Introduction
Turkey is one of the fastest growing emerging markets with immense business opportunities. However, it has numerous risks that should be addressed. This paper will analyze the risks that are associated with investing in Turkey.
Economic Risks
First, economic growth has declined from 9.2% in 2010 to 3.3% in 2013 (World Bank, 2014). This decline is mainly attributed to the country’s reliance on export earnings, which reduced due to poor economic performance in the Eurozone. Economic growth is not expected to exceed 4% in the medium-term. Thus, growth in corporate profits will be limited if economic growth remains low.
Second, Turkey depends on volatile external capital, which includes short-term loans and non-resident deposits (KPMG, 2013). The persistence of the European crisis is likely to hinder access to external funding. This poses high liquidity risks to the country’s financial system in terms of limited access to credit.
Finally, Turkey’s inflation rate has remained above 6% since 2012 (World Bank, 2014). High inflation will reduce purchasing power, thereby reducing demand for various products. Moreover, the cost of borrowing will increase as commercial banks raise lending interest rates to avoid losing the value of their money.
Political Risks
First, the conflict between the government and the Kurdistan Workers’ Party (PKK) is a threat to political stability. If PKK continues to use violence, business activities are likely to be disrupted, thereby causing losses to investors. Second, the regulatory framework in Turkey is weak. Key regulatory agencies such as the BRSA and the EMRA, which regulate the banking industry and the energy sector respectively, are being controlled by their respective ministries (KPMG, 2013). This denies the regulators independence by exposing them to political influence. Third, the level of corruption in Turkey is high (KPMG, 2013). This increases the cost of doing business since investors have to bribe government officials to obtain basic services such as business registration. Finally, Turkey is not likely to get access to the EU market as a member country due to its poor democracy and strained relationship with Syria. This will deny local companies the opportunity to serve the lucrative EU market.
Social Risks
High unemployment rate and rising inequality in income distribution are likely to cause social unrest (KPMG, 2013). Moreover, aggregate demand and economic growth will reduce in future if unemployment rate remains high. Another social risk is the difficulty in finding senior personnel with high experience. This forces foreign companies to incur high costs by employing expats.
Horizon and Future Expectations
Economic growth is expected to improve in the long-run since the government is already implementing an expansionary fiscal policy (KPMG, 2013). Access to external capital is also expected to improve in the medium-term as the European Central Bank and the US Federal Reserve Bank continue to pursue expansionary monetary policies. Since the government is increasing its expenditure to spur economic growth, inflation rate is expected to remain high in the medium-term. The threat to political stability is also likely to remain high since the government and the PKK are yet to resolve their differences.
Conclusion
The main risks associated with investing in Turkey include declining economic growth and dependence on external capital. Moreover, the regulatory framework is weak and political tensions are likely to increase. These risks are expected to reduce in the long-run.
References
KPMG. (2013). Investing in Turkey. Istanbul, Turkey: KPMG. Web.
World Bank. (2014). Data bank. Web.