(Bloomberg) -- Turkish companies are struggling under the weight of myriad challenges, hit by a combination of stubbornly high inflation, rising costs, dwindling access to finance and weak demand.
The clothing and textile industries are among those most affected as monetary officials try to tame year-on-year price rises of over 60%, or 12 times the official target. The central bank has left its benchmark interest rate at 50% since April, the tightest conditions in about two decades.
“We are in a groundswell,” Ramazan Kaya, the head of Turkish Clothing Industrialists Association, said in Istanbul last week. “We used to come out of them quicker in the past.”
For export-oriented businesses like apparel manufacturing, the list of problems in the $1.1 trillion economy is compounded by dampened demand from buyers in Europe, Turkey’s biggest export market, and the “expensiveness” of the lira, according to Kaya. While the currency is down 13% this year against the dollar — one of the worst performers in emerging markets — exporters say it’s still too strong.
The industry acknowledges that inflation needs to be tamed but firms are running out of cash, Kaya said, with access to financing shut or extremely costly.
The Union of Chambers and Commodity Exchanges of Turkey, the country’s biggest business group, said in July almost 40% more firms were shutting down compared with the same month a year ago.
Gross domestic product data will be published on Monday, and is expected to show a contraction of 0.5% in the second quarter from a 2.4% expansion the previous three months, according to the median forecast of a Bloomberg survey. The key challenge for Finance Minister Mehmet Simsek is to ensure inflation is brought down without inflicting too much damage.
Real sector confidence fell for four months straight and hit its lowest since 2020 in June. Export orders, employment, production volume, capital investments and an assessment of the next three months were among reasons for the decline, the central bank said.
For years, Turkish companies profited from one of the world’s most negative real rates, having access to single-digit loans when inflation was hovering above 80%. That changed in May last year, when President Recep Tayyip Erdogan ended the era of cheap money by approving a switch to a more investor-friendly economic program that looked to stabilize prices with higher interest rates.
The policy is overseen by Central Bank Governor Fatih Karahan, a former Federal Reserve Bank of New York policy adviser and economist. Officials have capped commercial loans at a monthly 2% to ensure conditions remain tight. The weighted average interest has been above 60% since March.
Turkey’s annual growth for 2024 and 2025 is expected to be 3.2% and 3.4% respectively, according to Bloomberg Economics. That compares with above-5% averages seen in the decade leading up to the Covid-19 pandemic. Turkish authorities are expected to lower official growth forecasts for this year and next, a person familiar with the plans said last week.
Seasonally-adjusted unemployment rose to 9.2% in June, the highest in a year, and there are concerns this could increase as firms grapple with high labor costs and dwindling equity. “We see that 400-500 of our firms have lost their production capacity,” said Berke Icten, the head of Turkey Shoe Industrialists Association.
According to latest data, capacity utilization — a gauge of potential output levels — fell in both July and August.
“Demand indicators in the second quarter imply a slowdown compared to the first quarter, albeit it’s still at inflationary levels,” the central bank said in August. A slowdown in credit growth is expected to help balance domestic demand and contribute to lowering inflation, it added.
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