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For energy-guzzling Türkiye, a crisis in the Gulf is usually a direct ticket to economic pain. The math is simple: for every $10 jump in a barrel of oil, Turkish inflation shoots up by 1.2% and another $5 billion evaporates into a widening current account deficit.
It’s a vicious cycle that threatens to trigger a currency devaluation, force interest rates higher, and choke off growth.
Yet, Ankara is trying to flip the script. In a bid to spin the current crisis into an upbeat narrative, the Turkish government has sought to present the crisis in the Gulf as creating short-term challenges but also longer-term opportunities.
The pitch? If the Gulf destabilizes, Türkiye stands ready to absorb the fallout—repositioning itself as the alternative trade route, a safer haven for tourism, and the ideal sanctuary for international businesses and capital looking to flee the Gulf.
The Iran war will increase Türkiye’s external financing needs, and it is entirely understandable that the Turkish government is trying to signal that the country is even more open to international capital.
Capitalizing on media reports of financial expats fleeing the Gulf over security fears, the Turkish government has tabled a bill in parliament offering lucrative incentives for international businesses to relocate to Türkiye.
The carrot? Massive tax holidays for both businesses and individuals. Under the proposed law, financial institutions that relocate to the Istanbul Financial Centre (IFC) would enjoy corporate tax-free status until 2047 on all earnings generated out of the hub.
Exporters relocating to Türkiye are set to benefit from a cut in corporate tax rates from 25% to just 9%. Additional tax benefits are also planned for tech companies relocating to Türkiye. Furthermore, individuals and businesses moving assets, including gold and FX, and securities, will enjoy an amnesty from tax audit or assessments.
On paper, the above incentive appears very attractive. But the proposals raise several questions and broader challenges.
First, the relaxed regulation on asset movements into Türkiye will likely raise red—or rather, grey—flags with the Financial Action Task Force (FATF), given that the country has only recently graduated from the organization’s grey list. Financial institutions looking to relocate to Türkiye will need absolute certainty that these new incentives do not undermine the country’s FATF status, as that will also impact their own creditworthiness.
Second, there will be questions over the fiscal cost of this move. If this brings new business to Türkiye, it will boost overall real gross domestic product (GDP) growth and the overall tax take.
Third, while these tax incentives appear generous on paper, Türkiye will be competing directly with Gulf states that already operate remarkably low-tax regimes. This reality raises broader questions about what truly constitutes a "pull factor" for international businesses when deciding where to locate.
Security and tax are important. But other factors also weigh heavily on relocation decisions, including political stability, the legal and regulatory environment, macroeconomic stability, and broader competitiveness, including the availability of skilled and unskilled labor.
Furthermore, international businesses rarely operate in a vacuum; they require a critical mass of like-minded enterprises to be already present in a location to ensure optimal ecosystem support and service provision.
In recent years, the Gulf states have focused heavily on lifestyle improvements to increase their allure for high-end expats. These initiatives went beyond investments in education, transport, and public services; they also involved simplifying rules and regulations around daily life and the ease of doing business.
In the earlier years of the Gulf states' development, it was all about the tax advantages. However, lately—at least prior to the conflict with Iran—the surge in expat inflows was driven just as much by lifestyle choices and a clear confidence in the forward trajectory of these nations' development.
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Obviously, Türkiye has a mixed track record on a number of these potential pull factors. This inconsistent performance explains the country's relatively subdued foreign direct investment (FDI) inflows in recent years, which have hovered in the lower single digits in terms of billions of dollars.
Contrast that with the record FDI highs in 2007-08 when annualized net FDI surged past $20 billion. The critical question is why Turkiye performed so well then, and why that momentum has since stalled.
During the boom FDI years, Türkiye was perceived as an improving credit story, much like the Gulf states, until the recent Iran war. The country was emerging from a successful IMF program that provided a strong anchor, alongside a serious EU accession process.
The credible macro policy was delivering high real GDP growth and lower inflation, indeed, the one year the Turkish central bank met its inflation target of 5% as in 2011. By the end of this first decade of governing Justice and Development Party (AK Party) rule, Turkiye achieved an upgrade to investment-grade status.
The second decade, however, saw many of these positive trends reverse. For foreign direct investors, the overall direction of travel is critical, alongside baseline demands for macro-financial stability, an independent, efficient, and trusted legal process, and the rule of law. All of these are areas where Türkiye still needs to work.
It is crucial to note that in the case of the Gulf states, a central factor is the presence of a vast pool of domestic capital. Their local banks are highly liquid, and their local sovereign wealth funds hold an estimated $5 trillion or so in assets. International financial institutions have relocated to the Gulf states in recent years, specifically to access and manage this immense pool of liquidity.
For Türkiye, which remains a net importer of capital, the priority must be rectifying its macro imbalances and boosting domestic savings rates. This is essential so that international financial institutions are drawn to locate in the country because of the strength of the local financial market. Arguably, this creates a classic chicken-and-egg dilemma.
All that said, the Turkish government’s focus on attracting international capital should be commended. It sends a welcome message that Türkiye is open for business, which will help improve the country’s external image and hopefully focus reform efforts on the areas mentioned above—all of which require change if Türkiye is to truly compete with the Gulf states for international capital.
There is absolutely a strategic opportunity here. Ideally, Türkiye will benefit from new capital inflows and foreign investment that drive economic growth, create well-paid jobs, and ultimately improve the nation’s overall financing profile.
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