Written by Seda Caglayan and Ezgi Erkoyun
COROM, Turkey (Reuters) – It is hard for Dogan Duman to see how he can keep his clothing factory in central Turkey open much longer, even after firing a third of his staff to cut costs that have soared for companies across the country, leading to a wave of bankruptcies and closures.
Broken sewing machines are pushed to the side of his factory floor in Corum, where “for sale” signs are posted outside and gates are locked in the once bustling industrial area of the small town.
Such sobering scenes are spreading across Turkey as part of the fallout from more than a year of monetary tightening efforts, including a record 50% interest rate, to rein in years of high inflation and excessive demand.
Thousands of companies like Duman, which makes coats and jackets for global fashion brand Zara, are struggling with inflation that topped 75% earlier this year, an overvalued lira, rising electricity and gas prices, and falling export orders.
“Orders are shrinking every day because we are losing our competitiveness… and I think it will shrink even more,” he said of his 27-year-old company, which is now operating at 60% capacity with 210 employees.
Turkey is one of the world’s top five apparel-producing nations and a major source of top European brands. But despite the advantage of its proximity to Europe, its main trading partner, Duman says high energy, labor and foreign exchange costs have left it behind rivals in Vietnam and Bangladesh.
“Given the current lira exchange rate and the expected minimum wage hike next year, I don’t think we will be able to compete. We will be at the point of closure,” he said.
These days, Turkish households and businesses are grappling with the economic consequences of a cumulative 41.5 percentage point interest rate hike that began in June last year, which is now finally starting to cool inflation, which fell to 52% last month.
Turkey’s sweeping policy shifts last year, including fiscal moves, aim to reverse years of soaring prices and collapsing currencies under President Recep Tayyip Erdogan’s unconventional approach to monetary easing to stimulate growth.
But with credit out of reach for many, and the lira’s depreciation lagging far behind monthly price increases, businesses, especially clothing and textile exporters, are in crisis.
Some 15,000 companies closed their doors in the first seven months of the year, a 28% increase from 2023, according to the Union of Chambers and Commodity Exchanges of Turkey.
Other data suggests that bankruptcy pressures are looming.
Monitoring firm konkordatotakip.com says 982 companies received initial debt protection from the court in the first eight months of the year, nearly double last year’s total.
Construction and textile companies were the ones that filed the largest number of such requests to suspend debt payments to banks and suppliers to continue operations, as well as for bankruptcy proceedings.
Such pressures on businesses have indirect effects, slowing or stopping payments across the economy and raising unemployment.
The costs could be huge, said Erdal Bahcevan, head of the Istanbul Chamber of Industry. “While trying to save a company, dozens of (creditor) companies could end up in a dire situation,” he said.
Some economists say the aggressive tools used to kill inflation make high unemployment and bankruptcies all but certain.
“This is a serious dilemma for the government,” said Seyfettin Gursel, director of the Center for Economic and Social Research at Bahcesehir University. “It is trying to bring the monster it created back to its lair, but it does not know how to do it.”
scattered clothes
In the city of Corum, 500 kilometers east of Istanbul, the windows of some factories were shattered, and dozens of colorful clothes soaked by rain were scattered in its grassy yard.
Bulent Demirci, a co-owner of a spinning factory in the city that employs 50 workers, said he closed his factory a few months ago due to “unprecedented economic expectations.”
“We have seen production cuts from time to time in the past. But this time the situation has become bleak,” he said.
Ankara’s last minimum wage increase was 17,002 Turkish liras ($500) in January, a 100% increase from a year earlier and 500% from the end of 2021, when a historic collapse in the lira rocked Turkey.
Gas and electricity prices have risen by about seven-fold and three-fold, respectively, since 2021 for small and medium-sized manufacturers.
According to interviews with exporters, overall production costs in Turkey are now about 40% higher than those of Asian competitors in dollar terms, and they also blame barriers to financing and declining working capital.
Exporters have been pressing for further depreciation, given that inflation has hit 32% so far this year while the lira has fallen by only 13% against the dollar. However, authorities have urged holding the lira, helped by high interest rates on deposits.
Istanbul-based Mega Polietilen and clothing manufacturer 3F Tekstil are among the companies that have applied for court protection from debt repayment.
The move has helped the company fight to survive with a total of 600 workers and continue supplying fashion brands such as Mango and H&M, said a 3F executive who asked not to be identified.
“But our suppliers and those who are owed money will suffer more in this process,” the executive added, which amounts to about 10,000 workers at outsourced manufacturing companies across the country.
“When interest rates reached 60-70%, companies could not afford it. They could not manage their debts. Companies paid the price of high inflation in Turkey,” he said.