Turkey’s ‘Darwinian’ companies overcome 80% inflation

As Western businesses reel from the highest inflation in decades, many of their Turkish counterparts, who are facing a rate almost 10 times higher, are taking it in their stride.

The country has suffered a succession of crises in recent years, but the economy continues to grow, buoyed by a mix of cheap credit, diversification and shrewd business management, honed in bouts of turbulence over the years and decades. past.

“It’s difficult, but we faced this in Turkey [before]said a senior executive from one of the country’s largest manufacturers. “One way or another, we know how to help customers, the dealer network, to continue their operations in a high inflation environment,” he added, citing how the company had managed to find a happy medium for pricing that covered its costs without deterring customers.

Charlie Robertson, chief economist at investment bank Renaissance Capital, said Turkish corporate management teams had experienced “soft coups, violent coups, sustained triple-digit inflation and multiple currency crises” in the 25 years he had spent following the country.

“Darwin’s ‘survival of the fittest’ certainly applies to Turkey,” he said, adding that it is also supported by demographic dividends from its young population and strong underlying GDP growth. . The economy grew 7.6% year-on-year in the second quarter and 11% last year.

One of the many challenges for Turkish business leaders has been workers’ compensation, given the erosion of purchasing power caused by official inflation which topped 80% in August. Eurozone inflation hit a record high of 9.1% in August.

President Recep Tayyip Erdoğan opposes high interest rates, despite astronomical inflation © Moe Zoyari/Bloomberg

As price increases began to take off in the summer of last year, Mustafa Tonguç, the general manager of DHL Express in Turkey, listed the cost of 50 basic products and compared them to their equivalents in Germany in order to persuade the bosses at the headquarters of the logistics provider to increase the salaries of its 1,100 employees. He would raise them three more times in the coming year.

“As a company, we cannot fix the global economy, but we can take care of our employees as much as possible,” Tonguç said. “Over the past 12 months, many businesses have gone bankrupt. We thought people needed to be assured of their job security.

Tonguç also proposed a pricing structure for customers and suppliers, which include companies in the textile and automotive sectors, that fixes the cost of some parts of their fees and ties others to fast-changing inputs. such as the cost of fuel and packaging. His advice to Western leaders is: “Don’t panic, focus on productivity. . . focus on the things you can change.

Much of the Turkish business community is angry and frustrated with President Recep Tayyip Erdoğan, who is so adamantly opposed to high interest rates that he has repeatedly ordered the central bank to cut borrowing costs despite rising inflation.

Line chart of CPI (%) showing history of inflation spike in Turkey

Yet even as his increasingly erratic economic management marks a break with the stability of his early years in power, leaders say they have at least experience in managing high inflation and weak currency of periods difficult times of the 1980s and 1990s.

The most recent sharp fall in the lira last December, when it hit a new high, was “not pleasant”, conceded Tolga Kaan Doğancıoğlu, chief executive of Turkish bus maker TEMSA.

But he said as inflation started to climb in Turkey and around the world, his company “immediately shifted gears” and decided to access the financing needed to increase production of low-margin non-electric vehicles. .

While conventional wisdom suggests that inflation leads to lower demand, Doğancıoğlu said past crises in Turkey have often shown the opposite, at least initially. It was the same in this case.

“Obviously, high inflation or long-term hyperinflation is not healthy. But there is a sweet spot. [where] as a business, you need to make agile decisions so you don’t lose the market. He added, “In an inflationary environment, investing early also has a virtue.”

A vendor serves customers in The Spice Bazaar, Eminonu District in Istanbul on September 6, 2022
Turkish companies more dependent on their domestic market remain exposed © Yasin Akgul/AFP/Getty Images

After taking a series of hits in recent years, Turkish groups have reduced their exposure to fluctuations in the lira by “significantly” reducing their dollar and euro-denominated debt and accumulating hard currency, according to firm economist Murat Üçer. Consulting GlobalSource Partners. Deleveraging has reduced their net open foreign exchange position from around $200 billion in 2018 to around $100 billion today. “It’s a welcome and understandable development,” he said.

Still, the true extent of problem lending in the banking sector raises concerns, as state lenders, in particular, have used cheap credit to help struggling businesses stay afloat.

Many of Turkey’s most successful companies – including those in the automotive, chemical and textile sectors – have prioritized exports, taking advantage of the weak lira to sell their wares around the world and contributing fuel economic growth.

It has been more difficult for those who rely heavily on local sales. Last month, Fitch downgraded the debt rating of a series of companies, including white goods maker Arçelik and telecommunications company Turkcell, due to their high exposure to the domestic market.

The managing director of a large Turkish-focused retail company lamented that while his sales are rising in lira, the falling lira means profits disappear when converted to dollars. “It makes life very difficult with investors,” he said.

Renaissance’s Robertson warned there was a risk that the government’s array of unorthodox measures aimed at supporting growth while supporting the currency would put the country’s sovereign credit rating under pressure and could possibly ‘come back to bite it’ . He cited a government-backed program that promises to compensate savers for a falling exchange rate as an example.

Others praise the resilience but lament the missed opportunities for the country, where GDP per capita fell from a peak of $12,600 in 2013 to $9,600 last year – a stark illustration of the erosion of prosperity.

“I’ve worked so hard for the past 20 years just to get our country back to where it was in the 1990s,” said a senior executive at a company with interests in tourism and energy. “This country is so resilient and vibrant that somehow most people are still on their feet… But this country could have been another South Korea. I feel very sad when I think about where it might have been compared to where it is today.

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