# External financing and the composition of Turkish investment

Economy Study · Türkiye · International Trade and Investment

External finance can support investment in factories, export services, property, or financial assets. Its effect on Türkiye's productive structure depends on the maturity and currency of the funding, the income expected from the asset, and the risks borne by the borrower. A larger inflow is therefore not sufficient evidence of a larger investment in internationally competitive production.

The central question is whether financing terms favor activities that can earn a sustainable return under plausible exchange-rate and demand conditions. Tradable and non-tradable projects face different revenue exposures, but the distinction is not absolute: domestic property can be purchased by foreign buyers, and exporters can use substantial imported inputs. A useful analysis follows the actual cash flows rather than assign risk solely from a sector label.

## The central bank's evidence is about balance sheets and funding

The [CBRT Financial Stability Report overview for May 2026](https://tcmb.gov.tr/wps/wcm/connect/b778d075-3e86-4334-a51c-820c3c84630a/i.%2BOverview.pdf?CACHEID=ROOTWORKSPACE-b778d075-3e86-4334-a51c-820c3c84630a-pVeCEDz&MOD=AJPERES) describes resilient corporate external-debt rollover and the concentration of foreign-currency loans among larger enterprises. It also reports a shift in credit composition toward Turkish lira lending. These are dated observations about financing, not a direct estimate of which new projects were completed or how productive they became.

A rollover ratio compares new borrowing with maturing obligations under the relevant definition. A ratio above full replacement can improve near-term liquidity, but it does not establish that all proceeds finance additional fixed capital. Funds can refinance debt, increase cash holdings, or support working capital. The economic use requires a separate account.

The concentration of foreign-currency borrowing also matters for distribution. Large firms with export receipts and international relationships may have access unavailable to smaller domestic businesses. An aggregate improvement in external financing can therefore coexist with tight conditions for firms dependent on local-currency bank credit.

This study treats the May report as a historical reference for those mechanisms. It does not extend the report's observations into an assertion that external conditions remain unchanged or that the same risks apply equally to every Turkish borrower.

## Funding sources imply different commitments

Foreign direct investment can provide equity, retained earnings, or intercompany debt. The category does not mean every recorded flow creates a new production facility. An acquisition transfers ownership of an existing asset, while a new plant adds capacity. Both can affect productivity and management, but their immediate investment accounting differs.

Portfolio finance can lower market borrowing costs or support asset prices, yet it may be sensitive to global risk appetite. A foreign purchase of an existing bond is distinct from a new bond issue, and both differ from the issuer's eventual capital expenditure. Flows through secondary markets should not be counted as new factory investment without evidence of the subsequent financing link.

Bank lending introduces intermediation. A bank can borrow abroad and lend domestically in another currency or maturity, subject to hedging and regulation. The bank's exposure and the customer's exposure need separate treatment. A hedged bank does not imply that its borrower is protected from operating or refinancing risk.

Equity absorbs losses differently from debt. A project funded with equity may tolerate a longer period before positive cash flow, while debt requires scheduled payments. The relative cost also depends on taxation, control rights, and risk. A lower quoted debt rate does not establish that debt is the better financing structure for an uncertain long-lived asset.

## Currency matching influences the choice of project

An exporter receiving foreign currency can have a natural offset to foreign-currency debt service. The match depends on net receipts after imported inputs, their timing, and the reliability of customers. Gross exports are not all available to repay debt. A company with high imported content can have much less protection than its foreign sales suggest.

A domestic service or property project earning lira can face a mismatch if it borrows in foreign currency. Higher domestic prices may provide some eventual adjustment, but revenue cannot necessarily reprice as quickly as the debt's lira value. A long lease or regulated price can make the timing gap particularly important.

Currency hedging can reduce the mismatch but has a cost and maturity. A short hedge against a long-lived project leaves future renewal risk. Collateral or settlement requirements can create liquidity needs during market volatility even if the eventual exchange rate is protected. The appraisal should therefore include the hedge's cash-flow profile rather than simply mark the exposure as covered.

The tradable label is consequently an initial guide, not a complete credit judgment. An exporter exposed to falling foreign prices can be riskier than a well-capitalized domestic business with stable contracts. The appropriate assessment compares net currency cash flow, demand, costs, and financing together.

## Exhibit: compare debt service with net foreign receipts

Consider two hypothetical Turkish projects, each owing US$5 million annually in debt service. The first exports output, receiving US$12 million and paying US$6 million for imported operating inputs. The second sells domestically and has no foreign-currency receipts.

| Assumed annual foreign-currency account | Export project | Domestic project |
|---|---:|---:|
| Foreign-currency sales receipts | US$12 million | US$0 |
| Foreign-currency operating inputs | US$6 million | US$0 |
| Net receipts before debt service | US$6 million | US$0 |
| Foreign-currency debt service | US$5 million | US$5 million |
| Balance before other cash items | US$1 million | −US$5 million |

The export project has a positive foreign-currency balance under these assumptions. The domestic project must obtain foreign currency from lira receipts or another source. This is an illustration, not observed project data, and it does not establish that the exporter is profitable after domestic costs or capital expenditure.

If the export project's dollar receipts fall 20 percent while imported operating costs remain unchanged, net receipts fall to US$3.6 million. Debt-service coverage from those receipts declines from 1.2 times to 0.72 times. A natural currency match therefore does not eliminate demand or price risk.

The example shows why a lender should test both exchange rates and operating conditions. A project can appear protected in a currency-only scenario while becoming unable to service debt after a sales shock. The appropriate stress combines risks that can plausibly occur together.

## Maturity determines whether an investment can reach its return

Productive assets often require construction, commissioning, qualification, and customer development before generating stable cash. Short-term funding can expose them to refinancing before the business is established. An initially low rate may be offset by repeated rollover risk and uncertain future terms.

The same issue applies to working capital. A manufacturer can require funds to purchase inputs and hold inventory before collecting export proceeds. A financing interruption can reduce production even when the long-run project remains viable. Liquidity should therefore be assessed across the operating cycle as well as at the final debt maturity.

A borrower may extend maturity while accepting a higher rate, reducing refinancing risk but increasing scheduled cost. Neither term alone establishes improved conditions. The analysis should compare the whole payment schedule, covenants, security, and any foreign-currency exposure.

Grace periods require similar care. Deferring principal can align payments with project start-up, but capitalized interest can increase the later obligation. A temporary reduction in cash service is not necessarily a reduction in the present value or risk of the debt.

## Financial conditions can alter sector allocation

Projects with collateral that lenders readily value may obtain finance more easily than innovative businesses whose assets are intangible. That can influence the allocation between property, established production, and new tradable capabilities. The pattern reflects information, security, and risk management as well as expected economic returns.

External finance can help overcome some constraints by bringing longer horizons, technical knowledge, or a wider investor base. It can also favor large incumbent firms with established international access. Evaluating its developmental role requires attention to which businesses receive funds and what they do with them.

A rise in the nominal investment total can also reflect higher prices for buildings or imported machinery. Real capital formation and the composition of assets are needed to identify additional capacity. Land purchases and ownership transfers should not be treated as newly produced machinery or structures.

The national return depends on capabilities and external earnings over time. An export project with high imported content can still create useful domestic income, while a domestic infrastructure project can improve the competitiveness of tradable firms indirectly. A rigid tradable/non-tradable ranking would miss those complementarities.

Retained earnings provide an additional source that should not disappear from the financing account. A company may invest without new external borrowing because earlier profits supply internal funds. Lower inflows would then coexist with continued capital formation. Conversely, strong external borrowing can support precautionary liquidity without immediate investment. The financing and expenditure records need to be reconciled over time.

For a long-lived Turkish project, the relevant return also depends on maintenance and replacement imports after initial commissioning. Foreign-currency equipment purchases can recur even if most sales are domestic. A currency assessment based solely on the construction invoice would understate that continuing exposure. The project appraisal should therefore include operating inputs, maintenance, replacement cycles, and debt service on a consistent currency and maturity basis.

## Evidence that would support a stronger investment base

A useful evaluation would reconcile financing flows with capital expenditure by asset and industry, distinguish new capacity from acquisitions, and identify the currency and maturity of obligations. Project operation, utilization, employment, and net external earnings would then show whether financing translated into productive activity.

Bank and corporate aggregates should be supplemented with distribution. A low average currency mismatch can coexist with concentrated exposures at particular firms. Likewise, strong rollover at large borrowers cannot establish access for smaller companies. The relevant question is whether risk is manageable where it is actually held.

Türkiye's access to external funding can support a broader productive base when financing is matched to realistic cash flows and sufficiently long investment horizons. The May 2026 evidence provides a view of financing resilience and composition, while leaving the use and return of new investment to be demonstrated. Following that distinction produces a clearer assessment of whether capital inflows build sustainable earning capacity or mainly sustain existing balance-sheet commitments.


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American Economic Senate