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Investors in the Gulf are becoming more aware of what Turkey can offer in terms of diversifying their portfolios. It was recently estimated that the amount of direct investment attracted by Turkey will reach $30 billion in 2008, and particularly countries in the Middle East region will increase their shares in these investments.
A number of Gulf institutions have already entered the market and others have identified the country as part of their growth plans.
There are several opportunities in Turkey at the moment: macroeconomic transformation, tight fiscal discipline, European Union anchoring and high interest rates. There are also lesser known risks to investing in Turkey.
The Turkish economy is currently booming, its GDP has risen by 122 per cent in four years. This growth is driven by several factors, it has: a young, dynamic and qualified population; strategic location at the crossroads of Europe, Central Asia and the Middle East; an anchoring alongside the European Union, lending support and international credibility; and the country is also beginning to reap the benefits of reforms undertaken after the major financial crisis of 2001.
One of the pillars of these vast reforms is very strict tax discipline. A new, inflation-focused monetary policy and a floating exchange rate are now in place.
On the other hand, the increasing current-account deficit is a source of concern for the economy in Turkey. But increasing, more diverse long-term foreign investment is emerging to mitigate this risk. Foreign direct investment in Turkey has increased significantly since 2006, with international investors pouring in $42 billion. Gulf investors are an important source of this income, accounting for around 27 per cent of the total. This is funding part of the deficit and includes local offices set up by foreign banks, energy projects, privatisation of strategic infrastructure, real-estate, etc.
Better management of risks are also improving the Turkish banking system. Heavy accumulation of foreign currency positions helped trigger the industry's crisis in 2001; since then bank balance sheets have transferred most of these assets into government bonds and cut their debt levels drastically.
Looking to the Istanbul Stock Exchange (ISE), the market cap has risen sharply, from $34 billion in 2002 to $290 billion in 2007. The banking sector is the most heavily weighted, representing almost 40 per cent of the ISE 100 National Index.
Exceptional returns are reflected in the ISE National 100's growth of more than 632 per cent in five years. Although the credit crunch crisis has hit Istanbul especially hard, and it lost 36 per cent in the first quarter of this year.
In summary, Turkey has a number of things going for it. It has developed rapidly over the past few years as a credible investment opportunity offering sophisticated emerging markets exposure, which has been of particular interest to this region.
This year will be rough going in Turkey, as in most financial markets, and foreign inflows of capital are likely to diminish, but it is estimated these will still be enough to fund the current-account deficit.
As an emerging market closely anchored to developed markets and with growth above the European average, Turkey remains an attractive investment offering for regional investors seeking diversification.
The writer is head of Middle East office, Dexia Asset Management.
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