Turkey is at a turning point in its economic trajectory. As the fuel of 2001 reforms runs out, the country is facing growth rates lower than the past decade, rising inflation amidst low consumption, and a depreciating currency. As domestic tensions are on the rise and the availability of foreign financing is declining, the need for structural reform couldn’t be more evident than now.
Under current conditions, it is becoming increasingly unlikely that Turkey will reach high growth levels (around 8-9% YOY). The country faces multiple structural issues, and it will need to tackle them before it can return to high growth. In the previous decade, Turkey took advantage of its political stability, relative to other countries in its region, and the availability of ample international liquidity that could make Turkey attractive even with low interest rates. However, as Turkey can no longer count entirely on foreign financing for its growth, the need for implementing structural reforms is becoming more urgent.
The government can do much to overcome these problems by tackling three major issues: increase the national savings rate, reduce dependency on energy imports, and move to a growth model where new investments are directed towards productive and innovative enterprises. Each of these requires multiple reforms, only some of which the government is likely to implement. As it does, multinational companies (MNCs) will face both risks and opportunities to their operations in Turkey.
Government’s medium term focus – take advantage of the incentives
- Keeping low budget deficit targets, continuing to fund the budget via new privatization schemes, and refraining from overall tax reductions
- Reducing the importation of numerous goods that the government believes can be produced in Turkey without a significant impact on prices
- Incentivizing local manufacturing via preferential treatment in tenders and tax reliefs, especially in the healthcare, chemicals, and IT sectors
- Incentivizing new investments in local R&D and renewable energy
As the government initiates these reforms, MNCs will need to assess whether there are government incentives they can benefit from and how these fit into their long-term strategy for Turkey. Reforms are intended to push companies to localize further, including production in Turkey. Companies that are not ready for such a commitment might find that over time they will become less competitive against players with a deeper local footprint.
Achieving stability in the medium term – prepare for disruptors
As the government focuses on increasing localization and sophistication of production, other issues – both economic and political – continue to undermine the medium term outlook for Turkey.
Political instability should remain on the radar of all MNCs as Turkey faces a multitude of challenges in the medium term. These include parliamentary elections in 2015, a high likelihood of domestic socio-political tensions over the powers of the presidency, the uncertainties regarding the government’s reconciliation process with the Kurds, and tensions among various institutions in the country, such as the judiciary, professional associations, civil society organizations, and the government. Externally, regional insecurity, potential changes in global energy prices, and the health of the eurozone will pose significant threats to Turkey’s medium term outlook.
MNCs should be prepared for these and other disruptors through careful planning, an agile local organization with the authority to make rapid adjustments to strategy, and strong local partners who can absorb some of the risks the market will pose.
Read our Turkey 2020: Outlook and Scenarios report for more information on scenario planning for Turkey’s economic trajectory in the next 3-5 years, the Turkish government’s plans to tackle the structural issues it faces, and what this means for MNC strategy.