Turkish firms face wave of closures amid economic reckoning By Reuters

By Ceyda Caglayan and Ezgi Erkoyun

CORUM, Turkey (Reuters) – Dogan Duman is struggling to see how he can keep his garment factory in central Turkey running much longer, even after laying off a third of its staff to cut rising costs skyrocketing for companies across the country, generating a wave. of bankruptcies and closures.

Idle sewing machines are pushed to one side of his factory floor in Corum, where “For Sale” signs and padlocked gates dot the once bustling industrial area of ​​the small town.

Such sober scenes are spreading across Turkey as part of the fallout from a more than year-long effort to tighten policies, including a benchmark interest rate of 50 percent, to rein in years of soaring inflation and overheated demand.

Thousands of companies such as Duman’s – which makes coats and jackets for global fashion brand Zara – are being squeezed by inflation that topped 75% earlier this year, an overvalued pound, rising electricity and gas prices and falling export orders.

“Orders are shrinking every day because we’re losing competitiveness … and I think they’re going to shrink even more,” he said of his 27-year-old company, which is now at 60 percent capacity and 210 employees.

Turkey is one of the top five apparel producers in the world and a critical source for Europe’s leading brands. But despite its advantage of proximity to Europe, its main trading partner, Duman says rising energy, labor and foreign exchange costs have left it behind rivals in Vietnam and Bangladesh.

“Given the current exchange rate of the pound and the expected further rise in the minimum wage next year, I don’t think we will be able to compete,” he said. “We’re going to be at a point of closure.”

These days, Turkish households and businesses are grappling with the economic fallout from the cumulative 41.5 percentage point hikes in interest rates that began last June and are now finally starting to moderate inflation, which fell to 52% last month.

Last year’s dramatic policy turnaround, including fiscal measures, aims to put an end to years of rising prices and currency crashes under President Tayyip Erdogan’s previously unorthodox approach to monetary easing to boost growth.

But with credit out of reach for many and the pound’s depreciation significantly delaying monthly price increases, companies, particularly garment and textile exporters, are in a crunch.

Nearly 15,000 companies closed in the first seven months of the year, up 28 percent from 2023, according to the Union of Chambers and Commodity Exchanges of Turkey.

Other data suggest that bankruptcy stress is building.

Monitoring station konkordatotakip.com says 982 companies received initial debt protection in the first eight months of the year, almost double last year’s total.

Construction and textile firms filed the largest number of such requests to suspend debt payments to banks and suppliers to continue operations, as well as bankruptcy proceedings.

Such company tensions have knock-on effects, slowing or stopping payments in the economy and raising unemployment.

There may be “high costs,” said Erdal Bahcivan, president of the Istanbul Chamber of Industry. “While trying to save one company, dozens of firms (creditors) can end up in a difficult situation.”

Some economists say that given the aggressive tools used to kill inflation, rising unemployment and bankruptcies are almost certain.

“This is a serious dilemma for the government,” said Seyfettin Gursel, director of the Bahcesehir University Center for Economic and Social Research. “He’s trying to put the monster he created back into his lair, but he doesn’t know how to do it.”

CLOTHES strewn about

In Corum, 500 kilometers east of Istanbul, some factories had broken windows and one had dozens of rain-soaked colorful clothes strewn across the grassy yard.

Bulent Demirci, co-owner of a yarn factory in the city with 50 workers, said he closed it several months ago because of an “unpredictable economic outlook.”

“We have had production dips from time to time in the past. But this time everything is disappointment,” he said.

Ankara’s most recent minimum wage increase was to 17,002 lira ($500) in January, up 100 percent from a year earlier and 500 percent from the end of 2021, when a historic crash of lira shook Turkey.

Gas and electricity prices have increased by about seven times and three times, respectively, since 2021 for small and medium producers.

Turkey’s total production costs are now nearly 40 percent higher than competing Asian countries in dollar terms, according to interviews with exporters, who also blame barriers to financing and declining working capital.

Exporters have lobbied for more currency depreciation, with inflation running at 32% year-to-date, while the pound is down just 13% against the dollar. However, the authorities have called for holdings in pounds, helped by high deposit rates.

Istanbul-traded Mega Polyethylene and clothing maker 3F Tekstil are among those that have sought court protection against debt payments.

An executive at 3F, who requested anonymity, said the move helped it as it struggled to survive with a total of 600 workers and continue to supply fashion brands such as Mango and H&M (ST: ).

“But our suppliers and those with claims will suffer more in the process,” totaling about 10,000 workers at outsourced manufacturers across the country, the executive said.

“When interest rates reached 60-70% companies couldn’t take it. They can’t manage their debt,” he said. “Business has paid for Turkey’s high inflation”.