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Gulf awaits vital Turkish election results

Turkish President Recep Tayyip Erdoğan holds an election rally in Ankara Reuters
Ankara's credit score has been in decline for years due to repeated episodes of unorthodox policy-driven crises.
  • Turkey holds presidential and parliamentary elections on Sunday
  • Foreign direct investment in Turkey has dropped $10bn since 2007
  • UAE and Qatar have committed heavily to investments in Turkey

The Turkish presidential and parliamentary elections on Sunday will be keenly watched by Gulf investors who have bet billions of dollars on the world’s 19th-largest economy.

Should incumbent president Recep Tayyip Erdoğan and his ruling AK Party again prevail in the votes, Turkey will maintain its unorthodox monetary policies.

The central bank has slashed interest rates by more than half over the past two years – to 8.5 percent – despite annual inflation running at more than 43 percent, according to the latest official figures.

Such policies have accelerated a collapse in the Turkish lira, which has lost 78 percent of its value against the dollar since May 2018. The lira is now worth less than a tenth of what it was a decade ago, with the valuations of Gulf-owned Turkish assets now considerably below what the buyers paid in hard currency terms.

Unemployment remains above 10 percent, while wages have failed to keep pace with soaring living costs.

Turkey’s stuttering performance and increasingly opaque means of doing business have led foreign direct investment (FDI) to decline from a peak of $22 billion in 2007 to $12.5 billion in 2021, the most recently available UNCTAD data shows.

“Turkey has the potential to be an economic powerhouse,” said Howard Eissenstat, a non-resident scholar at the Middle East Institute (MEI).

“It is located near both the Gulf and Europe, has a good industrial base, a highly skilled labour force and a tremendous amount of human capital. There are really good reasons to invest in Turkey – FDI has declined because Turkey has been mismanaged.”

Erdogan, who has been in power since 2003 – first as prime minister and then as Turkish president from 2014 – is unlikely to change his economic policies should he remain in situ after the election.

“Erdogan is somebody who doesn’t trust experts – authoritarians are bad economists and they’re even worse at managing the economy if they don’t listen to their own staff,” said Eissenstat.

Yet Gulf countries, especially Qatar, have invested heavily in Turkey in the past few years despite the country’s malaise and poor returns from previous multibillion dollar deals as part of wider efforts to de-escalate tensions in the Middle East.

A Saudi Arabia-Turkey business and investment forum last December was attended by ministers and around 280 companies from the two countries. About 12 memorandums of understanding were signed spanning various industries including renewable energy, minerals, mining, petrochemicals and manufacturing.

In November 2021 the UAE announced it would establish a $10 billion investment fund in Turkey that will acquire interests in various sectors such as logistics, energy, health and food. That follows a 2018 Qatar pledge to invest $15 billion directly in Turkey.

Different priorities

Western investors want a new government that re-establishes the checks and balances that once protected the economy, said Arda Tunca, a Bodrum-based independent Turkish economist.

“That’s not such a concern for Gulf investors,” said Tunca, noting Gulf governments would be wary of investing further into Turkey were Erdoğan to lose to rival presidential candidate Kemal Kılıçdaroğlu.

“Should they find common ground with the new government, they might continue but they won’t get the special protections and privileges Erdoğan gave them,” said Tunca. “Kılıçdaroğlu will shake hands with them, but in a different way.”

According to Turkish central bank investment figures, which uses a broader definition than UNCTAD, Qatari investments into Turkey totalled $10.4 billion in 2021, down from $33 billion in 2020 and $22 billion in 2019.

Saudi investments also declined in 2021 to $225 million, from $864 million a year earlier. Likewise, those from the UAE fell to $1.7 billion from $4.9 billion over the same period.

Headline-grabbing investments have fared poorly in valuation terms, even if the underlying businesses have prospered. For example, Dubai bank Emirates NBD paid 15.48 billion lira to buy Turkey’s Denizbank in 2019. At the time, this was the equivalent of $2.78 billion, but would now be just $791 million.

Similarly, Qatar National Bank in 2016 paid 2.7 billion euros (8.6 billion lira) to buy Finansbank, Turkey’s fifth-largest private bank. The lira price would now be worth about 402 million euros.

Undeterred, Qatar has bought stakes in Istanbul’s bourse and a huge shopping mall in the city, plus an Antalya port and a tunnel under the Bosphorus linking Istanbul’s European and Asian districts among other investments.

Saudi Telecom Co (STC) paid $2.6 billion for an effective 19.3 percent stake in Turk Telekom via Dubai-based Oger Telecom in 2008. Oger is being liquidated after defaulting on debts and has agreed to sell its Turk Telekom stake in a deal that would see STC get around $318 million, according to AGBI calculations.

“Turkey doesn’t have a coherent economic policy (but) once the economy is up and running again, valuations should increase and asset sales could be viable from perhaps 2025 onwards,” said Tunca.

The lira is widely expected to plunge further following the elections.

“Erdogan has been pumping so much free cash into the economy to try to gird support for himself and his party,” added MEI’s Eissenstat.

“There’s a long list of goodies he’s thrown at the electorate in the hope they'll forgive him for the general malaise, but I’m unsure it’ll succeed because people are still struggling to put food on the table.”

Inside the Turkish elections

A May report by the Middle East Institute (MEI) describes this Sunday’s elections as the country’s “most consequential” in its history.

In a May 7 poll, Kemal Kılıçdaroğlu was forecast to get 50.9 percent of votes, with Erdoğan on 45.4 percent. Should no candidate get 50 percent, there will be a second round on May 28 between the top two candidates. 

In the parliamentary elections, Erdoğan’s AK Party is part of the People’s Alliance, which also includes two nationalist parties and a rival Islamist party.

The Nation Alliance comprises six parties across much of the political spectrum including the centre-left Republican People’s Party, a moderate nationalist party and four minor right-wing parties, MEI wrote.

The Labor and Freedom Alliance, which includes environmental, pro-Kurdish and leftist parties, is also competing. Kılıçdaroğlu is the joint presidential candidate for the Labour and Freedom Alliance and the Nation Alliance.

A separate May 7 parliamentary poll puts the People’s Alliance parties on a combined 45.2 percent, Nation Alliance parties on 42.7 percent and the Labour and Freedom Alliance on 10.8 percent. 

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