major macro economic indicators
|GDP growth (%)||6,1||3,2||7,4||4|
|Inflation (yearly average, %)||7,7||7,8||10,9||9,3|
|Budget balance (% GDP)||-1,0||-1,1||-2,0||-1,9|
|Current account balance (% GDP)||-3,7||-3,8||-4,6||-4,3|
|Public debt (% GDP)*||27,5||28,1||28,5||28,5|
*EU-defined general government’s debt stock (f): forecast
- Demographic vitality
- Large population with rising middle income class
- Strategic geographic location
- Well-developed industrial base
- High capacity of creating employment
- Domestic and geopolitical instability
- High dependence on external borrowing
- High import reliance of the industry
Hard landing risks surface after a period of very high growth
Turkey’s economy recorded a solid growth rate of 7.4% year-on-year in the first quarter of 2018, mainly backed by private consumption and investments, and partly by public spending. In 2016, the Turkish economy experienced a series of shocks, such as a failed coup attempt, sharp depreciation of the lira and severe external and domestic security issues. In order to counter negative spill overs of these shocks on the economy, the authorities introduced a series of stimulation packages in 2017 that have fuelled private consumption and investment. However, the strong resulting growth performance has exacerbated existing imbalances, stirring double-digit inflation, a sharp devaluation of the Turkish lira, and a wider current account deficit. In May 2018, the central bank held an emergency meeting and hiked its late liquidity window interest rate by 300 basis points to 16.5%, and raised it again by 125 basis points to 17.75% in June 2018. This tightening will likely weigh on domestic demand, which in turn will impact domestic-driven sectors’ performances. The pace of growth could also lose momentum due currency weakness, lower purchasing power trimmed by high inflation.[IS1] .
In early 2017, the government introduced a countercyclical measure in a bid to support economic activity. It increased the size of the Credit Guarantee Fund (CGF) to ease small and medium companies’ access to financing. The size of the fund was raised to TRY 250 billion. In 2018, the size of the CGF was expanded by another TRY 55 billion to further support exports and investments. In the first four months of 2018, Turkish exports rose by 8.6% from the same period a year earlier. However, as exports are dependent on imported inputs, imports jumped by 20.8% over the same period, and the trade deficit widened by 56.2% to USD 27.4 billion. The coverage rate of imports by exports declined to 66.7% in January-April 2018, down from 74.3% a year earlier. Moreover, rising energy prices also add to the country’s import bill. This wider trade deficit has resulted in a larger current account deficit, which attained USD 55.4 billion on a 12-month rolling basis in March 2018. [IS2]
A continued depreciation of the lira remains the main risk for Turkey’s highly import-dependent economy in the near future. Non-financial private sector’s short-term foreign currency denominated debt stood at USD 50.5 billion as of the first quarter of 2018.Any additional weakness of the lira would increase both the debt burden and the costs of imported inputs for the manufacturing sector. The current inflationary environment suggests that interest rates will remain at very high levels (around 19% for both commercial and individual loans) for some time. Further rate hikes by the central bank to counter the currency weakness and inflationary pressures would again add to borrowing costs. This scenario would deteriorate the cash flow situation of Turkish companies, which suffer from structural undercapitalisation.
Twin deficits: A cause of concern
Fiscal policy has become more expansionary due to temporary tax cuts, expanded public services, and employment incentives. Off-balance sheet stimulus measures represent upside risks to debt levels if the government had to take on the liabilities mostly linked to the public guarantees given under the Public Private Partnership (PPP) projects. Although the expansionary fiscal policy is likely to be gradually scaled back in 2018, the deficit may continue to remain high ahead of the local elections[FD3] [IS4] in March 2019. Fiscal revenues are largely based on consumption, so an economic downturn and/or weaker domestic consumption would decrease government revenues accordingly. Despite all of this, the public balance sheet currently remains healthy.
While promoting banks’ lending, the government CGF programme pushed the banking sector’s loan-to-deposit ratio to 121% as of May 2018. However, due to the limited size of domestic savings, Turkey’s economy relies heavily on external financing. While the increase in energy prices will likely widen the current account deficit, the structural lack of savings will continue to be the economy’s Achilles’ heel in the years ahead. The reliance on short-term capital inflows for current account deficit financing leaves the country exposed to markets’ mood. Monetary tightening strategies of the major central banks and rising regional tensions may quickly reduce investors’ confidence, meaning foreign direct investments may remain limited.
Lower political uncertainty after the June 2018 election
In April 2018, Turkey had presidential and parliamentary elections. The country’s long-standing [FD5] [IS6] leader Recep Tayyip Erdogan (since 2002) has secured a new five-year term with nearly 53% of the votes. The country will now shift into the executive presidency system from the parliamentary system. In the parliamentary contest, the ruling AKP took 43% of the votes while its allies MHP got 11%. Political noise has decreased since the elections. However there is a possibility for the local elections initially scheduled in March 2019 to be held earlier.
In this context, international investors will pay particular attention to the ability of the new Administration to maintain economic and financial stability. A sharp depreciation of the lira due to a negative shift in investor sentiment would weigh heavily on corporate sector and extend payment terms, as the economy is dependent on imports and foreign funds. Such a situation would put under risk the financial stability and the sustainability of growth performance.
Last update : June 2018
Traditional credit payment instruments are still in common use in Turkey’s domestic market, as they not only constitute a means of payment, but also often serve as negotiable instruments.
This is the case for promissory notes, a solution regularly used by smaller and medium-sized companies for commercial transactions. Similarly, post-dated cheques are another commonplace practice, as they serve as both a title of payment and a credit instrument. Cheques circulate in the domestic market as negotiable instruments until their maturity date.
The most recent law concerning cheques, which came into force in December 2009, focuses on the protection of the rights of cheque holders (beneficiaries). The law covers three categories of cheques – cheques for business users, cheques for consumers, and pre-printed bearer cheques – with the aim being to optimise tracking of cheques as a payment instrument and combat the underground economy.
Although banks are now required to exercise greater vigilance with regard to the profiles of their clients, the law also provides for large financial sanctions, which are payable by the drawer of the cheque in cases of non-payment.
An amendment, which came into effect on 15 July 2016, imposes a punitive fine on the person responsible for a “dishonoured transaction”. 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 for ten years, by order of the court (an administrative, rather than a penal sanction).
For rapid and secure processing of bank transfers, the SWIFT electronic network is well-established in Turkish banking circles and constitutes the most commonly used instrument for international payments.
There are three separate procedures in Turkey for pursuing debt payments:
1. Amicable Procedures
2. Debt Execution Procedures (provided by an Administrative Body)
3. Litigation Procedures (examined by the Court)
1. Amicable Procedure
Out of court settlements are always preferable to taking legal action. 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. Points of negotiation include the number of instalments, guarantees, collaterals, grace periods and interest. 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 (including those with an international element) arising from acts or transactions of interested parties who have the capacity to settle such conflicts.
The parties involved design their own solutions in an environment conducive to mutual understanding. Mediation relies on a process of communications, via meetings and negotiations. While the parties create their own solution framework, an impartial and independent third party (a mediator) enables them to establish communications, hold meetings and generally develop better understanding of each other.
The parties are free to apply to a mediator at any time, in order to continue, finalise or abandon the process. The parties can also apply to a mediator before filing a lawsuit, or while a lawsuit is pending. The court may also advise and encourage the parties to apply to a mediator.
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.
2. Debt Execution Procedure, via an Administrative Body
There are particular advantages for creditors who use negotiable instruments such as bills of exchange, promissory notes and cheques – provided they have been duly established and that any legal action is taken within the legal limitation period. These instruments 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 opposition is deemed to be abusive, the debtor is liable to large penalties.
3. 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. Commercial courts exist in the main Turkish cities.
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 reason for the surety bond is to protect the debtor against potential damages by foreign entities during the procedure.
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, including the contract signed between the parties (if available) and the invoices due (translated into Turkish by a certified translator, if the documents are drafted in a foreign language).
Claims need be filed with details including the name of the court, the names and addresses of the creditor and the debtor (along with the details of their attorneys or legal representatives), the amount due, the circumstances of the claim, the content of the demand, public taxes and costs, the power of attorney (if necessary) and the signature of the person making the claim.
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.
The new civil procedure code, effective since 1st October 2011, was designed to accelerate and simplify proceedings, in order to combat lengthy lawsuits and reduce the workload for courts. The parties need to submit their defence arguments, counter claims and available evidence at the commencement of the trial. These documents are reviewed by the court during a preliminary hearing, during which the parties will be encouraged to reach a compromise.
The examination and cross examination of the litigants is now conducted by lawyers, in order to discharge judges who previously had a strong tendency to resort to expert opinions to assist them with their judgments. The new code also limits the list of technical and scientific experts that can be registered with the Ministry of Justice.