Turkish firms face “plenty” of problems as 50% rates bite

(Bloomberg) — Turkish companies are struggling under the weight of myriad challenges, hit by a combination of stubbornly high inflation, rising costs, shrinking access to finance and weak demand.

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The clothing and textile industries are among the hardest hit as monetary officials try to tame year-on-year price increases of more than 60 percent, or 12 times the official target. The central bank has left its benchmark interest rate at 50 percent since April, the tightest conditions in about two decades.

“We are in a sea of ​​waves,” Ramazan Kaya, head of the Turkish Garment Manufacturers Association, said last week in Istanbul. “We used to get out of them quicker in the past.”

For export-oriented businesses such as garment manufacturing, the list of problems in the $1.1 trillion economy is compounded by reduced demand from buyers in Europe, Turkey’s biggest export market, and the lira’s “suit” , according to Kaya. While the currency has fallen 13 percent this year against the dollar — one of the worst performers in emerging markets — exporters say it is still too strong.

The industry recognizes that inflation needs to be tamed, but firms are running out of cash, Kaya said, with access to funding closed or extremely expensive.

The Union of Chambers and Commodity Exchanges of Turkey, the country’s largest business group, said nearly 40 percent more firms were closing in July compared to the same month a year ago.

Gross domestic product data is due on Monday and is expected to show a 0.5 percent contraction in the second quarter, down from a 2.4 percent expansion in the previous three months, according to the median forecast of a Bloomberg survey. The key challenge for Finance Minister Mehmet Simsek is to ensure that inflation is reduced without causing too much damage.

Confidence in the real sector fell for four consecutive months and hit its lowest level since 2020 in June. Export orders, jobs, output, capital investment and an assessment of the next three months were among the reasons for the decline, the central bank said.

For years, Turkish companies took advantage of one of the world’s most negative real rates, having access to single-digit loans when inflation was over 80 percent. That changed last May when President Recep Tayyip Erdogan ended the era of cheap money by approving a shift to a more investor-friendly economic program that aimed to stabilize prices with higher interest rates.

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Policy is overseen by Central Bank Governor Fatih Karahan, a former policy adviser and economist at the Federal Reserve Bank of New York. Officials have capped commercial loans at 2 percent a month to ensure conditions remain tight. The weighted average interest rate has been over 60% since March.

Turkey’s annual growth for 2024 and 2025 is expected to be 3.2 percent and 3.4 percent, respectively, according to Bloomberg Economics. This compares to averages of over 5% seen in the decade preceding the Covid-19 pandemic. Turkish authorities are expected to cut official growth forecasts for this year and next, a person familiar with the plans said last week.

Seasonally adjusted unemployment rose to 9.2 percent in June, the highest in years, and there are concerns that this could rise as firms grapple with high labor costs and dwindling capital. “We see that 400-500 of our companies have lost their production capacity,” said Berke Icten, head of the Turkish Shoe Manufacturers Association.

According to the latest data, capacity utilization – an indicator of potential production levels – fell in both July and August.

“Second quarter demand indicators imply a slowdown from the first quarter, although it is still at inflationary levels,” the central bank said in August. A slowdown in credit growth is expected to help balance domestic demand and lower inflation, it added.

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