Turkey’s elevation to investment grade last week may or may not be a game changer for its stock and bond markets, but the country is really hoping for a boost to FDI – bricks-and-mortar foreign direct investment into manufacturing or power generation. Its peace process with Kurdish separatists should help.
Speaking last week at Mitsubishi-UFJ’s annual Turkey conference, Finance Minister Mehmet Simsek cited data showing an average 2 percentage-point pick-up in FDI in the two years immediately after a country moves into investment grade.
Sticky, job-creating and not prone to sudden flight, FDI is the kind of investment that Turkey, with a massive balance of payments deficit, desperately needs. Turkey does worse than most other countries on the FDI front. Its combined deficit of the current account and net FDI is around 5 percent, Commerzbank analysts note – wider than most emerging market peers.
By itself, an investment grade rating may not lead to a surge in FDI. But Turkey has an ace up its sleeve. Having fought a deadly three-decade war against Kurdish separatists, Ankara has managed to negotiate a withdrawal of PKK militants from Turkey to bases in Iraqi Kurdistan. That peace gambit, if successful, has the potential to transform the impoverished Turkish provinces that border the Kurdish areas.
Simsek told the conference:
The reconciliation process has boosted morale and interest in investment in southern and eastern Turkey has gone up five- and 10-fold. The regional development gap is going to be one of the main engines of growth in the next decade of two. Convergence between the regions of Turkey will be key.