities in infrastructure, with more than 250 public-private partnership contracts with a total worth of $159 billion concluded during the last decades. The construction and real estate markets are the sectors that keep Turkey’s economy up and running and are profitable for investors. The advantage of buying property in Turkey is that it is affordable and, at the same time, is in demand due to the rapid population growth. The increase in house prices in Turkey and Istanbul is below inflation levels and the demand mostly comes from the middle-income group, for whom there is no sufficient supply of housing. The number of house sales to foreigners has increased, driven by legislative amendments that facilitated citizenship with investment limits for foreigners and rising foreign currency.
One of Turkey’s largest construction companies is Enka Insaat ve Sanayi A.S. (ENKAI.IS) with a market capitalization of $6.9 billion. This construction company has undertaken 127 projects in Turkey and 413 projects abroad. Tekfen Holding Anonim Sirketi (TKFEN.IS) with a market capitalization of $500 mln specializes in the construction of gas, petroleum, and petrochemical facilities, pipelines, and oil refineries.
Financial services
Over the last decade, the Turkish financial service industry has been growing at an annual rate of 18%, and today, there are 51 banks operating in the country. As of 2018, the total asset size of the Turkish banking sector as a percentage of GDP amounted to 104%. Banking dominates the sector, with more than 70% of all financial services, while insurance services and other financial activities also demonstrate considerable growth potential. Commercial banks account for 91% of total financial sector assets as of 2020. The banking service sector reported strong profitability from 2011 to 2018 when ROE amounted to an average of 17% per year. However, over the last years, profitability declined to 11% because of lower net interest margins in state-owned banks as compared to private ones.
Remarkably, the largest company in Turkey by market capitalization is QNB Finansbank A.S. (QNBFB.IS) with a value of $11.7 billion. Other large Turkish banks include Turkiye Garanti Bankasi A.S. (GARAN.IS) with $3.5 billion of market capitalization, Türkiye Is Bankasi A.S. (ISATR.IS) ($2.6 billion), and Türkiye Vakiflar Bankasi (VAKBN.IS) with $1 billion of market capitalization.
Major Publicly Traded Companies in Turkey
According to Forbes, the largest company in Turkey is Koç Holding A.S. (KCHOL.IS), an Istanbul-based industrial conglomerate that comprises more than 100 companies operating across a variety of industries, from electronics to consumer finance and restaurants. The energy and automotive sectors are the largest contributors to the company’s revenue. Koç Holding A.S. is controlled by the Koç family which owns 64% of the holding company. Mustafa Rahmi Koç, an honorary chairman of Koç Holding, is the 7th richest person in Turkey with a net worth of $2.3 billion. Koç Holding A.S. has $5.7 billion of market value, $20.5 billion of sales, and $84 billion of assets.
Türkiye Is Bankasi A.S. or Isbank (ISATR.IS) is the largest company in Turkey by the size of assets ($94 billion). Founded in 1924, the bank operates more than 1.300 branches domestically and has branches in the Turkish Republic of Northern Cyprus, Iraq, Kosovo, Bahrain, Cairo, China, and the UK. The bank offers İşCep, the mobile banking platform with the widest set of transactions in the sector. Ereğli Demir ve Çelik Fabrikaları T.A.Ş. or Erdemir (EREGL.IS) is Turkey’s largest integrated steelmaker and one of the largest steel producers worldwide, with 3.850 Mt of liquid steel production capacity. Established in 1960, the company has a market capitalization of $5.4 billion and total sales of 5.6 billion. In the first quarter of 2021, Erdemir produced 24% of Turkish crude steel and reported a 262% increase in EBITDA due to strong domestic and international demand. Haci Ömer Sabanci Holding A.S. or simply Sabancı Holding (SAHOL.IS) is an industrial and financial conglomerate that operates in financial services, electricity generation, cement, retail and industrial sectors. Last year, the company posted sales of $8.8 billion and $678 million in profit. With a market capitalization of $2.1 billion, Sabancı Holding has total assets worth 67.4 billion and is present in more than a dozen countries.
Turkcell Iletisim Hizmetleri A.S. (TKC) is the leading mobile phone operator in Turkey. It is the first Turkish company that was listed on the New York Stock Exchange, where the company’s shares have been traded for 20 years. Turkcell provides digital services in the domestic market as well as in Azerbaijan, Ukraine, Belarus, Cyprus, the Netherlands, and Germany. The company, whose market capitalization amounts to $3.3 billion, has seen rising revenues and earnings over the last years. From 2019 to 2020, Turkcell’s revenue has increased from $1.8 billion to $2.1 billion, while net income was up from $230 million to $310 million. During this year, the company’s revenue has been rising each quarter, by 22% year on year. Turkey Wealth Fund owns a 26% stake in the company, while 19.8% belong to Letterone Investment Holdings SARL set up by Russian billionaire Mikhail Fridman. Last month, the media reported that Fridman demanded Turkcell to set up a new board committee to review its cost structure and asset monetization plans.