Türkiye

Growth to improve amid gradual disinflation

In light of the fact that the anticipated disinflationary process is set to gain momentum in 2025, the Turkish economy is poised for an enhanced growth trajectory and a more balanced macroeconomic outlook. The contribution of domestic demand (approximately 60% of GDP) to growth will inch up as the Central Bank's policy rate, which increased by 4,150 basis points to 50% between June 2023 and March 2024, is expected to be cut as low as the 25-30% range, in line with disinflation. However, the negative impact of the durably elevated inflation rate will continue to weigh on the purchasing power of middle and lower incomes. Accordingly, the higher contribution of private demand to growth will be led mostly by the upper income group. Conversely, the tighter fiscal policy and spending cuts (excluding reconstruction in the wake of the two earthquakes in 2023) will reduce the public-sector contribution (approximately 12% of GDP) to growth. Following a period of weakness due to elevated financing costs in 2024, private investments (approximately 10% of GDP) are expected to show gradual improvement from 2025 onwards. Net exports will continue to drag on growth albeit to a lesser extent thanks to the anticipated recovery in European demand, lower global energy prices, the restriction on gold imports, and higher tourism revenues (USD 56 billion, up 6% from 2024).

The Turkish lira will continue to appreciate in real terms in 2025, which is expected to provide support to the disinflation process. Annual inflation is projected to decline close to 30% by year-2025, although it will remain significantly above the Central Bank's forecast of 14%. Barring an unexpected exchange rate shock, this should drive disinflation by slowing the rise in imported basic goods prices. However, it will not be easy to break the price inertia in the services group given the impact of seasonality, the deterioration in income distribution and the difficulties in anchoring inflation expectations.

Narrowing external deficit, with fiscal consolidation to continue

Despite the gap in the income balance, the surplus in the services balance and the narrowing of the foreign trade deficit will again reduce the current account deficit as a percentage of GDP in 2025. Tourism and transportation revenues are expected to be among the most important contributors to the services surplus. While the narrowing of the trade deficit was mainly due to a decline in imports in 2024, the deficit should be more related to an increase in exports in 2025. On that score, the improvement in demand conditions will lead to an increase in imports of intermediate goods, which account for about 70% of total imports. In addition, the recovery of growth in Europe, in line with looser monetary policy, will have a positive impact on the Turkish exports. The main risk factor to this scenario is the impact on commodity prices of developments in the Middle East. If the war leads to the closure of important transit routes for global oil (e.g., the Strait of Hormuz) or disrupts oil production, the rise in energy prices could widen the current account deficit. In 2024, the moderation in demand caused by the official monthly cap on credit growth (2%) has helped narrow the current account deficit and improved the central bank's international reserves. At October 2024, the central bank’s gross international reserves had risen to USD 157.4 billion (around 86% of short-term external debt stock) from USD 98.5 billion in May 2023. The growth in reserves has resulted in a decrease in the risk premium – the 5-year USD CDS fell to 275 points in October 2024 vs. 888 points in July 2022. This has increased the country's ability to attract foreign capital inflows. Conversely, the reliance on short-term inflows to support the increase in reserves (portfolio inflows reached USD 15 billion in the first eight months of 2024 vs. USD 930 million during the same period of 2023) presents a challenge for the central bank to maintain Turkish lira stability in the face of potential external pressures.

The anticipated fiscal consolidation will be driven by increased revenues in line with higher economic growth and reduced expenditure. The legislation introduced in July 2024, which set a minimum tax rate of 15% for multinational firms and 10% for domestic firms, was a clear indication from the government of its intention to tighten fiscal policy. The current transfers, representing approximately 35% of total expenditures, are projected to increase by around 35% in 2025. This follows an 80% rise in 2024, largely attributable to earthquake-related costs in 2023. The slowdown in inflation will facilitate a deceleration in the growth of personnel expenditures, which constitute 30% of the total. Additionally, capital expenditures are expected to inch up only by around 1% in 2025, a decrease in real terms, compared with 2024 while capital transfers would fall by around 50%.

Regional geopolitical tensions will be a marker in foreign policy

Türkiye is governed by a presidential system which was adopted by referendum in 2017 and has been in effect since mid-2018. Under this system, executive powers and duties are exercised and fulfilled by the President according to the Constitution and the law. Following the 2023 presidential and 2024 local elections, the domestic political scene which is mostly dominated by President Recep Tayyip Erdo?an and his Justice and Development Party (AK Parti) is expected to be relatively more stable. While Türkiye’s foreign policy has been primarily driven by economic considerations in recent years, geopolitical tensions, particularly in the Middle East, are expected to become a more significant factor from 2025 onwards. The country is expected to proceed with caution to avoid being drawn into the conflicts.

Second, Türkiye will continue to serve as a pivotal global diplomatic mediator, particularly in the ongoing discussions between Ethiopia and Somalia, as well as in the negotiations between Ukraine and Russia. Türkiye has expanded its presence in Africa, investing in infrastructure, energy, and telecommunications. It has established robust economic ties with African nations, positioning itself as a crucial partner (trade between Africa and Türkiye rose to USD 37 billion in 2023 from USD 5 billion in 2003). The ties with Russia, ranging from energy to the grain corridor, are expected to continue, 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. After the second Karabakh War in 2020, an agreement was reached to remove economic and transportation impediments in the region. In this context, the Zangezur Corridor via Armenia, which connects Azerbaijan to its Nakhchivan exclave and Türkiye, became a priority. Opening the corridor would create a direct land route with Azerbaijan, one of Türkiye's primary economic partners, while also enabling Türkiye's trade with Central Asia. Armenia and Iran are against the project.

Despite the current challenges in their relationship, Türkiye, the US and the European Union remain committed to maintaining their diplomatic engagements. The Turkish Foreign Minister's attendance at an informal EU Foreign Ministers’ meeting in August 2024 after a five-year absence indicated the potential for renewed momentum in EU-Türkiye relations. In terms of US foreign policy, post-election practices will be pivotal in shaping relations with Türkiye. Despite the parties' differing stances on foreign policy, including their respective positions on issues such as Ukraine-Russia and the war in Israel, there are certain stabilising factors such as the NATO alliance and Türkiye's status as a regional power that can contribute to a more stable relationship. Türkiye's application for BRICS membership in September 2024 was likely to have been driven by the country's pursuit of an alternative to its stalled EU membership, in line with its foreign policy of maintaining balance.

Payment

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.

Debt Collection

AMICABLE PHASE

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.

Legal proceedings

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.

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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.

Insolvency Proceedings

COMPOSITION

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.

REORGANISATION

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.

RESTRUCTURING

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.

BANKRUPTCY

Ordinary bankruptcy

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.

Last updated: October 2024