The general elections of May 2023 marked a shift in Turkish economic policy with the implementation of more orthodox policies to end a period characterized by negative real interest rates and a sharp depreciation of the lira. The local elections in March 2024 marked a further step in this strategy with a tightening of financial conditions to stabilize the economy, reduce runaway inflation and strengthen the country's macroeconomic foundations.
Can Turkish exports benefit from the sharp depreciation of the lira?
In mid-2021, Türkiye launched the Turkish Economic Program (TEP) with the aim of stimulating production, investment, employment and exports. To achieve these objectives, the central bank reduced its key rate from 19% to 8.5% between September 2021 and May 2023. As a result, the Turkish lira depreciated by almost 60% against the dollar over this period and inflation jumped from 19.3% in August 2021 to 85.5% in October 2022.
Despite the TEP's initial objectives, the depreciation of the lira has not had the desired effect on the current account. Between 2021 and 2023, Turkish exports grew by 13.4% in nominal terms, compared with 33% for imports, widening the trade deficit to $106 billion (9.5% of GDP) in 2023, $60 billion more than in 2021 ($46 billion, 6% of GDP).
Impact of negative real interest rates on companies
The period of negative real interest rates enabled Turkish companies to benefit from cheap credit, stimulating their activity despite high inflation. Companies with highly capitalized production and pricing power have particularly benefited from this situation thanks to increased margins and the passing on costs to consumers.
Despite an explosion in production and wage costs (+270% in unit labor costs between 2021 and 2023), the very low interest rate environment has enabled companies to maintain their profitability.
The consequences of a more orthodox economic policy
The adoption of more orthodox economic policies from June 2023 has been accompanied by an increase in the Turkish Central Bank's key interest rate from 8.5% to 50% and a rise in interest rates on commercial loans to 70%. The aim: reduce the rise in domestic demand, regulate inflation and stabilize the lira.
This turnaround should help rebalance the economy in the medium term. Forecasts for 2024 predict real GDP growth of 3%, accompanied by a gradual fall in inflation to 43% by the end of the year. The current account deficit, which fell by $14 billions between the first quarters of 2023 and 2024, should continue to narrow, providing additional stability for the economy.
If Turkish companies manage to adapt to these changes (new financial conditions, a recovery in external demand, regional cooperation initiatives such as "The Middle Corridor" project, which aims to link Europe and Asia via the Caucasus and the Caspian Sea), they can look forward to promising prospects for sustainable and stable long-term economic growth.
