Turkey at a Crossroads

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When it comes to car production in Turkey, the figures are quite impressive.

Six global automakers are present in the country and 75% of local production is shipped abroad. Next year, the industry is expected to rake in USD16bn in export revenues. Add to that the launch of the new, Turkish produced FIAT TIPO, due to compete with the VW Golf and Renault Megane for worldwide dominance in 2016.

You get the picture.

But what about the other parts of the Turkish machine? Turkey has been a very promising market​ with its rising middle class and strong private sector. Will it continue to bridge three continents? Will the country prove resilient to turbulences at home and abroad?

The Economic Research team attempted to crack these riddles at the International Trade Observatory conference, organized by Euler Hermes this week in Istanbul.

After a rough 2015, Turkey seems to be heading towards a modest recovery in 2016. But a few glitches are expected:  corporate bankruptcies may increase by +6% next year; Days Sales Outstanding (DSO) will remain stable but still 15 days above world average.

The economy, it seems, is slowed down by a number of flat tires.

First, the Turkish lira, one of the hardest hit currencies in 2015, will further depreciate next year and volatility would probably remain high. Because goods exports fell -9% y/y in USD terms, the current account deficit remains large. Add to that net portfolio investment outflows – and the result is a financing gap.

Also worrying is the mix between weak growth prospects and the high dependency on external financing. Turkey will be burdened further when the US Fed raises its interest rate.

The foreign currency debt that kept the Turkish economy going poses a genuine threat. And private-sector debt is rising rapidly, especially in the non-financial sector.

So where do you find a spare wheel? Obviously not in Russia, an important market for Turkish exports. Iran, which experiences growing external interest and activity, might offer new opportunities.

But the big repair shop is located to the west: in Europe. A continued EU recovery in 2016 could mean a boost for almost 50% of Turkish exports.

And how can the country prepare for the next curve?

Continue to climb up the value-added chain and let sectors such as agrifood and automotive​ lead the way. Diversify the transport industry and enable Turkish Airlines – whose revenue per passenger-kilometer grew by +19% over the last 12 months – spread its wings even further. Do not close the economic doors to the world.

And hitch a ride with clunky Europe as it gets unstuck.

Ludovic Subran

Chief Economist

Euler Hermes

If you would like to learn more about Euler Hermes in your country or near you, feel free to visit our countries’ pages.
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On Wednesday, November 22, 2017
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