COFACE ECONOMIC
PUBLICATIONSJUNE 2024

FOCUS

By Seltem Iyigun, Economist
Middle East & Türkiye
Based in Istanbul, Türkiye

Will the Turkish economy benefit
from the authorities’ U-turn towards
greater orthodoxy?
EXECUTIVE SUMMARY
Starting in mid-2021, Türkiye shifted its economic policies and introduced a negative real interest rate policy within the framework of a new program,announced as the Türkiye Economic Program (TEP), based on increasing production, investments, employment, and exports through low interest
rates, as well as reducing the current account deficit to eventually reach a surplus. To achieve these goals, the central bank had cut its policy rate from
19% to 8.5% between September 2021 and May 2023. However, as manufacturing production is heavily dependent on imported intermediate goods
and energy, the Turkish lira depreciated by nearly 60% vs. the USD during this period and inflation surged from 19.3% in August 2021 to as high as
85.5% in October 2022. Following this sharp depreciation of the lira, exports rose by 13.4% on a nominal basis between 2021 and 2023, while imports
jumped by 33%. This widened the trade deficit to USD 106 billion (9.5% of GDP) in 2023 compared with USD 46 billion in 2021 (around 6% of GDP).
Consequently, the current account deficit rose from 0.9% of GDP in 2021 to 4.1% in 2023 partly due to the increase in global energy prices because of
the war in Ukraine.
On the other hand, the negative real interest rate policy, which was not able to reduce the current account deficit through the lira’s depreciation as
expected, allowed companies to obtain cheap credits with interest rates standing far below inflation. As a result, companies can be considered as thereal winners of this period, especially those with more capital-intensive production and strong pricing power.
After the May 2023 general elections, economic conditions have become more restrictive for the Turkish economy. Indeed, following these elections,Türkiye has shifted into a more orthodox economic policy set, focused on abandoning its negative real interest rate policy and bringing down
skyrocketing inflation. The Central Bank raised the policy rate from 8.5% to 50% in March 2024 and tightened financial conditions significantly.
Therefore, interest rates on commercial loans have approached 70%, raising the financial burden on companies considerably.

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WILL THE TURKISH ECONOMY BENEFITFROM THE AUTHORITIES’ U-TURN TOWARDSGREATER ORTHODOXY?

However, Turkish companies still have some comparative advantages over their competitors. The country’s proximity to major export
markets, quality of technological equipment, educated labour force, diversified manufacturing fabric, etc., coupled with the likely returnof EU countries to growth in 2024 and 2025, are expected to support Turkish exports from the second half of 2024. In addition, companies
should benefit from more stable domestic macroeconomic conditions from 2025 onwards. The disinflation process, which will begin
in the second half of 2024, will provide a new opportunity for Türkiye to attract foreign investment, stabilize the lira, lower interest rates,
and reduce the financing burden on businesses. From this perspective, we can also see that the depreciation of the lira between 2021
and 2023 will support the narrowing of the current account deficit not mainly by increasing exports, but by decreasing imports. Indeed,in the first quarter of 2024, the current account deficit declined to USD 11 billion, from close to USD 25 billion in the same period of 2023.
At that time, the surplus of the core current account balance (excluding gold and energy) rose from USD 2.7 billion to USD 5 billion. Imports excluding
energy have been declining since January 2024. In the first four months of 2024, they fell by 8% year-over-year (YoY).

Can Turkish exports benefit
from the sharp depreciationof the lira?
From mid-2021, Türkiye adopted an unorthodox economic
policy called the Turkish Economic Program, which was
based on increasing production, investment, employment,
and exports through a negative interest rate policy. Initially,
the program aimed to gradually reduce the current
account deficit and achieve a current account surplus
in the medium-term, supported by recent investmentsin the energy sector. The current account surplus was
expected to reduce depreciation pressure on the lira in themedium-term and to lower imported inflation, enabling
the economy to exit the depreciation-inflation spiral.
To achieve these objectives, the central bank cut its policy
rate from 19% in September 2021 to as low as 8.5% in May
2023. Consequently, the interest rates on one to threemonth deposits declined to around 13%, while 12-monthinflation expectations rose to nearly 35%. On the other
hand, the economic authorities introduced a significant
number of macroprudential measures to encouragebanks to lend cheaply, for interest rates on loans of 2025%, far below inflation rates. Consequently, the Turkishlira depreciated by nearly 60% vs. the USD between
September 2021 and May 2023.

10% higher in March 2024 than in September 2021 andanalysis of previous episodes show that the depreciationof the lira has little impact on exports.
Looking at the performance of Turkish exports overthe last decade, they are rather positively affected byrising external demand, especially in Europe, and thedepreciation of the lira did not have much effect onexports. Typically, the narrowing of the current accountdeficit during periods of lira depreciation was due tofalling domestic demand in Türkiye’s case, which inturn depressed imports. Between 2013 and 2016, theTurkish lira depreciated by nearly 45% against a basketof currencies (composed of 0.5 USD+0.5 EUR), while theforeign trade deficit narrowed from around USD 100
billion (around 12% of GDP) to USD 53 billion (6% of GDP).
However, during this period, exports declined by 7.6%
while imports declined by 22.5%. In other words, exports
declined despite the depreciation of the Turkish lira. The
main reason for the narrowing of the trade deficit was the
sharp decline in imports (Chart 1). In the pre-pandemic
period between 2017 and 2019, the lira depreciated by
40%, exports rose by 10% and imports declined by 12% despite higher oil prices. The trade deficit declined from
USD 74 billion (around 9% of GDP) to USD 29.5 billion (4%of GDP).
Chart 1 -Turkish exports and imports vs. basket currency

One should note that even before the 2021-2023 period,
the depreciation of the lira had only a partial, but notsignificant, impact on Türkiye’s export performance. In
fact, between early 2013 and late 2016, the lira depreciatedby around 17% in real terms, while exports fell by 7% in
nominal terms. This suggests that other factors, suchas external demand, had a greater impact on export
performance than the exchange rate.

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During the period of unconventional policies, and coupledwith the unprecedented increase in global energy prices
due to the start of the war in Ukraine in February 2022, thesharp depreciation of the lira widened Türkiye’s current
account deficit. Between 2021 and 2023, Turkish exportsrose by 13% on a nominal basis while imports increased by
33%. This widened the trade deficit to USD 106 billion (9.5%of GDP) in 2023 compared with USD 46.2 billion in 2021
(around 6% of GDP). Consequently, the current accountdeficit rose to 4.1% of GDP in 2023, from 0.9% in 2021.

0

While this produced the opposite result of what was
desired by the new economic model, it may be too early
to assess the efficacity of the lira’s depreciation. According
to the economic theory, it is supposed to produce its full
impact in the medium-term: after an initial unfavourable
price effect in the short-term (higher import prices),volumes adjust, and exporters' price competitivenessenables them to gain market shares.
While the slight uptick in export volumes in recent
months (+4.5% YoY in January-May 2024) could be the first
impact of this policy 3 years later, exports were still only

0
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24

Imports ex. gold (12-months cumulative, USD billion)
Exports (12-months cumulative, USD billion)
Basket currency (0.5 USD+0.5 EUR) vs. TRY*

*RHS
Sources: TSI, Workspace, Coface

This suggests that even if there is a theoretical relationship
200
betweenexchange rate changes and the level of exports
andimports,other variables may also be influential. In the150
case of Türkiye, the main determinant of exports is thechangein income across trading partners (Charts 2 and100
3 - See next page).
50

In 0fact, nearly 95% of Türkiye's total exports in nominal
terms come from the manufacturing sector and are-50
mostlydirected towards European Union (EU) countries,
2019
2020
whose
share in the
country’s2021
total exports2022
is close to 2023
40%. Half ofthe exports
goods,
Commodities
excl. aregold intermediate
Türkiye domestic
PPI mostly
processed raw materials for industries (i.e. medium-low
technology basic metals, chemicals, and plastics).

WILL THE TURKISH ECONOMY BENEFITFROM THE AUTHORITIES’ U-TURN TOWARDS
25
GREATER ORTHODOXY?

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22
Global growth
EU growth
Imports ex. gold (12-months cumulative, USD billion)
Turkish exports growth (volume, annual average)
Exports (12-months cumulative, USD billion)
currency
Sources:Basket
TSI, IMF,
Coface(0.5 USD+0.5 EUR) vs. TRY*

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-5.0

REER

-6.0

2023

Global growth
EU growth
Turkish exports growth (volume, annual average)

160Chart 3 - CAGR between 2013-2023 (%)

2015

Global growth
EU growth
Turkish exports growth (volu

140

Commodities excl. gold
Türkiye domestic PPI
Türkiye's
Imports
Türkiye's
EU GDPWorld GDP
-10exports
excl. energy
domestic
2015
2016
2017
2018
2019
2020 2021
2022
Sources:2014
IMF, TSI,
Cofacedemand

I

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I

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III

2018

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2020

Türkiye's
exports

Imports
excl. energy

Tür
dom
dem

Chart
30 5 - Unit labour costs for industry (calendar-adj., YoY, %)
20
160
10
Retail
2022
2021
2019
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0
Wood
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-10
Construction-20
Plastics
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-30
Paper
80
-40
Textile-50
60 Furniture-60 Clothing
40-70
Metals20-80 Chemicals
2019
2020
2021
2022
2023
2024
Motor
vehicles0Electronics
I II III IV I II III Consumer
IV I II IIICommercial
IV I II IIIloans
IV I II III IV
IV I II III
loans
Pharmaceuticals
2018
2019
2020
2021
2022
2023
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I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV-6.02019
2020
2021
2022
2023
2018
2019
2020
2021
2022 GDP 2023
Türkiye's
Imports
Türkiye's
EU GDP
World
REER
exports
excl. energy
Commodities
excl. golddomestic
Türkiye domestic PPI
demand

3

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Chart 4 - Global commodity prices vs. Turkish PPI (YoY, %)

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10

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Chart 2 - Turkish exports vs. external demand (%, YoY)

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30

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15
150
pricingbehaviour. In other words, the deterioration of the
10100
domestic
inflation outlook, negative real interest rates
50 the rapid depreciation of the Turkish lira led to 5aand00
multiplicationof production costs, which had already
13
14
15
19
20
21
22
increaseddue
to 16the 17war18in Ukraine(Chart4).23 On24 theother hand,salaryincreases
for employees
Imports
ex. gold(12-months cumulative,
USD billion)due to rising
USDincrease
billion)inflation Exports
have (12-months
led to acumulative,
massivein unit labour
Basket currency (0.5 USD+0.5 EUR) vs. TRY*
costs incurredby firms (Chart 5).

20
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Textile and clothing, a low value-added sector, represent
around 30% of Türkiye’s exports. The share of high-tech
products in manufacturing industry exports is only 3%,
while the share of medium-tech products is around80%. As competition in these product categories is fierce
globally, Turkish companies face price reduction demands
from their customers abroad in case of a lira depreciation.
This means that the depreciation of the Turkish lira does
not support exports as strongly as expected.

25
40

350

03

Sources: TSI, IMF, Coface

30 Retail
Motor 20
vehicles10
Clothing

0Construction-10
Furniture-20
Plastics-30
Manufacturing-40Paper-50Textile-60Metals-70Wood
Chemicals-80
Pharmaceuticals
2019Electronics

2020
0

5

2021

Consumer lo
10

Sources: TSI, Coface

25

10

20

0
Another reason restraining the lira’s depreciation impact Despitea 270% increase in unit labour costs between 2021
15 on Turkish exports is the imported input dependence
and 2023, as well as the rise in raw materials, intermediate-1.0
inputs and other costs, the profitability of firms did not
10 30of sectors. According to a working paper published by-2.0
Türkiye’s Central Bank experts1, the sectors that use the decline during the period. On the contrary, both their
5 20-3.0 8Retail10most imported inputs in Türkiye are chemicals, plastic
profitability and the share of profits in national70
2022
2021
2019 operating
6RetailMotorvehicles
0 0
-4.0
and
electronic
products,
motor
vehicles,basic
metals,incomeincreased.
The main reason was that65 2019
Retail
2022
2021
2019
2022 financing
2021
4
Clothing-10Motor vehicles-5 machinery,Woodelectrical equipment, and pharmaceuticals. -5.0
costs
Construction
2 remained extremely low compared to the inflation-20
Clothing
Construction
Furniture
ratio of imported intermediate inputs to Construction
rate0 (Chart 6). In fact, in the last quarter of 2022, commercial60-10 -30The-6.0
Plastics
Plastics-2
Furniture-40total
Türkiye's
Imports
Türkiye's
EU GDPWorld GDP
REER
2014
2015
2016
2017 inputs
2018
2019
2020 2021
2022 (import2023
intermediateof
these
sectorsloan
rates
averaged
17%, while
inflation
averaged
85% YoY
in55
Paper
Manufacturing-4
Plastics
exports
excl. energy-50
dependency)
variesbetween30-45%.
High
levelsofSeptember-November.
Indomestic
addition, companies were able to
TextiledemandGlobal growth
Manufacturing-6-60 Paper
TextileFurniturepasson the increase in their input costs to customers. As a50
EU growthinput usage reduce the positive impact of-70imported-8Paper
MetalsClothing
Turkishexports growth (volume,annual average)
Textile-80the-10
lira’s depreciation
on export
revenues as it increases result,
their operating profitability surged.
45
Wood
Metals
Metals
2019
2020
2021
2022
2023
2024
-12
production
costs in thefirst place.
Chemicals
Chemicals
Wood

Pharmaceuticals
Motor vehicles
Electronics
Electronics

Consumer loans-1440
Chemicals
2021
2023
2024
Chart
6 - CPI adjusted2022
rates on loans (pp)Pharmaceuticals
How has your competitivity inside the EU developed over the past 3 months
30 Electronics(difference % of optimistic and pessimistic responses)
30
How
outsidethe EU
3 months
0 has your competitivity
5
10
15developed over
20 the past 25
20(difference % of optimistic and pessimistic responses)
10
REER (RHS)
0
-10
-20
-30
-40
-50
-60
-70
-80
2019
2020
2021
2022
2023
2024

Commercial loans

10
15
20
25
How did 5negative
real
rates
0
5
10
15
20
25
140 affect companies?
Pharmaceuticals
0
160

25

120

While the policy of negative real interest rates has not
reduced Türkiye's current account deficit so far, it has
led to skyrocketing inflation through an increase in60
local demand for dollars and a deterioration in terms70of
8
40
2019
6trade. As Türkiye’s manufacturing production is heavily
20 4dependent on imported intermediate goods and energy
65
0 2(of which prices soared in 2022), both producer and60
0 I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
consumer prices surged. Between September 2021 and
-2
2018
2019
2020
2021
2022
2023
55
-4June 2023, producer prices rose by 194% while consumerof-6prices increased by 137%. The continuous depreciation
50-8the lira's value and the unpredictability of the extent to-10which it would weaken led to a deterioration in companies'
45
100
80

-12
-14

30

2021

2022

2023

2024

Sources: CBRT, TSI, Coface

Consumer loans

Commercial loans

40

How has your competitivity inside the EU developed over the past 3 months(difference % of optimistic and pessimistic responses)

1 - Üretimin İthal
Girdi
ve İhracatınoutside
Reel Kur
Esnekliği:TürkiyeÖrneği(DemirhanHowhasİçeriği
your competitivity
theEU developedoverthe past
3 monthsDemir Selçuk Gül Abdullah Kazdal Paper No: 23/05, October 2023)(difference % of optimistic and pessimistic responses)
Retail REER (RHS)
2022
Motor vehicles
Clothing

2021

2019

8

70

6
4

65

30

8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14

2021

2022

How has your competitivity insi
(difference % of optimistic and p
How has your competitivity outs
(difference % of optimistic and p
REER (RHS)

5

50
13

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30
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200

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lion)

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23

ve, USD billion)
billion)
TRY*

022

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18

19

20

21

22

23

2023

ic PPI

140
120

2019

ye domestic PPI

20
2022

15

20

2018

2019

2020

2021

2022

2023

0

Retail
-5
5
Wood
80
-10
0Construction

2022

100

20
RetailMotor vehicles
02023
Clothing
Construction
Furniture
Plastics
Manufacturing
Paper
TextileMetalsWood
Chemicals
Pharmaceuticals
Electronics

25
2021

2017

160

40

2022

2016

10
During this period, net profits rose sharply relative
In 2024, corporate profitability is expected to remain
1400squeezed across all sectors. Barring a sudden change
to the pre-pandemic period in the manufacturing,120
transportation, and construction sectors, the latter-1.0in regulations or other unexpected economic and/or100
being generally considered as a high-risk sector. Across -2.0geopolitical shocks, the orthodox economic policies are
80
industries, net profitability in capital-intensive sectors like
expected to increase firms' financing costs and reduce
60 -3.0their domestic sales. Turkish companies in labourpharmaceuticals, electronics, automotive, and chemicals
40 -4.0intensive sectors, which usually compete through low
increased more than in labour-intensive sectors like retailand construction.
20 -5.0labour costs (with limited productivity) compared to their
The main reason is that while unit labour costs have risen,0 foreign peers, will face a loss of competitiveness. Higher
-6.0
2020
2021
2022
2023
below
(Chart 7). Iborrowing
costs,
well
asIIIaWorld
slowdown
in
II IIITürkiye's
IV I IIand
I II III Türkiye's
IV I II as
III EUIV GDP
I II
IV
I GDP
II III IVREERIII Imports
IVlabour2014 borrowing
2015
2016 rates
2017have
2018remained
2019
2020
2021inflation
2022 2023
exports demand,
excl. energywilldomestic
The factexcl.
that
operatingincomesrose faster than financing
domestic
weakenthe financial
structure
Commodities
gold
Türkiyedomestic PPI
2018
2019
2020
2021
2022
2023
demandGlobal growthcosts indicates that firms' profit margins rose faster thanof these companies. Withthe tightening of financial
EU growth
the
cost
of
credit(Chart
8)
.
The
low
cost
of
borrowingconditions
andtheincreasing
difficulties to access
Turkish exports growth (volume, annual average)bank loans (the economic authorities have limited
25 over the period supported the increase in profit margins,10
especially as companies did not face problems inthemonthly increase in loans to 2%), the number of20
0
accessing credit (Turkish lira commercial loans jumped bycompanies
applying for a concordat has already started
15
around 100% YoY at the end of 2022).
to-1.0increase, particularly in the textile and construction
10
These sectors are labour-intensive and more
-2.0
30sectors.
20dependent on domestic production and sales than5
-3.0
Chart 7 - Net profit/ Total sales per sector (%)
10other sectors.

60

2021

2015

Global growth
WILL
THE TURKISH ECONOMY BENEFIT
EU growth
FROM
THE
AUTHORITIES’U-TURNTOWARDS
Turkishexports
growth (volume,annual average)
GREATER ORTHODOXY?

2021

2019

-20

80

2

-6.0
2014

24

0-4.0
Retail
2022
2021
2019
-10-5.0
Motor vehicles
We expect this picture to gradually improve through-20
Clothing
2025. However, not all sectors will benefit equally from-30-6.0
Construction
Türkiye's
Imports
Türkiye's
EU GDPWorld GDP
REER
2014
2015
2016
2017
2018
2019
2020 2021
2022 2023
24
Plastics
60-40the rebalancing of the domestic economy and theFurnitureexports
excl. energy
domestic
Paper
In this regard, sectors-50recovery of external demand.
Plastics
demandGlobal growth40
Textile-60such as textiles, clothing, retail, wood, and construction,
Manufacturing
EU growth
20
Furniture-70
Paper
Turkish exports growth (volume, annual average)
which are mostly dominated by financially fragile small
Clothing-80
Textile0
and medium-sizedenterprises(SMEs) without
pricing
2020
2021
2022
2023
2024
Metals
Metals2019
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
power and where domestic demand is important
Chemicals
Wood
Consumer loans
Commercial loans
2018
2019
2020
2021
2022
2023
for
sales,
areexpected
to
face
more
challenges.
Chemicals
Motor vehicles
Pharmaceuticals
Electronics
On the other hand, more capital- and technology160
30
Electronics
Pharmaceuticals
intensive
sectors such as pharmaceuticals, electronics,
20
140
0
5
10
15
20
25
automotive
will benefit
more
5 and chemicals
1015
20
25 from 30
10 0
120
0
improvinginternational economic conditions.
-10
100 Sources: CBRT, Coface
10

20

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40

23

15

Imports ex. gold (12-months cumulative, USD billion)
Exports (12-months cumulative, USD billion)
Basket currency (0.5 USD+0.5 EUR) vs. TRY*

04

22

-10

0

0

2019

25

Chart 8 - Operating income/ interest rate expenses (%)
2022
I

II

III

2018

IV

I

II

III

2019

IV

I

II

III

2020

IV

I

II

III

2021

IV

I

II

2021
III

2022

IV

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2019

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IV

2023

However,the recovery in exports seems to be lengthy,-30
partlydue to the slow recovery in world trade - which-40-50 still negative on an annual basis in March 2024.
was-60
8Regardless of the trend of the real exchange rate,70-70
6the share of producers reporting a decline in their-80
65
4competitivenessmarkets
inside and20192020 in export
2021
2022 both2023
2024
2outside the EU continued to increase in the 2021-2023
Consumer loans
Commercial loans
600period (Chart 9). Although there has been a slight-2
recovery in the beginning of 2024, the fact that the data55-4is still in negative territory indicates that the number of-6
50-8companies reporting that their competitiveness has-10improved is lower.
45-12-14Chart 9 - Real effective exchange rate vs. Business survey
2021
2022 of companies
2023
2024
on
competitive position

30
0
5
10
15
20
25
Retail
2022
2021
2019
Motor vehicles
Sources: CBRT, Coface
Clothing
Construction
Furniture
Plastics
Furthermore, domestic demand remained strong due
Manufacturing
to the deterioration in inflation expectations, giving
Paper
Textilecompanies higher pricing power. The hyperinflationary
Metalsenvironment supported business sales in two ways.
Wood
First, the expectation of higher inflation led households
Chemicals
to bring forward their purchases, resulting in higher
Pharmaceuticals
Electronics
sales for companies. Secondly, as the pricing behaviour

30
deteriorated,companies
able to sell
0
5
10 were 15
20 their products25
at prices well above their costs, as customers werewilling to buy at any price, as goods and services would
be much more expensive in the next week or month.
Some of this spending was financed by savings, but asignificant portion was financed by low-interest loans.
Between 2021 and 2022, the household savings rate
fell from 7.2% to 6.7% of GDP. On the other hand, theannual growth of consumer loans, which was close
to 10% before the rate cut cycle began in 2021, rose to
60% in the second half of 2023. The rate of increase incredit cards spendings rose from 10% to 150% over thisperiod, while the annual increase in retail sales rosefrom around 5% in real terms in early 2021 to over 30%
in May 2023. Thus, business volumes and corporate
profitability increased.

40

How has your competitivity inside the EU developed over the past 3 months
8 (difference % of optimistic and pessimistic responses)
70
6 How has your competitivity outside the EU developed over the past 3 months
65
4 (difference % of optimistic and pessimistic responses)
2 REER (RHS)
60
0
-2
55
-4
-6
-8
-10
-12
-14

50
45

2021

2022

2023

2024

40

How has your competitivity inside the EU developed over the past 3 months(difference % of optimistic and pessimistic responses)
How has your competitivity outside the EU developed over the past 3 months(difference % of optimistic and pessimistic responses)
REER (RHS)

Source: CBRT, Coface

In the upcoming period, the lira is expected to appreciate
on a real basis in line with the orthodox policies. In fact,
although the cumulative inflation in the first five monthsof 2024 stood at 23%, the depreciation of the lira against
the US dollar remained close to 9%. The authorities havealso emphasized that this real appreciation of the lirawould continue in the period ahead. This means thatthe depreciation of the lira against the dollar will be lessthan the Central Bank's year-end inflation expectationof 38%. However, this should not lead to a widening of

30
20
10
0
-10
-20
-30
-40
-50
-60
-70
-80

20

8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14

2

COFACE ECONOMIC PUBLICATIONS
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the foreign trade deficit. In fact, imports of consumer
and intermediate goods are expected to decline withthe slowdown in domestic demand. Despite the realappreciation of the lira in the first five months, exports
increased only by 4.5% YoY in nominal terms while
imports fell by 9% YoY. This was mainly due to a 16% YoY
decline in imports of raw materials and intermediate
goods. In addition, in the first quarter of 2024, the termsof trade improved compared with the first quarter of2023, but remained below the 100 threshold, whichindicates that Türkiye still buys more expensive imports
and sells its exports cheaper.
The main support to exports in the coming period is
expected to come from the recovery in EU countries.
Coface expects growth in the EU region to acceleratefrom 0.5% in 2023 to 1% in 2024 and 1.7% in 2025. Similarly,
the MENA region which attracts around 20% of thecountry’s exports will grow by 2.2% in 2024 and 3.6% in
2025. This is expected to support demand for Turkish
exports, particularly for food, textile, clothing, chemicals,
home furnishing, ferrous and non-ferrous metals.

Could Türkiye benefit froma return to orthodox policies?
We expect the economic policies implemented sinceJune 2023 to create a more balanced economic outlook
in the medium-term. In 2024, Coface expects real GDP
growth to stand at 3%, below the country's estimatedpotential of nearly 5%. However, also because of thesepolicies, annual inflation is expected to fall from 65% at
end-2023 to 43% at end-2024, and the disinflation process
is expected to continue throughout 2025. The slowdown
in domestic demand from the second quarter of 2024
(especially gold and energy imports) is expected tocontribute positively to both the disinflation process andthe narrowing of the current account deficit thanks to theincrease in the terms of trade. After reaching 4 % of GDP
at the end of 2023, the current account deficit is expected
to narrow to 3 % at the end of 2024.
Beyond the positive effects of macroeconomic rebalancing,
Turkish firms still have comparative advantages overcompetitors. As Türkiye mostly exports food, nuts,
automotive products, plastics, textiles, and clothing, it isusually compared with Vietnam, Egypt, Czechia, Romania,
and Poland. Egypt’s exports mostly consist of petroleum
and petroleum products followed by chemicals andagricultural products while Vietnam's exports are mainly
based on transportation, textiles, footwear, electronics,
and food commodities. Romania’s exports are quite
similar to Türkiye’s, such as automotive, machinery, textiles
and apparel, chemical products, and metals. Poland
and Czechia’s exports are dominated by more complex
products containing higher value added than Turkish
export products, such as machinery, electrical equipment,
computer, and optical goods. As a result, Turkey's tradecompetition with countries such as Egypt, Vietnam,
and Romania is more concentrated in labour-intensive
sectors such as textile, clothing, food etc., while that with
the Czech Republic and Poland is concentrated in more
technological sectors such as automobiles and electronics.
Between 2002 and 2023, the share of Türkiye’s merchandise
exports in global merchandise exports increased from
0.6% to 1.1%, indicating that Türkiye’s integration into world
trade and participation in the global value chains had
increased. The Turkish industrial base is well-diversified
as the production is spread across both labour-intensive
products, such as textiles, clothing, food, wood products,
as well as capital-intensive products, such as machinery,
defence and transportation. While the technologicalcontent of Turkish manufacturing production is lower
than that of its Eastern European competitors like Polandor Czechia, it is still higher than that of Vietnam or Egypt.

WILL THE TURKISH ECONOMY BENEFITFROM THE AUTHORITIES’ U-TURN TOWARDSGREATER ORTHODOXY?

Türkiye’s exports are more limited in variety and can beproduced in more countries. Indeed, the country’s competitivenessin medium - and low-tech sectors (plastics, basic metals) isrelatively high while its competitiveness in high-tech sectors(medical and pharmaceutical products, communicationequipment, medical instruments, etc.) remains low.
Recent reforms aimed at shifting the country to a higher
value-added production structure and reducing energy
dependence have led to improved economic and social
indicators. These developments are expected to support
the business environment in sectors such as chemicals,
automotive, infrastructure and defence in the coming period.
The young and dynamic population is also an advantage
for Türkiye. The country's labour force is approximately
35 million (the second largest in Europe). Approximately
5 million are young people between the ages of 15 and24. This puts Türkiye ahead of its competitors in Europe interms of the availability of workforce.
In addition to the advantages of Türkiye's geographicallocation, the new economic cooperation initiatives thatthe country is promoting in its region are also expected tobenefit trade volumes in the coming period. One of themis the so-called "The Middle Corridor" project, which aims
to connect Asia and Europe to increase economic, politicaland socio-cultural interaction. It starts in Türkiye, passes
through the Caucasus region via Georgia and Azerbaijan,
then crosses the Caspian Sea, traverses Central Asia andreaches China. It is one of the key elements to revive
China's Belt and Road Initiative (BRI), a strategy that aims
to connect Asia with Africa and Europe through land andsea networks. In this context, these trade initiatives can beseen as export opportunities for Turkish companies.
However, despite these benefits for Türkiye, there are also
several risks associated with these initiatives, including
structural problems in transport, security issues along theroutes, concerns about political instability, etc.
To conclude, the Turkish economy is expected to benefit
from these orthodox policies by reducing macroeconomic
imbalances that occurred during the period of negativeinterest rates. The stabilization of the lira since the end of
Q124 and the anchoring of inflation expectations after the
introduction of tight monetary and fiscal policies are the firstindicators that these policies are working. The tighteningof domestic financial conditions can be seen as a positive
development in terms of reducing Türkiye's trade deficit
through lower imports (for now). This is expected to reducethe current account deficit from 4% of GDP in 2023 to 3%
in 2024, in turn reducing the depreciation pressures on thelira. On the other hand, the value of the lira is only a relative
factor in export growth. The recovery of external demand
will be more decisive. Therefore, growth in Türkiye’s major
export markets, particularly the EU, North Africa, the Middle
East, and the US, is expected to support Turkish exports inthe period ahead.
On the domestic front, financial conditions will remaintight until at least the last quarter of 2024 to counter
inflationary pressures. As a result, profitability will decline,
and bankruptcy risks will remain high throughout 2024
in sectors that lack pricing power and produce for thedomestic market. Orthodox policies are expected toprimarily reduce inflation, restore business and household
confidence in the economy over the medium-term, andimprove the investment climate. Although these policies
will sacrifice a part of the growth rate for disinflation, newregional cooperation and trade corridors are expected tosupport Turkish firms' exports.

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WILL THE TURKISH ECONOMY BENEFITFROM THE AUTHORITIES’ U-TURN TOWARDSGREATER ORTHODOXY?

This document reflects the opinion of Coface’s Economic Research
Department at the time of writing and based on the information
available. The information, analyses and opinions contained herein havebeen prepared on the basis of multiple sources considered reliable andserious; however, Coface does not guarantee the accuracy, completenessor reality of the data contained in this guide. The information, analyses
and opinions are provided for information purposes only and areintended to supplement the information otherwise available to thereader. Coface publishes this guide in good faith and on the basis ofcommercially reasonable efforts as regards the accuracy, completeness,and reality of the data. Coface shall not be liable for any damage (direct
or indirect) or loss of any kind suffered by the reader as a result of thereader’s use of the information, analyses and opinions. The reader istherefore solely responsible for the decisions and consequences of thedecisions he or she makes on the basis of this guide. This handbook
and the analyses and opinions expressed herein are the exclusive
property of Coface; the reader is authorised to consult or reproduce
them for internal use only, provided that they are clearly marked with
the name «Coface», that this paragraph is reproduced and that the data
is not altered or modified. Any use, extraction, reproduction for public orcommercial use is prohibited without Coface’s prior consent. The reader
is invited to refer to the legal notices on Coface’s website: https://www.
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