The world's fastest growing economy is putting the faith of foreign investors to the test. Turkey has suffered staggering losses on its stock exchange in the days following the US loss of its AAA+ credit rating. But so far, Dutch businesses remain confident in the new 'Eurasian Tiger.'

In the massive sell-off that has sent share prices worldwide into a dizzying free fall, few countries are taking as harsh a beating as Turkey. On Monday alone, Turkish stocks plunged by over 7 percent, far more than the average loss in other emerging markets. It was the steepest drop in the G20 group of the world's leading economies, the Wall Street Journal reports. 

Still upbeat
But a gloomy market does not scare Joost Nienhuis. His company Tripolis, a Dutch software developer for e-mail marketing, opened an office in Istanbul last month. "We're in Turkey for the long run. We see great potential there. It's a big country with a young population that embraces modern technology. We might experience some challenges as people feel the impact of stock movements, but the Turkish are excellent businesspeople, they see the potential of what we offer. So I'm upbeat about the country."

Even the poor showing of the Turkish lira, the worst performing currency in all of the world's emerging markets, is not enough to scare off Nienhuis. "That's what you expect from an emerging market," he says. "There's always a relationship between risks and rewards. The potential in Turkey is enormous. But it's not the most stable economy worldwide, everyone's aware of that."

Turnaround
Paradoxically, Turkey truly turned a corner this year. It outstripped China as the world's fastest growing economy. Memories of 100-percent inflation, IMF bailouts and military coups faded fast. Inflation was reined in, economic growth reached double figures and the Erdogan government won a key power struggle with the military.

This all sparked strong interest in Turkey among Dutch investors, columnist Semih Idiz of the Turkish daily Milliyet said on a recent visit to the Netherlands. "I was talking with a group of Dutch CEOs and businessmen who are investing in Turkey already. They were much more bullish about the Turkish economy than I was. They consider it to be sustainable; they believe we've overcome the difficulties stemming from crises in 1996 and 2001. They say they can rely on our economic system now, unlike the system in some EU countries. Which is ironic."

Dutch bank ING expects Dutch business investment in Turkey to increase fivefold in the next few years. Trade should receive an extra push from next year's celebration of the 400th anniversary of Dutch-Turkish relations.

Danger of overheating
However, apart from the fragility of Turkish stocks, there are other more structural problems. The country has a rapidly growing trade deficit. Imports are growing four times faster than exports. Critics also point to the loose monetary policy that is fuelling a creditcard boom. There are fears of a bubble economy that could soon burst. Turkey's high-consumption economic model - much like that of Spain or China - is not sustainable in the long run, according to the head of the nation’s chamber of commerce.

Bouncing back
Hüseyin Celik, head of the international business desk at ING Bank Turkey, is confident the country has little to fear from its trade deficit or from big losses on the stock market. After a similar crisis two years ago, Turkey was among the first countries in the world to bounce back, he points out. He warns though that some Dutch businesses investing in Turkey will be hurt by the crisis. "Dutch investors have in recent years invested in large real estate, shopping malls for instance. Such large, long-term investments will be affected by the financial crisis. The same can be said for large Dutch investments in the energy sector."  

Celik is not surprised that Turkish stocks have taken such a disproportionate blow. He explains that the Turkish stock market has a large percentage of foreign investors, who are always the first to sell their shares and invest their money elsewhere when the going gets rough. Eventually, they will return, Celik says, because they want to invest in a growth market. "And if you look around, you'll find that not many markets are still growing."

(/tf)