Can Turkey’s investment in Africa be sustained?

Can Turkey’s investment in Africa be sustained?

Turkey’s investment with Africa has increased considerably in recent years, but the country’s financial crisis could affect its ability to engage in the continent.

Over the last decade, Turkey has become one of the largest investors in Africa, with investment coming from both the state and the private sector. Security, economics and politics have been the driving factors. Yet as the Turkish economy lurches into a financial crisis, questions are being raised about whether existing levels of investment can be sustained on the continent. Turkey’s economy has shown classic signs of overheating: a construction boom, a large trade deficit and mounting foreign owned debt.

This has been further exacerbated by President Recep Tayyip Erdogan’s unorthodox relationship with the central bank and his reluctance to increase interest rates. The detention of American pastor Andrew Brunson – released in October – saw the Trump administration launch an economic war against Turkey, including a doubling of tariffs on aluminium and steel. As a result, external debt boomed as the Turkish lira collapsed.

Recent years have seen a blossoming relationship between Turkey and the continent. Turkish African investment has increased from $100m to over $6bn since Erdogan’s ascension to power in 2003, while trade has grown to $20.6bn. Turkish Airlines, in which the state maintains a 49% stake, now flies to 52 African destinations in 33 countries. The Turkish government has 41 embassies on the continent, compared to China’s 47. The relationship extends into infrastructure, with Turkish firms undertaking numerous projects across the continent. Yapi Merzkei, a construction company, pipped the state-owned Chinese Railway group to a $1.7bn contract for the 400km Awash-Weldiya railway in northern Ethiopia. 

Professor Sedat Aybar, head of economics at Istanbul’s Aydin University, says that the devaluation of the Turkish currency may begin to impact projects carried out by the Turkish private sector. An underlying problem with Turkey’s economy is that many large infrastructure projects were purchased on foreign credit. As most of this debt is held in foreign currency, there is an increased risk of default. In June, Reuters reported that global banks held $200bn in Turkish debt, a potential risk to private investment in Africa as credit becomes harder to obtain and debt servicing becomes more expensive.

Alongside inflation, the poor economic situation has dampened the overall investment climate. If a general crisis were to engulf Turkish loan repayments, the government has stated that it would support the banks who, earlier this month, agreed to underwrite many debt-ridden companies. But given the size of Turkish foreign-owned debt, a major bailout would represent a significant drain on Turkey’s monetary system.

Military and political aid

The financial crisis also has implications for Turkey’s ability to fund expensive aid projects on the continent. Turkey has identified two priority partners in Africa: Somalia and Sudan. Turkish aid to Somalia reached $4.5m a month as of July 2013, the impact of which can be seen in the creation of Erdogan Hospital in Mogadishu. Aid has been accompanied by a steady influx of private sector firms, including Turkey’s Abaryak group, which runs Mogadishu Port.

Much of the aid is not purely humanitarian. Turkey has opened a military base in Somalia that houses 200 troops. The aim of the mission is to train the Somalian army to maintain law and order, and battle Islamist militants in the region. The creation of the military base in Mogadishu and a similar dispatching of $5m to fund Malian counterinsurgency operations in the Sahel were a sign of Turkey’s increasing muscle on the continent. In 2017, Turkey purchased a 99-year lease of Sudan’s Suakin Island, which included an agreement to build a dock to maintain civilian and military vessels. The partners agreed that future military cooperation is possible.

And yet the perilous financial backdrop is certain to impact Turkey’s ability to execute its grander foreign policy objectives. The lira has stabilised recently, having hit record lows of L6.82 against the US dollar in October. It has since rebounded to L6.12, but that level represents a gloomy new normal for the currency compared to even one year ago, when the Lira was trading around L3.70. To stem capital outflows, the country’s benchmark interest rate has been raised to 24%. The days of easy lending to the private sector are almost certainly over.

Furthermore, there are pressures for an increase in taxes and the introduction of what critics see as long overdue-austerity measures. The drying up of Turkish government largesse in Africa could mean that the Turkish private sector finds fewer doors opening when it attempts to bid for contracts on the continent.

Long-term strategic goals

Yet Turkey’s shifting strategic position means that it is unlikely to cease its long-term goal of building bridges with African partners. Ankara’s bid to reposition itself as a regional hegemon is key to Erdogan’s nationalist project, but has earned the country few friends abroad. While Erdogan’s aggressive rhetoric has led to clashes with traditional partners – including the US, Europe and Russia, cordial relations with Africa have largely been sustained. Erdogan views Africa as a future trade partner as he aims to reposition Turkey’s economy away from the US and Eurozone. As objects of long-term foreign policy, Turkish investments in Africa are thus likely to weather the financial storm brewing at home.

Even if Turkey buckles under the current financial pressure and curbs spending to tackle its fiscal deficit, Africa’s economic fundamentals mean that future engagement will remain compelling. The financial crisis represents a risk to private sector investment, but as Turkey’s political clout grows in the region it is not inconceivable that Turkish firms will see a fast-growing Africa as a counterweight to the woes of their domestic market.

Giorgio Berti

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Written by African Business Magazine

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