Turkey offers better investment opportunities than much of the developed world, but economic headwinds, fractious politics and regional unrest pose risks for businesses 


Investments in infrastructure and healthcare, financial sector expansion and the sale of state assets will drive growth in Turkey in 2015. Yet, political instability and a complex local business landscape will continue to form high barriers to entry for foreign investors. Meanwhile, security risks remain from Islamist militants and an uneasy peace with Kurdish separatists.

Turkey’s government is committed to major expansion of healthcare, transportation and energy infrastructure. These sectors will continue to offer deals to investors, provided they are prepared to navigate Turkey’s complex tender process and find a suitable local partner. Privatisation of motorways and ports is also planned for 2015. As in previous years, the sale of state assets will drive M&A activity. Turkey is also welcoming foreign expertise to expand its financial sector.

In January 2015, Turkey’s revamped stock exchange, the Istanbul Bourse, inked a partnership with the London Stock Exchange. Goldman Sachs and other international banks have recently opened Istanbul offices in advance of the completion of a new financial district in 2016. However, the country is in a middle income trap. The years of easy growth driven by urbanisation are reaching their natural limits, and Turkey’s economy needs deep structural reforms to boost productivity and transparency. Such changes will not be realised in 2015. Facing worsening economic prospects at home, Turkish companies are diversifying by acquiring abroad. Outbound investment will continue to be a bright spot for the economy.

Parliamentary elections on 7 June punctuate a busy political year. Key to watch is whether the governing Justice and Development Party (AKP) can garner the two-thirds majority needed to constitutionally transfer power from parliament to president Recep Tayyip Erdogan. If it does, Turkey’s politics will be restricted to a small group around Erdogan and policymaking will become increasingly unpredictable.

Security will also continue to be a challenge for Turkey. Syria’s brutal civil war is straining Turkish society even as the government plans new policies to integrate its large Syrian refugee population. Further, networks providing logistical support to radical fighters in Syria will continue to threaten stability at home and complicate supply lines to Iraq’s Kurdistan Region (KR), Turkey’s second largest export market.

Business outlook

Populist policymaking will mark the run-up to the 7 June elections. That includes low interest rates and support for home-buyers. For foreign investors, the focus will be on state-led parts of the economy, in line with the government’s goal to make the country one of the world’s 10 leading economies by 2023. However, a middle-income trap will stunt growth, while the economy will remain vulnerable to external shocks, currency speculation and political meddling.

Sweetening the deal: the business landscape

When Turks buy chocolates for official meetings, they take care to stock the pro-government brand. Companies traditionally broke into two camps: those tied to secularist politicians and those tied to Islamists. In the late 2000s, Turkey’s AKP government began targeting these pro-secular companies with additional regulatory scrutiny and sought to replace them in government contracts with their pro-Islamist counterparts. Over the past year, the Islamist political camp has split: president Erdogan has all but declared war against his former ally, the charismatic preacher Fethullah Gulen, and his dissident camp. This political battle will reverberate in the business world in 2015.

Peace at home, commerce in the world

Ataturk, modern Turkey’s founder, once summed his country’s foreign policy as “peace at home, peace in the world.” Nowadays, trade has replaced security as the keyword and Erdogan rarely travels far without a retinue of entrepreneurial dealmakers in tow. Mixing business with foreign policy can bring profits, but it also brings pitfalls: Turkey’s government is pressuring foreign leaders to freeze out firms associated with Gulen. Meanwhile, security risks and low oil prices will continue to batter the 1,500+ Turkish firms operating in KR. However, new Iraqi prime minister Haidar al-Abadi has engineered a rapprochement with Ankara, reopening opportunities for Turks beyond the KR.

Middle income trap

Turkey has a GDP per capita exceeding $10,000 (€ 8,9000), placing it in the upper ranks of middle-income countries. It reached this mark largely on the back of a young population leaving small villages to enter the urban workforce. Structural reforms imposed by the International Monetary Fund )IMF) after a financial collapse gave investors the confidence needed to fund Turkey’s current account deficit. This deficit remains the Achilles’ heel of the country’s growth model.

The gains from urbanisation are fast reaching their natural limits and the key change forced by the IMF in the early 2000s—the separation of day-to-day economic policymaking from politics—is unravelling. Turkey’s current growth model depends on credit-fuelled construction and state privatisation. Neither is sustainable but reforms are not on the agenda.

Political outlook

All eyes are on the June parliamentary elections. The governing AKP is certain to win, with the polls showing its support varying between 40% and 48%. The key question is whether the AKP can garner the 330 seats needed to unilaterally issue referendums. After elections, the government intends to pass constitutional reforms centralising power to the presidency and negotiate peace with Kurdish militants. Neither effort is likely to go according to plan.

The sultan and the grand vizier

For the first time in more than a decade, Turkey will enter parliamentary elections without Erdogan running as prime minister. Yet Erdogan, now president, will refuse to play the part of ceremonial head of state. He has charged his hand-picked successor as prime minister, Ahmet Davutoglu, with a single task: transfer executive power to the presidency.

Moreover, term limits mean that almost a quarter of AKP members of parliament are ineligible for election. Some of this old guard is sympathetic to Gulen and Erdogan hopes to use the term limits to replace this group.

Power is in the eyes of the beholder

Erdogan already holds executive power in practice. However, his control depends on the continued loyalty of Davutoglu and the governing AKP. Erdogan wants the informal deal between them put into writing. To amend the constitution by itself, the AKP needs to win at least 367 seats. Electoral mathematics suggest this number will be difficult to reach. A more attainable goal is 330 seats, which would allow the AKP to bypass parliament by submitting a new constitution to referendum. If the AKP fails to gain 330 seats, its only fall-back option is to cut a deal with a traditionally marginalised group: Turkey’s Kurdish nationalists.

Kurdish question

Turkey’s Kurdish nationalists are the key to the June elections. For the first time in more than a decade, they will enter elections as a single party, the HDP, rather than as independent candidates. This is a massive gamble, because parties are subject to Turkey’s 10% electoral threshold for entering parliament. If the HDP breaks the 10% barrier, its members will control the swing votes needed by the AKP to pass constitutional reform. However, if it falls short Turkey’s electoral law means the Kurds’ seats will pass to the AKP, handing it a 330-seat supermajority or even the magic 367 seats.

While the polls will be close, a number of factors suggest that the Kurdish nationalists will fall short of the 10% mark. The HDP’s win of 9.8% of the vote in last year’s presidential election is not representative of the HDP’s support in parliamentary elections, which are structured differently.

At first glance, an HDP electoral defeat would deliver Erdogan his wish: a thumping majority in parliament. However, it would leave Turkey’s restive Kurdish nationalists unrepresented, throwing a wrench into Ankara’s peace negotiations with the HDP’s armed backers, the militant Kurdistan Workers’ Party (PKK). It would also spur protests against Turkey’s majoritarian electoral system.

Security outlook

Turkey’s main security challenge remains Kurdish separatism. Regional unrest will keep a peace deal with the PKK out of reach. At the same time, Islamist militants perched on Turkey’s borders and embedded in its towns are a gathering storm.

The puzzling peace

Since late 2012, Turkey’s military and the PKK have mostly adhered to a ceasefire in the four decade-long Kurdish separatist insurgency. The goal of the ceasefire is that it will be a bridge to a comprehensive peace. Any settlement will require the PKK to disarm in exchange for ethnic rights and an amnesty.

A deal is possible because the relevant leaders, president Erdogan and PKK chief Abdullah Ocalan, are both personally invested in reaching an agreement. Erdogan seeks Kurdish support for constitutional reform, while Ocalan, languishing in solitary confinement since 1999, wants freedom. However, a solution will not be reached in 2015. The PKK, whose affiliates in Syria are fighting daily against Islamist militants, will not disarm. At the same time, Erdogan’s goal is to consolidate power, in contrast with the PKK’s agenda of decentralised power. These competing interests will not be reconciled, and Turkey’s southeast will remain prone to instability and outbreaks of violence.

Syrian spillover

Since 2011, more than 20,000 foreign fighters have travelled to Syria, most through Turkey. Blowback from the war is a latent threat, and Syrian-linked militants have already been associated with a number of plots in Turkey. These include twin car bombings that killed 51 people in Reyhanli, a Turkish border town. The question is not if another major attack will occur, but when. The biggest consequences will continue to be felt in Turkey’s border provinces, where militant Islamists and anti-Islamists PKK fighters are concentrated. Ankara’s Syria policy has already caused riots in universities and on the streets between Islamists, Kurdish nationalists and Turkish leftists. Violent PKK protests against Turkey’s Syria policy killed 31 people in October.

The number of Syrian refugees in Turkey, officially estimated at 1.6 million, will continue to grow. Turkey’s efforts to support this population are laudable. Yet this traumatised group will continue to suffer from a lack of education, poor job prospects and discrimination. Without fuller integration into society, refugees pose an increasing threat to Turkey’s security. 

Uncivil society

Turkey in recent years has become a top jailer of journalists. Continued pressure on media organisations and trade unions will further stifle civil society, increasing the threat of violent protests. Turkey’s Alevi religious minority, which comprises up to 20% of the population but is unrecognised by authorities, is increasingly militant. Its members have spurred a revival of the radical leftist Revolutionary People’s Liberation Front/Party. Known in the past for assassinating businesspersons, more recently it has bombed the US embassy, government offices and police stations.

Turkey’s high internet penetration makes it an appealing market for internet companies. Yet, Erdogan’s control of traditional media has encouraged dissidents to organise through social media. As a result, politics frequently prompt Turkey’s trigger-happy web censors to block Western internet companies. In a year dominated by elections, Turkey’s promising online market will remain a minefield for the unprepared investor.


Turkey offers appealing opportunities at a time of weak growth in the global economy. Yet, the country’s political and economic stability are highly vulnerable to breakdown, while its security faces rising threats from regional Islamist extremists. Successful investors will be the ones that best understand the relationships between their sector, local partners and politics, enabling them to limit their exposure to future crises in country.

Jonathan Friedman is a senior associate at Stroz Friedberg