Moody’s downgraded Turkey to a speculative level on 22 September. That makes two such grades, the first being S&P’s decision soon after the attempted coup in July. Moody’s downgrade was based on the “weakening in previously supportive credit fundamentals, particularly growth and institutional strength.” So, one would expect foreign fund outflows from the country as investors shy away from Turkish assets. Yet, like a slap in the face of Moody’s and S&P analysts, portfolio investors are flocking in. Foreign investors bought a net of $618 million worth of stocks and bonds in five trading days through September 30. That’s the highest inflow in the last 7 weeks, mind you. So, foreign investors reacted to Moody’s downgrade by buying more Turkish assets.

Why? I think the answer lies at Turkey’s relative performance. When it comes to portfolio flows, Turkey’s main competition is Brazil, Russia and South Africa. Except for South Africa, all, including Turkey, now have speculative grades. Between 2002-2007, Brazil’s average annual growth was around 4 percent. Turkish and Russian average annual growth was around 7 percent. Then came the global crisis, and between 2008-2014, the highest average annual growth rate in the pack was around 3 percent in Brazil and Turkey.

But lately, Turkey has been standing out even more favorably. China’s slowdown has completely changed the picture. Just have a look at 2012-2015 average annual growth rates for the four portfolio sisters: Turkey stayed stable at around 3 percent average annual growth rate. Yet Brazil and Russia declined to around 0 percent average and South Africa to less than 2 percent. When compared to its portfolio sisters, Turkish growth shines, even if it is far below its pre-crisis performance. That is why portfolio investors still flock to Turkey.

As the IMF noted, 2016 is the 6^th consecutive year of lower than average global growth. For Turkey, it is the 5^th such consecutive year. Both, the Turkish government and the IMF have lowered Turkish growth forecasts early this month. The Medium Term Program of the Turkish government lowered the country’s growth forecasts to 3.2 percent for 2016, and the IMF lowered it to 3.3 percent. That is right about where the global growth rate is going to be, by the way. So when portfolio investors look at their options, and Turkey does not look like a bad one relative to others.

Recently, I see another trend that needs to be taken into account. Compare Turkey with Brazil, especially in terms of the impact of geography on economic performance. Looking at the doing business indicators for the two countries, Turkey is far ahead of Brazil, yet Brazil attracts far more foreign direct investment (FDI) than Turkey. Why? Because geography is destiny. Brazil is in a far better neighborhood when compared to Turkey. As the Arab spring turned into a winter, we are beset by terrorism and find ourselves as neighbors to the most devastating war since WWII. Turkey has already been feeling the impact. Take this year alone: together with the Istanbul Atatürk airport attack and Ankara bombings, Turkey suffered about 16 major terrorist attacks, one failed coup attempt with Turkish jets bombing the Parliament building in Ankara, and a continuing purge to demilitarize the fanatics who infiltrated the state apparatus. Yet Turkey endures and portfolio investors keep coming in. I know that state of emergency in a country of weak institutions is double jeopardy. Yet more than $4.5 billion so far this year have gone towards Turkish stocks and bonds.

Why? I tend to think that living in a lousy neighborhood has also its advantages. For starters, you tend look better in comparison and become more important. Turkey has become of prime importance for our western Allies in a totally destabilized neighborhood, especially considering the refugee crisis. And this neighborhood is going to stay lousy, if not get lousier. That makes Turkey more, not less, important for decades to come.

But let us not delude ourselves into thinking this picture is sustainable. Turkey is a country of contingent liabilities, and we are not really strong in the risk management department. So for Turkey to continue outperforming its portfolio sisters in the future, it needs a new story. A story where trust in judiciary is restored, fundamental rights and freedoms are secured, foreign R&D personnel don’t have second thoughts to bring their families, and Turkish jets stop dropping bombs to Turkish territories. Turkey needs a new and more democratic constitution that embodies the new storyline.

This commentary was published in Hürriyet Daily News on 08.10.2016