major macro economic indicators
|2017||2018||2019 (e)||2020 (f)|
|GDP growth (%)||7.5||2.8||0.2||-1.2|
|Inflation (yearly average, %)||11.1||16.3||15.7||12.6|
|Budget balance (% GDP)||-2.0||-2.5||-3.2||-3.1|
|Current account balance (% GDP)||-5.6||-3.5||0.1||-0.9|
|Public debt (% GDP)||28.2||30.2||30.8||30.5|
(e): Estimate. (f): Forecast.
- Deceleration of inflation, lower interest rates supporting domestic demand
- Lower external vulnerability on narrower current account deficit
- Low public deficit to GDP ratio, but some contingent liabilities
- Large industrial production tissue and tourism industry, competitive export base
- Customs union with the EU
- Strategic location
- Still fragile consumer and business confidence
- Economy largely dependent on short-term capital inflows, high private external debt
- Industrial dependence on imported inputs, exposure to lira volatility
- Elevated regional geopolitical risks
- Informality (27% in 2017) and inequality
Rebalancing of the economy continues yet vulnerabilities persist
After hitting 25%, annual inflation declined as low as 8.6% end-2019 on the back of favourable base effects and mainly declining food prices. Thanks to lower inflation and supportive monetary policies from major central banks (US Fed, ECB, BOJ etc.), Turkey’s central bank was able to reduce its policy rate by around 10 percentage points in the second half of 2019. Lower inflation and interest rates, as well as further credit provision from state banks, are expected to sustain domestic demand in 2020, which would push up the growth performance, as domestic demand accounts for nearly 60% of GDP. Except in the event of another currency shock, industrial production will continue to recover in line with improving domestic consumption and continuous external demand. Low volatility of the lira will be important for the sustainable recovery of the economic dynamics. Due to its depreciation, the lira now supports the competitiveness of Turkish exports. Despite this rebalancing, corporate payment behaviour will need more time to improve due to the high level of debt and deteriorated cash flows. During the economic contraction, and despite granted restructurings, non-performing loans rose to 6% compared to 3% mid-2018. Coupled with elevated risk perception, this has deterred banks to provide new loans. As a result, Turkish corporates, which rely largely on bank loans to maintain their cash flow and operating capital, started to struggle because of the lack and high cost of financing, as well as lower turnovers. Although lower interest rates are expected to feed credit channel in 2020, payment terms, especially for small and medium enterprises, particularly in domestic-oriented sectors, will not shorten quickly. High external debt that jumped to 62% of GDP mid-2019 remains an important challenge and a serious source of an increasing risk premium for Turkey. Yet, this figure deserves a detailed breakdown. The challenging part of the external debt is the one maturing within a year (short-term external debt). Turkey’s short-term external debt was at 16% of its GDP as of Q2 2019, with non-financial private companies’ short-term external debt standing at 8% of GDP. Therefore, even though the factors mentioned above are expected to support growth performance in the near-term, in the middle to long-term, the credit-driven nature of growth, the high level of debt (especially for non-financial companies) and squeezed profit margins, as well as the absence of significant progress on labour and products markets, insolvency framework and R&D will restrain the pace of economic recovery and keep investments at low levels.
Despite wider budget deficit, public debt will remain low; external gap narrows
The government expenditure remained high in 2019 due to the elections and the government’s efforts to support the ailing economy, while revenues were impacted by stagnation. Economic recovery will support tax revenues. Yet, they are expected to remain weak due to slow growth performance. On the expenditure side, the high level of unemployment (nearly 14% compared with 11% on average in 2018) and costs related to public guaranteed credit schemes will weigh on expenditures. As a result, Turkey is expected to run budget deficits higher than in the previous decade. Nevertheless, public debt to GDP ratio will remain low compared to Turkey’s emerging peers, giving the government more room to contract more debt. The economic contraction dragged down import demand in 2019 and contributed to the improvement of the current account balance. Consequently, the latter is expected to produce again a slight deficit in 2020, on the back of recovering domestic demand, particularly from the production side. Turkey’s production tissue is dependent on imported inputs that dig the current account balance. Despite regional tensions, tourism revenues are expected to increase in 2020, as this industry remains immune to them, and an important positive contributor to the current account balance. The core current account (excluding gold and energy) recorded a record-high level surplus of USD 48 billion in September 2019, on a 12-month cumulative basis. The country continues to attract foreign direct investments for a total of around USD 8 billion annually (1% of GDP), while there is a very shy return of portfolio investments. Because the country recorded a current account surplus, the central bank’s reserves increased, covering nearly 4.5 months of imports. However, this trend may be reversed in 2020.
Domestic stability but external challenges
After several years of successive elections, Turkey is now supposed to have a period without elections until 2023. This is expected to be a positive contributor to the business environment. Any rise in tensions with the US, which led to a sharp currency devaluation in August 2018, will be on the radar of investors. Threats of US sanctions continue to be a drag on confidence, and keep Turkey’s risk premium higher than its peers, as well as adding to the lira’s volatility.
Last update: May 2020
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 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.