Turkish Exports in the Face of Global Stagflation and Earthquake in 2023

The global and domestic economic outlook points to negative signals for Turkish exports, as Türkiye’s short-term export performance depends on the income growth of export partners and the cost of exported products, which in turn are linked to inflation and exchange rate dynamics.

Türkiye’s export prospects are closely linked to the growth of the European Union (EU-27) and the United Kingdom (UK), as well as the United States, as about 60% of Türkiye’s exports in 2022 are destined for these countries. Among Türkiye’s major export partners, Germany, the United States, and the United Kingdom rank in the top four in the same year.(Table 1). However, the economic outlook of Germany and the United Kingdom is not positive, as the World Economic Outlook of the International Monetary Fund (IMF) ^[1] forecasts negative growth for the United Kingdom and almost no growth for Germany. The U.S. is predicted to grow by about 1%, which is below the country’s 2% average growth rate over the past decade. These countries are still struggling with the effects of the pandemic, including supply chain bottlenecks and high inflation. Germany is facing energy shortages after the country decided to curb oil and gas imports from Russia in response to the ongoing conflict between Russia and Ukraine. Tight fiscal and monetary policies have been pursued particularly in the UK ,to contain inflation and inflation expectations. In addition, the challenges of post-Brexit trade restrictions in EU markets have not been helpful for UK economic growth.

China has become one of the export markets for Turkish products, as about 1 percent of total exports are destined for China. Expectations for the growth rate of the Chinese economy have been revised upward after China abandoned its zero Covid policy at the end of January 2023. This could change the economic dynamics not only in China, but also in the countries in the region whose economic activities are closely linked to China’s economic performance. While still lower than the average growth performance of 8.4 percent over the past decade,  China’s growth rate of is expected to be about 5 percent in 2023. Increasing economic activies  in China and Asian countries can be a positive indicator for Türkiye’s exports, but have a negative impact on the overall price level of commodities, including oil and gas, as demand for these products from China increases in line with revitalization of its economic activities.

As the world’s largest economy and with the largest financial markets, the United States exerts considerable influence on other countries through its policies. The exchange rate dynamics of emerging markets, including Türkiye, are particularly sensitive to Federal Reserve (Fed) responses to changes in U.S. growth and inflation rates. During the pandemic, the Fed took extraordinary measures to support the economy, but these measures created inflation rates of 7.4 percent and 6.4 percent in 2021 and 2022[2], respectively, above the 2 percent target rate. As a result, the United States has sought to contain inflation, and now the Fed is pursuing a tight monetary policy by raising interest rates and withdrawing excess dollars created during and after the pandemic.

The Fed’s rate hike shifts the preferences of capital owners toward more liquid and safer U.S. Treasury bonds, so money flows from emerging markets to the United States. This causes the U.S. dollar to appreciate[3] and puts pressure on emerging market currencies, including the Turkish lira. Türkiye’s central bank has long sought to keep exchange rates at the same level in order to contain inflation and inflation expectations through the liquidation of international reserves and other measures. However, the Fed’s monetary policy stance is putting further pressure on the Turkish central bank, making it difficult to maintain the overvaluation of the Turkish lira for an extended period of time. A possible devaluation of the Turkish lira could therefore have a positive impact on exporters in the short term while creating further pressure on prices. As mentioned earlier, growth expectations in the U.S. are not supportive of Turkish export performance in 2023, as the U.S. growth rate will be below long-term trends. In addition, ongoing trade restrictions between Türkiye and the United States remain an obstacle to bilateral trade potential.

Given the mixed signals from the external environment, where negative factors predominate, Türkiye’s export potential is also affected by the catastrophic earthquake on February 6. The earthquake had a negative impact on the production and export of certain goods, particularly in 11 cities, which account for 9.8 percent of the country’s gross domestic product (GDP) and 8.6 percent of total exports. Exports from the hardest-hit cities of Hatay, Adıyaman, and Kahramanmaraş accounted for 2.2 percent of total exports, which amounted to about $5.6 billion in 2022 (Table 2).

The Turkish government responded to the earthquake by announcing plans to construct about 270,000[4] new buildings in the affected areas. Contracts for this project are expected to be signed by the end of February. However, due to the extent of damage to buildings, commercial businesses, industrial facilities and agricultural land, reconstruction is likely to be complicated and multi-faceted. It is unfortunate that Türkiye currently faces the loss of 44,218 lives[5] and must also address the needs of millions of people displaced from their homes by the earthquake. The psychological and sociological effects of this disaster are likely to last beyond the immediate aftermath of the event, and it seems unlikely that normal economic activity will resume within the government’s projected time frame of one year. As a result, exporters will face greater challenges than they anticipated in the days ahead.

Gülsüm Akbulut

Director of Global and Turkish Economic Studies

Foreign Policy Institute

26 February 2023

Table 1: Türkiye’s Top 20 Exports Destinations

Table 2: Exports from the cities affected by the 6th February earthquakes

[1] https://www.imf.org/en/Publications/WEO/Issues/2023/01/31/world-economic-outlook-update-january-2023

[2] https://www.imf.org/en/Publications/WEO/weo-database/2022/October

[3] https://www.macrotrends.net/1329/us-dollar-index-historical-chart

[4] https://csb.gov.tr/bakan-kurum-520-bin-bagimsiz-bolumden-olusan-164-bin-321-bina-yikik-acil-yikilacak-ve-agir-hasarli-bakanlik-faaliyetleri-38447

[5] https://www.afad.gov.tr/kahramanmarasta-meydana-gelen-depremler-hk-basin-bulteni-35