Türkiye's president Recep Tayyip Erdoğan has wrapped up a three-day trip to the Gulf having secured millions in new investment for his country's troubled economy.

Chief among these is the biggest defense contract in the republic's history. The Saudi government is paying an unspecified sum for a supply of Turkish Bayraktar combat drones, in a joint production deal.

As well as Saudi Arabia, Erdogan's visit took in the United Arab Emirates and Qatar, with the UAE provisionally approving deals with Türkiye worth over $50 billion.

Investment boost

Erdogan's AK party defied polls in May by winning a historic third decade in power, promising voters a host of benefits, including higher public sector salaries, more generous pension arrangements and natural gas giveaways. 

While inflation in Türkiye has halved from its high of 85 percent last October, serious economic challenges remain. 

The republic's current account deficit reached a record high of $37.7 billion in the first five months of the year, while a series of interest rate cuts by the central bank has been blamed by analysts for exacerbating the cost-of-living crisis.

Now, with the AKP facing the cost of rebuilding after February's earthquakes, taxes are rising and pressure is on to boost revenues and foreign currency reserves. 

Speaking ahead of his Gulf trip, the President said: "Türkiye will have a serious investment opportunity in the defense industry, infrastructure and superstructure investments in these three countries."

Diplomatic compromises

For Gulf states eager to diversify their economies away from fossil fuels, Türkiye with its large manufacturing base, educated middle class and a strategic location has much to offer as a trading partner.

Part of the drone deal with Saudi has involved a technology information transfer, "enhancing the readiness of the kingdom's armed forces and bolstering its defense and manufacturing capabilities," said Saudi Defence Minister Prince Khalid bin Salman in a tweet.

However, improving business links has involved diplomatic compromises for Türkiye, particularly with Saudi Arabia. Relations between Riyadh and Ankara have been strained since the murder of the Saudi dissident journalist Jamal Khashoggi in the kingdom's Istanbul consulate in 2018.

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Rates Decision

Erdogan was joined on his Gulf tour by finance minister Mehmet Şimşek and new central bank governor Hafize Gaye Erkan.

The new economic chiefs surprised the markets last month by almost doubling the cost of borrowing to 15 percent to cool runaway consumer prices.

However, ahead of July's central bank meeting the lira fell to a new low of almost 27 to the dollar, amid expectations of a much smaller rate rise this time.

The Central Bank of the Republic of Türkiye and Monetary Policy Committee did indeed raise the rate on July 20 from 15 percent to 17.5 percent, which was below the expectations of analysts.

Speaking ahead of this rise, Matt Vogel, a portfolio manager at FIM Partners in London, said: "There is a massive discrepancy where policy rates are and where inflation is … so the question is how do you square that circle?" 

With the Turkish economy under continuing pressure Gulf investment has taken on new importance for Türkiye, as western investors stay away. 

Analysts warn that with local elections next spring, more unfunded public spending policies by the AKP may be on the way, fuelling higher inflation.

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