Turkish Finance Hub Opens Half Empty Due to Investor Exodus

As a result of the president's unpredictable policies throughout the past year, Turkey's largest city, Istanbul, has opened its first financial center under the leadership of Recep Tayyip Erdogan on Monday.

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As a future hub for finance in the region, Erdogan's inner circle has positioned the Istanbul Finance Center as an office space complex that has a capacity of 1.4 million square meters. 

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To critics, the inauguration is just another campaign stop for the president, who’s trying to boost his popularity ahead of May 14 elections, where he’s seeking a third term.

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Here is a quick look at why Erdogan is up against a big test in Turkey's upcoming elections

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The IFC is going to create a new financial ecosystem," Erdogan stated during the opening ceremony. "With the IFC facilitation of international capital flows, we will increase the capacity of our country to attract investment."

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There are only a few tenants of the new finance center, which is located on the Asian side of Istanbul, right across from the city's older financial district, with an estimated cost of $3 billion. It is important to note, however, that local financial institutions are also wary of moving to the new finance center. A few tenants of the new finance center include the central bank, state lenders, and regulators.

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In the last few years, a number of Wall Street banks have been cutting the size of their Istanbul offices and there is little indication that this trend will reverse.

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According to Oner Guncavdi, an economist at Istanbul Technical University and a member of the Turkish Union of Economists, the opening of the Istanbul Financial Center is "only a show intended for the upcoming elections," he said.

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Past with a troubled history

Since the project's inception in 2009, it has experienced some difficulties since its construction was aborted by contractors who were unable to provide reliable financing for the construction, as there were no tenants interested in renting the space. Turkey's sovereign wealth fund assumed responsibility for the project in 2019.

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Despite Erdogan's appointment of Berat Albayrak as minister of Treasury and Finance in 2018, there has been a lackluster interest in the IFC.

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The Turkish government has taken steps to make it more difficult for foreign investors to trade Turkish lira bonds and hedge against currency fluctuations under Albayrak. The amount of foreign capital holdings of Turkish lira bonds decreased by $1.2 billion in March from $72 billion in 2013. Stock ownership dropped from 61 percent in the past to 26 percent during this period.

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In the meantime, many of the world's largest financial institutions have cut the number of staff in Istanbul or shut down their trading or research operations in this area without explanation. Morgan Stanley, Citigroup Inc. and JPMorgan Chase & Co. are an example. 

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A statement released by the Turkish government said the IFC would attract $250 billion of foreign investment to Turkey between 2036 and 2047. In addition, the center will also elicit a clear message to the global financial center that Turkey is on the path to economic independence.

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Policies with an unorthodox approach

Erdogan has been pushing for Turkey's policymakers to pursue an increasingly unorthodox economic strategy ever since his 2018 elections consolidated all executive power in his hands. Turkey's monetary policy stands out as the biggest outlier in recent years. In February, the central bank decided to lower its interest rate to 8.5% despite a record high inflation rate, in keeping with Erdogan's unorthodox belief that lower rates would slow price increases, resulting in a rise in inflation.

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Upon defeating Erdogan next month, the main opposition parties in Turkey promise that the economic policies will normalize. According to Kemal Kilicdaroglu, the main opposition candidate in the elections and the winner in many polls, the central bank headquarters will be reinstalled in Ankara, the capital, and monetary policy will not be interfered with.