Turkey and the GCC: 'A win-win dynamic'

Momentum is building for economic relations between the Gulf states and Turkey, economists told the Anadolu Agency today.

“Trade relations, which have been poor in the past, are improving rapidly to the benefit of all concerned,” commented Giacomo Luciani, an economist and co-director of the Graduate Institute of International and Development Studies in Geneva. “And there is a vast potential for improvement.”

“Turkey can increase the existing trade volume with the Gulf states by setting sector-based targets and by taking advantage of international conditions,” explained Sedat Kutlu, an expert with the Turkish Arab Countries Businessmen’s Association. Exports and imports can open access to a broad base of businesspeople.”

The Economist Intelligence Unit (EIU) noted in a July report that Turkey is developing as an increasingly important economic partner for the Gulf Cooperation Council (GCC) countries. Trade volume between Turkey and the GCC was close to $16 billion in 2014, according to EIU statistics, up from about $5 billion in 2005.

“These commercial exchanges are being dominated by Saudi Arabia and the United Arab Emirates, accounting for 86 per cent of GCC imports from and exports to Turkey in 2013. They are mainly focused on construction goods, iron, steel and precious metals. Apart from the specific case of Turkish defence industry’s growing exports to the Gulf, these exchanges are relatively poor in terms of high added value,” a French Institute of International Relations (IFRI) report noted.

“The number of service contracts awarded to Turkish companies in the Gulf has also experienced significant growth over the past decade to reach a value of $52.6 billion on March 31, 2013. About 1,000 Turkish entrepreneurs initiated large-scale projects and participated in the construction of new airports, subways, refineries and other infrastructures for petrochemical industries in the region.”

Turkish government strategy

A report from the IFRI, published in January, tells how the Turkish government has developed its strategy for improved economic relations with the Gulf states, with what it called a “win-win” strategy.

“Although not immediate neighbours to the Republic of Turkey, GCC countries were included into the ‘zero problems with neighbours’ perimeter designed by the current Turkish Prime Minister, ex-Foreign Minister, Ahmet Davutoglu.”

“Relations with the GCC were from the outset considered as strategically important essentially because of their economic potential. Thus, the development of Turkey’s economic links with Gulf monarchies was both a motivation and a driving force for the rapprochement.”

“Multilateral as well as bilateral meetings have multiplied over the last years, allowing a rapid development of trade as well as political consultations about several regional issues. Diplomatic initiatives and economic expansion have been considered complementary and business circles have joined the momentum, under the guidance of the Turkish state,” the report said.

A Joint-Action Plan for Turkey and the GCC has been elaborated by the GCC-Turkey High Level Strategic Dialogue, the report noted.

“Turkey-GCC relations would develop around the issues such as maritime and land transportation, trade and private business, and investments in the areas of energy, water, electricity and cultural exchanges,” the report said.

Vast potential for development

But these are only a few areas in which Turkish-GCC trade may develop, economists pointed out.

The Gulf economies depend on oil sales, Luciani said. For Qatar, oil accounts for 55 per cent of GDP; for Kuwait, it’s 60 per cent, and for Saudi Arabia it’s 50 per cent, according to OPEC statistics.

“The GCC countries are facing considerable pressure from the ongoing slump in oil prices, as they are heavily dependent on oil and gas revenues,” the International Monetary Fund wrote in its 5 May report on the region.

“Growth is forecast at about 3/4 per cent on average for 2015. GCC countries will have to adjust the incentives of workers and firms to encourage them to work and produce in the non-oil tradable sector if these economies are to succeed in diversifying their economies. Consumer spending is expected to ease back from its current high of about $9,000 per capita.”

These trends create opportunities for Turkish companies.

“Consumers in the GCC countries have, until recently, preferred high-end luxury consumer goods. But Gulf economies are slowing as the price of oil has fallen sharply this year. Meanwhile, Turkish consumer goods manufacturers have vastly improved the quality of their products, while the price of Turkish exports is still relatively low compared with those from Europe. All of this creates an open window for Turkish exporters in the Gulf,” Luciani explained.

Another area offering vast opportunities for Turkish business is agriculture, said Kutlu. The Gulf states have massive import bills for food.

Gulf countries see Turkey as a key partner in the region to ensure their food security. Gulf investors actively buy shares in Turkish companies producing wheat and other cereals, the IFRI report said. In this context, the Turkish Economic Council in Dubai welcomed the UAE-Turkey Partnership for Food Security forum on 24 February, 2013.

Construction continues to be a major Turkish service export to the Gulf region, as Turkish companies have $350 billion in projects throughout the GCC, according to statistics from Construction News published in June.

“Slowing government and consumer spending in the Gulf will impact Turkish construction projects,” Luciani noted. “But expansion will continue regardless, as demand for diversification of the economies away from oil in these countries drives infrastructure and office building demand.”

The GCC’s combined rail, road and maritime projects will be worth an estimated $422 billion over the next five years, according to Fleming Gulf research.

“Turkish contractors have a few inherent advantages when competing in the GCC market against more established regional and global players that should see this trend of success continue – they have some very capable companies that have moved up the quality curve and are as good as their international counterparts, but cheaper. Their cost advantage is bolstered by a geographic and cultural proximity advantage,” said Tim Reid, head of regional banking for HSBC in a report published in June.

Another area in which vast expansion in the Gulf is possible for Turkey is banking. “While banks in the Gulf are well-developed and strong, Turkish banks lead in terms of online banking,” Luciani noted. This could prove a support for growth for Turkish banks in the Gulf, he added.

There is a wealth of possibilities for Turkish companies in the Gulf, Luciani continued, but competition will be strong from Asia, particularly from Chinese firms. Turkish companies are competitive, however, and if they can match offers from Asia, they will take the market share, he said.

The Gulf in Turkey

Turkey is also proving to be a very attractive target for investment by GCC companies.

“Collectively, investment flows from the GCC to Turkey are helping to drive economic growth, build vital infrastructure, boost company profits, create jobs and lift living standards,” Reid said.

The latest available figures show that total investments by the GCC countries in Turkey are estimated at nearly $10 billion, including around $6.5 billion invested during 2004-2011, according to Reid.

Some good examples are Saudi Arabia’s AcwaPower, which is the main developer of the 950MW Kirikkale independent power project (IPP); while Qatar’s Nebras is looking at developing Turkey’s lignite reserves to develop up to 4,500MW of new power capacity.

The Saudi Economic and Development Company recently announced its decision to buy a 50 per cent stake in a company running 63 private schools in Turkey under the name of Mektebim Koleji.

UAE investors have been particularly active in real estate investment in Turkey. Among the most significant are Emaar Properties which has projects in the country worth $4.3 billion, Green Valley which has a $60 million residence project in Trabzon province in 2014, and the PJSC Group with its $400 million in projects.

The Outlook

To increase investment from the Gulf, and to gain a share in Gulf markets, Turkish businesses must take advantage of their know-how and human capital, Kutlu insisted.

“Qualified manpower is an important factor for Turkish businesses working in GCC countries. Setting sector-based goals in this regard would be an important step forward,” he said.

“The only real value that creates value is knowledge. Building trust based on shared know-how is the way forward,” Kutlu added.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.