major macro economic indicators
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(e): Estimate (f): Forecast *general government gross debt
- Strategic geographic location, proximity to key export markets
- Highly diversified manufacturing tissue, strong production knowledge
- Young population, educated workforce
- Renewables reaching 53% of Turkey’s total installed power capacity
- Discovery of gas field off the Black Sea shore
- Dependence on imported energy and intermediate goods
- High inflation, local currency hitting record weak levels
- Vulnerability resulting from high level of short-term private external debt, low level of gross international reserves
- Credit-driven growth performance causing a high level of private debt, overheating risk
Turkey returns to orthodox policies, inflation will remain elevated
Turkey’s credit-driven economic expansion will fade now that the May 2023 elections have passed, as this model pushed for lower interest rates despite skyrocketing inflation (85% y-o-y in October 2022). The central bank is expected to raise its policy rate to around 25-30% by end-2023 from 8.5% in May 2023. That said, the pace of rate hikes remains uncertain and modest compared with inflation expectations at the end of 2023 (between 60-65%) and tight financial conditions. In early July 2023, the average interest rate was 48% on consumer loans, 25% on commercial loans, while the one-month deposit rate was 28%, all well above the Bank’s policy rate. Additionally, the government’s decision to hike taxes on a broad category of goods and services, the lira’s sharp depreciation of 30% between January-July 2023, a rise of 86% for the lowest-grade public workers after the elections, and a total increase of 107% in the minimum wage in 2023, will heighten the economy’s inflationary pressures. Consequently, a return to single-digit inflation will remain out of reach in our forecast horizon. Persistently high inflation and the tightening of the financial conditions will weigh on private demand. Private consumption, which has been strong for a while on back of demand pulled forward by rising inflation, will make a smaller contribution to growth in the post-March 2024 local election period. Government expenses, on the other hand, will continue to contribute positively through reconstruction needs in the wake of the February 2023 earthquakes (estimated at around USD 26 billion) and other possible expenditures before the local elections. Tougher economic conditions for their clients, the obligation to buy treasuries to match credit and the maintained ceilings on the interest rates charged on commercial loans, both imposed by the central bank as part of its macro-prudential measures, will prompt banks to shy away from providing loans to the private sector. This will in turn weigh on investment growth and represent a key risk for companies as it complicates their cash flow management, particularly for highly indebted companies. In case of easing macro prudential measures on loans, companies’ access to credit may become easier, but it will cost more.
Wide twin deficits increase the need for financial resources
Tax hikes and the government’s efforts to curb all expenditure except for earthquake-related spending are expected to narrow the fiscal deficit in 2024, following the sharp widening trend in 2023. That said, public debt (around 35% of GDP, excluding liabilities linked to BOT projects) does not represent a major risk, although the portion linked to foreign currency has risen and affected more than 60% of the central government debt stock at May 2023. The main debt-related risk stems from the private sector. The short-term external debt stock of the non-financial private sector (around 6% of GDP) will continue to remain the main risk for companies due to their high indebtedness and weak equity structure.
Elevated inflation, low interest rates on term deposits and insufficient depreciation protection provided by KKM savings accounts have resulted in higher domestic demand for consumer goods and for gold as the latter, all of which is imported, is seen as a traditional safe value haven. The slowdown in domestic demand, however, will drag on the pace of import growth, Additionally, tepid European demand – Europe is Turkey’s key trade partner – for Turkish goods and services (except tourism) will weigh on export growth. All in all, the trade deficit should narrow, and, with it, the current account deficit, thus reducing pressure on the lira. The authorities’ efforts to defend the currency and counter forex demand until the elections in May 2023 sent the central bank’s international net reserves to a record low of USD -5.7 billion at 2 June, 2023. In order to build up its reserves, the central bank signed swap deals with central banks of China, Qatar, the United Arab Emirates, and South Korea worth about more than USD 20 billion, as well as with domestic commercial banks. In March 2023, Saudi Arabia deposited USD 5 billion in the Turkish central bank through the Saudi Fund for Development.
Need for financial resources pushes Turkey towards stronger and diversified alliances
Although the return to conventional policies is seen as a positive step to address the country’s economic issues, it will take time to gain back investor confidence which has been repeatedly hit by Turkey’s unorthodox policies. Until investors are confident of a stable legislative agenda and of macroeconomic stability, foreign investors' share in bond and equity markets (below 1% and 30%, respectively) will remain low. This situation may prompt Turkish authorities to soften their relations with the West. The start of talks between Greece and Turkey to agree on a roadmap and the green light to Sweden’s accession to NATO, are positive signs. Turkey will continue to reinforce relations with the Gulf states in the hope of reaching new investment deals. Turkey’s ties with Russia, ranging from energy to the grain corridor, are expected to prosper in the upcoming period, including cooperation over regional conflicts such as in Libya, Syria and between Armenia and Azerbaijan. Last, China could become interested in investing in the country to move closer to Western markets.
Last updated: September 2023
Traditional credit payment instruments are still in common use in Turkey’s domestic market, as they often serve as negotiable instruments. This is the case for promissory notes, a solution regularly used by SMEs for commercial transactions. Similarly, post-dated cheques serve as both a title of payment and a credit instrument. Cheques circulate in the domestic market as negotiable instruments until their maturity date. An amendment, which came into effect on the July 15, 2016, imposes a punitive fine on the person responsible for a “dishonoured cheque”. If the fine is not paid, the punitive measure can be transformed into a prison sentence of up to 1,500 days. In such cases, neither settlement nor prepayment are executed. In addition, the drawer of a dishonoured cheque is subsequently banned from drawing cheques or opening cheque accounts. After payment of cheque amount or ten years of the court decision, a ban shall be removed. Although banks are now required to exercise greater vigilance with regard to the profiles of their clients, the law concerning cheques, which came into force in December 2009 provides for large financial sanctions, which are payable by the drawer of the cheque in cases of non-payment.
The SWIFT electronic network is well-established in Turkish banking circles and constitutes the most commonly used instrument for international payments.
Amicable procedures, which involve the sending of a formal notice to pay, followed by repeated telephone calls, remain a relatively effective method. On-site visits can also pave the way for restoring communications between suppliers and customers, thereby enhancing the chances of completing successful negotiations. The civil procedure code specifically states that the judge may at any time during legal action encourage the amicable settlement of the dispute, provided that it results from a real desire by the parties to seek an out-of-court settlement via a negotiated transaction.
The Law on Mediation in Civil Disputes stipulates that mediation shall be applied only in the resolution of private law conflicts arising from acts or transactions of interested parties who have the capacity to settle such conflicts. The parties are free to apply to a mediator at any time, in order to continue, finalise or abandon the process.
Depending on the debtor’s solvency, the terms of the transaction can range from payment in full, to repayment by instalments, to a partial payment as final settlement. In the absence of a voluntary settlement, the threat of a bankruptcy petition (iflâs) is a frequently employed tactic to elicit a response from the debtor and prompt them to pay the arrears.
Debt execution procedure – via an Administrative Body
Negotiable instruments, such as bills of exchange, promissory notes and cheques, enable creditors (without obtaining a prior ruling) to directly approach the enforcement office (Icra Dairesi) for serving the debtor with an injunction to pay. They can then, if necessary, proceed with the seizure of the debtor’s assets. Seizure is a process that begins with filling an order for payment, which is then served to the debtor. If there are no objections to the order, the assets of the debtor are liquidated to cover the claims. If the order is not accepted by the debtor, he has the possibility to request that the creditor proves the claim in court. The debtor has ten days to settle the arrears in question, or five days to approach the enforcement court and oppose payment on grounds that, for example, the signature on the document is not his own, or that the debt no longer exists.
If the creditor decides to serve the debtor with an injunction to pay despite the fact that it does not hold negotiable instruments, such as bills of exchange, promissory notes and cheques, the debtor can object to the injunction to pay in 7 days after receiving it. This objection suspends the enforcement proceedings until the creditor files and wins an action for annulment of objection suit regarding its claim. With the regulation that came into force on 1.1.2019 applying to the mediator became a precondition for the cases that are filed against the claims for the payment of a certain amount of money and compensation. Therefore, in order for the creditor to file the action for annulment of objection suit to resume the execution process it first has to apply to the mediator.
If the opposition is deemed to be abusive, the debtor is liable to large penalties.
Litigation procedure – examined by the Court
If the pre-legal procedures for the collection of the debt from the partner/supplier fail, a lawsuit can be brought against the debtor before commercial courts. The commercial court (asliye ticaret mahkemeleri), which is a specialised chamber of the court of first instance, is competent to hear commercial disputes and insolvency proceedings. In cases where the validity of the claim is disputed, the only recourse is to initiate ordinary proceedings, via a summons, to appear in court.
If Turkey has not signed a bilateral treaty or a reciprocity treaty with the plaintiff’s country, the plaintiff is required to put up a surety bond, judicatum solvi, with the competent local court. This amount represents approximately 15% of the claim. The same pertains to Turkish applicants with no permanent residence in Turkey. At the end of the litigation procedure, the security deposit is refunded to the creditor by the court.
The plaintiff is also obliged to put up one quarter of the court fees, which are proportional to the amount of the claim, at the commencement of the proceedings. In addition, notarised documents must be presented to the court.
Ordinary proceedings are organised into three phases. The first involves position statements from each party (a statement of claim and a statement of defence). In the second and lengthier phase, the court investigates the case and examines the relevance of the evidence submitted, to see whether it is conclusive or discretionary evidence. Finally, in the main hearing that constitutes the third phase, the court hears both parties and their lawyers before issuing a ruling.
Enforcement of a Legal Decision
Any legal decision can be fulfilled via enforcement and bankruptcy offices/officers, if the person who is ruled against, does not performs legal decision voluntarily on time. Enforcement differs slightly depending on the type of debt, but it generally resembles the Debt Execution Procedure. However, in contrast with the Debt Execution Procedure, the objection to the enforcement of a legal decision is an exceptional situation.
The debtor subject to bankruptcy can apply for a proposal of composition agreement (konkordato projesi). If the proposal appears to the commercial court to be viable, the court imposes a moratorium and appoints a composition commissioner (konkordato komiseri) to examine the debtor’s affairs. The most common form of proposal is for a total or partial repayment over a period of time. However, a proposal may also take the form of an assignment of all or part of the debtor’s assets in satisfaction of creditors’ claims. If the proposal is not approved, a bankruptcy order may be rendered.
The debtor will designate some or all of its assets for its creditors, propose that those assets are sold (or transfer to third parties), and that the proceeds of the sale should be distributed to creditors. A debtor wishing to restructure (or a creditor having the right to institute bankruptcy proceedings) may apply to the competent execution court with a reorganisation project. If the execution court determines that the project is likely to be successful, it will order a creditors’ meeting to decide whether they accept the reorganisation project. If approved, the project will then be submitted to the court for approval. If the court determines that reorganisation will be more lucrative than bankruptcy, it will approve the project.
A debtor company facing financial difficulty or imminent risk of insolvency has the right to apply to the commercial court for approval of a restructuring project previously approved by the required quorum of creditors affected by it (impaired creditors).
The new EBC (Enforcement and Bankruptcy Code) provisions encourage the debtor and its creditor to reach a voluntary arrangement to rehabilitate the distressed but still viable business. The contents of the proposal enter into force after acceptance by the creditors and approval of the court. However, creditors have the right to apply to the court for relief if the debtor does not fulfil its obligations under the project. The court has a right to declare the debtor bankrupt following any non-compliance. Restructuring is only available for companies and co-operatives with the exception of banks and insurance companies.
The creditor begins this form of proceeding by requesting the execution office to serve on the debtor an order to pay for a due debt. The debtor has seven days after service in which to dispute the debt or pay. If the debtor fails to pay or dispute the debt, the creditor may apply to the commercial court for a bankruptcy order, which the court will generally grant.
A creditor or the debtor may file an application for direct bankruptcy. The debtor must submit a list of assets and liabilities together with the names and addresses of creditors. The creditor may apply for direct bankruptcy where: the debtor has absconded to avoid its obligations (transfer of the headquarter abroad); the debtor has engaged in fraudulent transactions which threaten the interests of creditors; the debtor has concealed assets to avoid execution; the debtor has suspended payments as they fall due to creditors; the debtor has failed to satisfy a final judgment served on it by the execution office; a voluntary arrangement proposal has been rejected by the court or a moratorium period is cancelled by the court; or the debtor may apply for the bankruptcy of the company on the basis of inability to pay its debts as they fall due in case of the debtor’s liabilities exceed its assets.
Consequences of bankruptcy
The bankrupt loses control of its assets and only the administrators have the authority to dispose of assets in the estate. If the bankrupt has no assets, the value of the assets is insufficient to cover the costs of the proceedings or the creditors are not prepared to put up the costs, the bankruptcy may be suspended.
The first meeting of creditors is convened, during which are appointed three bankruptcy administrators, and it is considered whether it is appropriate to propose an arrangement. The second meeting of creditors is to consider the delay and manner of the disposal of the bankruptcy estate (often by public auction), then to fix the order of priority for the creditors who have lodged their claims.
The claims of a higher rank of creditors must be satisfied in full before creditors of a lower rank receive a dividend, but creditors rank equally within each class. Creditors whose claims remain unsatisfied receive a certificate of insolvency.
Transactions performed by debtor in a state of insolvency up to one year prior to the bankruptcy order, free transactions up to two years prior to the bankruptcy order or transactions executed with the purpose of damaging a creditor’s interests up to five years prior to the commencement of legal proceedings for recovery of the debt (including bankruptcy proceedings), can be subject to an annulment recourse by a creditor. The administrators make a final report to the court which then makes an order closing the bankruptcy.