Turkey’s Economy Struggles As Business Closures Reach New Heights

What’s going on here?

Turkey’s economy is facing a wave of business closures, driven by rising costs and a strong lira. This year alone, 15,000 companies have shut down, marking a 28% increase from 2023, according to the Union of Chambers and Commodity Exchanges of Turkey.

What does this mean?

The strain is hitting Turkey’s apparel and textile sectors hard, with many firms seeking court protection to avoid collapse. For instance, a garment factory in Corum producing for Zara is now operating at just 60% capacity after laying off a third of its workforce. Turkey’s inflation, which peaked at over 75% earlier this year and now sits at 52%, plus substantial hikes in electricity and gas prices, is exacerbating financial woes. Furthermore, the Turkish lira’s overvaluation has undercut the country’s competitiveness against nations like Vietnam and Bangladesh. The Turkish government’s policy-tightening has led to a cumulative 41.5 percentage point rate increase since June last year, making credit inaccessible and pushing many exporters into financial difficulty.

Why should I care?

For markets: The domino effect of financial strain.

The wave of business closures in Turkey is setting off a chain reaction in the economy. Elevated production costs, around 40% higher than competing Asian countries, are driving up joblessness and delayed payments. The latest hike in Turkey’s minimum wage to 17,002 liras ($500) earlier this year—up 100% from the year before and 500% from the end of 2021—strains both employers and workers. With gas and electricity prices surging about sevenfold and threefold respectively for small to mid-sized manufacturers since 2021, the ripple effects on the broader market are profound and far-reaching.

The bigger picture: Turkey’s tug-of-war between inflation and stability.

Turkey’s government faces a complex dilemma: balancing inflation control with economic stability. The strain on companies is not just a localized issue but could have broader implications for the country’s economic health. Top industry voices, like Erdal Bahcivan, chairman of the Istanbul Chamber of Industry, highlight the heavy costs that could push creditor firms into precarious positions. Experts like Seyfettin Gursel from Bahcesehir University Center for Economic and Social Research (BETAM) warn that the government’s tightrope walk between these two priorities could spell long-term economic challenges.