Page 49 - Buy Russia - bne IntelliNews monthly magazine April 2017

bne April 2017 Southeast Europe I 49
of foreign investors in the noughties. Foreign direct investment (FDI) inflows surged to $22bn in 2007 from only $1bn in 2002.
But last year’s coup attempt, rising geo- political tensions and domestic political noise are scaring off investors, especially foreign ones, who watched anxiously
as the government seized hundreds of companies for their alleged links to the coup plotters.
Foreign direct investments declined to $12.2bn last year, financing just 38% of the country’s current account deficit of $32.6bn. Portfolio inflows rose to $38bn in 2012 from $1.5bn a decade ago, but they declined to $7.8bn last year.
Over the past five years M&A activ-
ity has also suffered. There were
331 deals in 2012 with a total value
of €16.6bn, but last year there were only 183 transactions worth €12.5bn, according to data from the Emerging Europe M&A report published by law firm CMS and research company EMIS. However, Turkey still remained one
of the most important M&A markets in Central and Eastern Europe.
and then it will focus on long-delayed reforms to unleash the country’s eco- nomic potential and to address some of the chronic problems such as inflation and the current account deficit.
If the AKP emerges from the referen- dum even stronger, many investors will probably think this would mean “years of stability”, maybe for another 10 years. “There is nobody within and outside the AKP who could challenge Erdogan given his popularity, charisma and grasp on power,” wrote Wolfgango Piccoli of Teneo Intelligence in an emailed note on March 12.
But investors may be more worried, at least in the short term, by the turbulent political environment and in particular the ongoing row with the EU caused by the AKP’s referendum campaign among Turkish migrants there.
Ankara reacted angrily when Ger- many and the Netherlands barred Turkish ministers from attending pro-Erdogan rallies in their cities, trig- gering an unprecedented diplomatic spat. Turkey subsequently announced a series of sanctions against the Dutch
support. Before the diplomatic crisis, some polls had suggested that the refer- endum would be a close call. According to most public opinion surveys, 20% of potential voters were still undecided. The tensions with European countries could now increase President Erdogan’s popularity with Turkey’s nationalist voters and boost his image of a strong leader standing against the West.
“The still escalating political crisis between Turkey and the Netherlands has reinforced concerns that Erdogan and the ruling AKP are prepared to seek short-term domestic political gains at the cost of severe damage to the coun- try’s long-term commercial, economic and political interests,” wrote Piccoli.
Upside, downside
If the AKP fails to win the referendum, some observers think the ruling party would then call snap elections this year, which means more uncertainty, though they would likely win a crushing majority.
“A ‘No’ vote would represent a humiliat- ing but not a fatal defeat for Erdogan’s standing. Nevertheless, it would trigger a phase with deeper uncertainty as a cabinet reshuffle and, most importantly, a snap parliamentary election would likely be on the agenda,” according
to Piccoli.
If it wins the referendum – the most likely outcome – the AKP’s immediate task will be to convince investors that it will create a better investment climate and that respect for property rights and the rule of law will not be compromised. If the AKP manages to combine political stability with economic reforms, then FDI may start to pour into the country again, the stock exchange could rally, and the currency would stabilise.
“A ‘No’ vote would represent a humiliating but not a fatal defeat”
Reflecting investors’ worries, the curren- cy lost 17% of its value last year against the dollar and it has fallen by another 6% since the start of the year. Inflation, pro- pelled by the weaker currency, hit double digits in February for the first time in five years. The central bank believes inflation will start to fall in the second half of this year because of its tight monetary stance. But analysts do not appear to share the bank’s optimism: end-year inflation expectations rose 9.08% in March from 8.87% in February.
Wait and see
Investors are now firmly in wait-and- see mode. The government is trying to convince them that the referendum will remove a major political uncertainty
government and again threatened
to scrap a key migrant deal between Ankara and Brussels that has helped Europe reduce the number of illegal migrants trying to reach the continent.
Some analysts argue that the AKP is deliberately stoking this row to boost its
Find more Southeast Europe content at www.bne.eu/southeast-europe
Selected headlines from past month:
· BALKAN BLOG: Russia the only winner as Macedonian crisis deepens · BALKAN BLOG: Borissov is so yesterday's man of the people
· Dräxlmaier expands across Southeast Europe
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