Political tensions and FX volatility emerge as key risks

Tracking Turkey - Election economics are in full swing as the country enters 2023

Turkey began 2023 with a very busy economic and political agenda. Economic management aims to balance inflation-driving populist policies with regulatory management of the exchange rate. Businesses are holding all investments while they try to keep up with changes to their cost base and wait for some certainty regarding the future of Turkey’s political and economic landscape. Consumers are anticipating a slowdown in the economy and lira depreciation after the elections and thus are trying to pull forward as much of their expenditures as financially possible. MNCs will need to monitor Turkey’s developments very closely in 2023, working with scenarios for the country’s post-election outlook and preparing their business for a slowdown in the economy. 

Economic developments:

Government moves to increase consumer support ahead of elections:

  • President Recep Tayyip Erdogan announced in late December that the country’s minimum wage will be increased 55%, to TRY 8,500. This is an increase of the minimum wage toward the US$ 450 range, up from the historical averages of US$ 350. While this increase will provide some support to low-income consumers and create a private sector wage push, it will also lock in a significant cost increase for Turkey’s industrial and service sectors.
  • Public sector wages were initially increased by 25%, only to be raised to 30% within a few days. The lower increase for the public sector (vs. the minimum wage) indicates the limitations within the public budget to raise rates closer to the country’s officially announced inflation. However, the very immediate increase from 25% to 30% also showed the pressure the government is under to support wages ahead of the elections. 
  • The government also announced a new scheme to support first-home ownership in the country, aiming to not only provide some financial support to low/middle-income consumers, but also provide a lifeline to the country’s recently contracting construction sector.

Official inflation figures enter a downward trend:

  • The official consumer price index grew 65% YOY in December, down from its 80–85% range seen in the last few months. Producer prices also fell into double digits (97%) for the first time in the last few months. The very high base effect from last year, alongside a stable exchange rate and a slight easing in energy prices were the main causes. 
  • However, alternative inflation figures point to higher numbers. According to ENAG, inflation in Turkey was 137.55% in December 2022. According to the Istanbul Chamber of Commerce, Istanbul’s December inflation was 93% YOY.

The private sector is struggling:

  • Industrial production figures remain muted, while proxy indicators for export performance show a significant slowdown. With low growth in Europe and Turkey’s policy uncertainty expected to continue into Q2 2023, such muted performance is also likely to protract. 
  • The textile sector has asked the government to be able to transact in foreign dealings with a weaker exchange rate. While this would further create complications in the country’s already-complex FX management strategy, the request stems from the sector’s struggles. While domestic operational costs (due to domestic inflation, the wage push, and energy costs) have been growing strongly, leading to higher selling prices, the artificially stable exchange rate has been limiting the competitiveness of the sector’s products abroad. 
  • Companies are also reporting challenges in accessing credit despite record-low benchmark interest rates in the country. Companies complain about not being able to maintain production levels due to lack of access to working capital, forcing firms to delay payments to their suppliers, where they are getting over 40% interest for such delayed payments, effectively creating high borrowing costs.

Political Developments: The country began 2023 with a strong election focus, in both the political and economic arenas. A few key developments point to limitations on opposition activity ahead of elections. First, Ekrem Imamoglu, Istanbul’s mayor and potentially a presidential candidate, was sentenced to two years in prison and banned from politics for calling Turkey’s Supreme Election Council members “fools” a few years ago. Second, Turkey’s constitutional court suspended the treasury’s funding for the pro-Kurdish HDP (Peoples’ Democratic Party) in the critical lead-up to the elections. Meanwhile, the date of Turkey’s elections remains unclear. President Erdogan did finally hint at potentially moving the date forward in a press conference.

Lira Developments: In the last two months, Turkey’s foreign exchange reserves have been slowly increasing, while the dollar deposits of Turkish residents—individual and corporate—have been declining. The forced transfer of 40% of exporters’ FX revenues to the central bank; a cash influx from Russia, Saudi Arabia, and Qatar; and some limitations on FX transfers have been major factors. While these will ease some pressure on the lira, ongoing high domestic inflation is a key pressure on the exchange rate.

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