What Do Foreign Investments Coming into Turkey Tell Us?The Impact of Capital Flows on the Economy and Financial Markets

Foreign investments are one of the most concrete indicators of confidence in a country. From exchange rates and interest rates to stock markets and real estate, many areas are directly affected by the inflow and outflow of foreign capital.

In emerging economies like Turkey, this impact is much more pronounced. In this article, we seek answers to the following questions:

• What is foreign investment?

• What types of foreign investments come into Turkey?

• Why have foreign investments fluctuated in recent years?

• What do foreign capital inflows mean for financial markets?

  
  

  

  15 Temmuz Şehitler Köprüsü

What Is Foreign Investment?

Foreign investment refers to capital brought into a country by non-resident individuals or institutions. These investments are generally examined under two main categories:

1. Foreign Direct Investment (FDI)

These are long-term and permanent investments.

Examples include:

• Company acquisitions

• Factory establishments

• Joint ventures and partnerships

• Real estate purchases

FDI contributes to employment creation and increases production capacity.

2. Portfolio Investments

These are short- to medium-term capital movements.

Examples include:

• Equity (stock) investments

• Government bonds

• Eurobond purchases

Portfolio investments tend to enter and exit quickly, which can increase market volatility.

Historical Overview of Foreign Investments in Turkey

Turkey was a strong destination for foreign investment in the mid-2000s. However, over the past decade, the composition of foreign investment has changed significantly.

2015–2018: Relative Stability

• Global liquidity conditions were still supportive

• FDI-led inflows continued

• The banking and energy sectors were at the forefront

2018–2023: Loss of Confidence and Volatility

• Currency shocks and high inflation

• Negative real interest rate policies

• Sharp increases in CDS risk premiums

During this period:

• Long-term investments declined

• Portfolio investments shifted toward net outflows

• Foreign ownership in Borsa Istanbul fell to historically low levels

2024–2025: Normalization and Selective Inflows

• Monetary policy tightening

• Interest rates rising above inflation

• Gradual decline in country risk premium

As a result, foreign investors have begun to act more selectively.

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How Do Foreign Investments Affect the Turkish Economy?

1. Exchange Rates

An inflow of foreign capital:

• Increases the supply of foreign currency

• Reduces pressure on the Turkish lira (TRY)

• Lowers exchange rate volatility

Capital outflows have the opposite effect.

2. Interest Rates and Financing Costs

When foreign investors participate:

• Purchasing government bonds → interest rates tend to decline

• Providing liquidity to the banking system

This can help reduce overall borrowing and credit costs.

3. Borsa Istanbul (BIST)

The share of foreign investors in BIST directly influences:

• The overall direction of the index

• Stock-specific price movements

• Valuation multiples

📌 During periods of rising foreign interest, the following sectors often stand out:

• Banking

• Industrial companies

• Transportation

4. Real Estate and Property Markets

A significant portion of foreign investment in Turkey is directed toward residential and commercial real estate.

Key drivers include:

• Citizenship-by-investment incentives

• Favorable exchange rate conditions

• Regional price differentials

These factors have particularly supported investments from the Gulf region, Russia, and Europe.

What Do Foreign Investors Look for in Turkey?

Key criteria for foreign investors include:

• Inflation dynamics and the credibility of monetary policy

• Rule of law and policy predictability

• Central Bank independence

• Current account balance

• Geopolitical risks

High interest rates alone are not enough—if uncertainty is high, capital inflows remain limited.

Turkey’s Advantages and Challenges

Advantages

• Young and dynamic population

• Strategic geographic location

• Large domestic market

• Strong production and logistics infrastructure

Challenges

• History of high inflation

• Exchange rate volatility

• Confidence issues

• Frequent short-term policy shifts

What Does This Mean for Investors?

Trends in foreign investment can serve as early signals for:

• The direction of exchange rates and interest rates

• Stock market performance

• The momentum of the housing market

Therefore, the question“Are foreign investors entering or exiting?”is a key indicator every investor should monitor regularly.

Conclusion: Foreign Invest

ment Is the Financial Reflection of Trust

Foreign investment in Turkey is not merely a capital inflow—it is a vote of confidence in the economy. For sustainable and long-term growth, increasing long-term foreign direct investment is far more critical than relying on short-term capital flows.

Going forward, Turkey’s ability to attract investment will depend on:

• Commitment to fighting inflation

• Policy consistency

• Effective expectation management

These factors will determine whether foreign capital remains temporary—or becomes permanent.