Turkish textile industry challenges: Interest rates & export decline

The Turkish textile industry stands as one of the nation's most prosperous sectors, ranking as the third largest in terms of exports and providing employment for approximately 4 million people. Turkiye's primary strengths in textile production include apparel and home textiles. The country mainly exports to the European Union, the US, and Middle Eastern nations such as Iran. Additionally, all manufacturing industries in Turkiye have benefitted from prolonged periods of low interest rates. However, this has led to an overheated economy characterised by higher inflation, job losses, and dampened consumer demand. In response to these challenges, the interest rates were increased amid rising inflation and decreasing foreign direct investment, to stabilise the economy.

Exhibit 1: Interest rates in Turkiye

Source: Central Bank of the Republic of Turkiye

The chief of Turkiye’s Central Bank kept interest rates low to support President Recep Tayyip Erdogan’s economic policy, which is based on the theoretical belief that higher interest rates will spur further inflation. As a result, interest rates were kept as low as 8 per cent in May 2023. However, with this theory failing amidst high inflation, the Central Bank was compelled to increase the interest rates, starting from 15 per cent in 2023 to 50 per cent by November 2024. The current rate is almost 400 per cent higher than May 2023’s lowest rate of 8 per cent, and 25 per cent higher than the rates in the same month in 2023. This has led to the inability of Turkish businesses to expand due to higher borrowing costs compared to the period up to 2023, when loans were cheaper, and expansion was easier. Consumption has also started to fall, indicating an eventual disinflation.

Although the Central Bank's decision came at a time when the country’s inflation was around 60 per cent, the damage had already been done. With businesses struggling, exports faltering, and a weak lira, the country is facing a multifaceted issue where all economic variables are suffering—both on the demand and supply sides of the economy. Although the country’s interest rates have now been successful in cooling down an overheating economy and lowering inflation to 48 per cent, Turkiye needs to address domestic economic issues like the struggling lira and interest rates, as well as adhere to the sustainability policies of consumer countries. These issues have already increased the production costs of textile firms, in addition to the inflation-led cost increase.

Exhibit 2: Turkiye’s inflation (in %)

Source: Turkish Statistical Institute

However, the rising interest rates greatly impacted the Turkish economy, with the manufacturing sector being hit the hardest. Inflation reached a peak of 75 per cent in April 2024, which further affected businesses due to increased production costs and expensive loans. The rise in interest rates led to Turkish manufacturing businesses losing margins and eventually closing due to higher production and debt servicing costs, even though manufacturing contributes 22.2 per cent to the GDP—a significant portion of the nation's wealth generation.

The textile sector was the worst affected within the manufacturing industry. This export-oriented sector suffered greatly due to high production costs and weakening economies in the EU, the US, and Iran, which led to reduced demand from these countries. This resulted in a further decline in exports, exacerbating the problems of the Turkish textile industry.

Exhibit 3: Turkish lira against US dollar

Source: Central Bank of Republic of Turkiye

Another reason is the depreciation of the Turkish lira against the US dollar. Despite the country implementing the Turkish Economic Programme (TEP), the currency continues to depreciate against the dollar. The macroeconomic effect on the economy would have been less harsh if the trade account of the country had been in better condition. However, the trade deficit of the country has widened and has been on a rising trend since November 2023. The trade deficit began to cool down in May 2024, which may reflect a potential easing for the Turkish economy. However, the goal will only be achieved when the lowering of inflation and rising interest rates are reflected in terms of an eventual increase in manufacturing, consumer demand picking up pace, and an eventual increase in employment.

Exhibit 4: Turkish lira against euro

Source: ECB

The Turkish lira has also consistently depreciated against the euro, where major Turkish textile exports are directed. This may have benefitted Turkish textile exports to some extent, but the potential was dampened by the cost-of-living crisis in the EU, and the higher interest rates and a cost-of-living crisis in Turkiye itself led to apparel and textile producers implementing cost-cutting measures, mass layoffs, and eventually, the closure of companies. Although the depreciating currency may increase exports, it will also work to eventually increase Foreign Direct Investment (FDI) as, despite higher interest rates, the main returns will be highly profitable for countries in the US and the EU. Turkiye receives the maximum investment from these regions. And with falling FDI, the country needs to do more beyond quantitative tightening.

Impact of high interest rates on Turkish manufacturing and exports

The impact of such high interest rates has not been good news for the manufacturing industry. The rising interest rates have impacted the manufacturing industry in terms of higher costs. Although Turkiye’s manufacturing sector is export-oriented, it is highly reliant on imports for manufacturing different commodities. This led to the manufacturing Purchasing Managers' Index (PMI) contracting.

Exhibit 5: Capacity utilisation rate in Turkiye

Source: Turkish Statistical Institute

The capacity utilisation rate of the manufacturing sector in Turkiye is moderate, which also indicates that the manufacturing sector must incur more costs to increase production and expand its operations. The manufacturing sector in Turkiye is facing the same problem. To expand production in the concerned sector, companies must increase costs to employ more people and enhance technological inputs among other factors. Capacity utilisation rates in Turkiye suggest from an investment perspective that the sector is running under capacity and might need to incur higher costs for expansion, which can trigger inflation.

A higher correlation has been found between inflation and capacity utilisation rates. Thus, the higher the inflation, the higher the capacity utilisation rates. Therefore, along with the interest rates and falling inflation, higher rates of capacity utilisation indicate an increase in inflation. However, it is going to take time until the entire sector recovers from the economic downturn.

Manufacturing is not the only factor of the economy that is affected by interest rates; the exports of the country have also been affected.

Exhibit 6: Turkish textile exports (in $ bn)

Source: ITC Trademap

If analysed, the trade figures show that the textile exports of the nation reduced by a staggering 10 per cent in the year 2023. The apparel sector is highly debt-laden and receives fewer orders from consumer countries like the US and the UK. A fall of 10 per cent in 2023 is a huge drop compared to a 2 per cent increase in 2022. The drop in textile exports comes at a time when there are around 1,500 firms that had to close down along with many firms filing for bankruptcy. In the year 2023, the share of exports to the Middle East significantly increased, specifically to Iran. Therefore, along with conventional markets like the EU and the US, the country is also discovering new markets. This aligns with the strategic goals of the country as well, where it is planning to create a new railway line to connect the Middle East to Europe.

Exhibit 7: Monthly exports of textiles from Turkiye (in $ bn)

Source: ITC Trademap

Along with an increase in interest rates, the textile exports of the country fell by a staggering 22 per cent when the interest rate increased to 50 per cent. Following this, as inflation began to fall and the industry experienced a downturn, exports increased again by 21 per cent in July 2024, reaching $1.46 billion, and then fell by a mere one per cent to $1.45 billion in August 2024. With inflation falling, there are some hopes for a recovery in consumer demand. Along with this, the country is also seeing a revival in demand from the EU and the US, which could increase textile exports—specifically within the home textiles and the apparel category, which experienced significant declines of 10 per cent. According to Fibre2Fashion’s market intelligence tool TexPro, the exports of home textiles stood at $4 billion in 2023, and apparel stood at $18 billion in 2023, compared to 2022.

Exhibit 8: Overall exports of Turkiye (in $ bn)

Source: ITC Trademap

On comparing the exports of apparel in 2024 with those of 2023, some changes are observed. The apparel exports of the nation improved by 9 per cent in July 2024 compared to the same period in 2023, and by 3 per cent in August 2024. However, the trends observed show that the decline in apparel exports on a year-on-year basis for the past months has been much higher compared to the rise in exports. The consecutive rise in exports in the months of July and August 2024 suggests that globally there is some recovery in demand for apparel and an improvement in consumer sentiment.

Table 1: Apparel exports of Turkiye (in $ bn)

Source: ITC Trademap, F2F Analysis

The increase in the exports of apparel can be attributed to the increasing integration of Turkiye with other countries worldwide. Along with this integration and the formation of new deals, the country is also signing new agreements with countries like the US to receive assistance in producing apparel in a sustainable way, which can increase the demand for Turkish apparel and boost investments in the sector, further reviving companies within the sector. However, it will take some time for the sector to fully recover. Although the increasing apparel exports are good news for the nation, the country’s readiness to adhere to the green deal and secure further investments will also play a crucial role in increasing the exports of apparel and textiles.

Key takeaways

Turkiye has been experiencing declining textile exports and overall exports due to the effects of interest rates on the overall economy. Along with reduced domestic spending on goods, sentiment in export markets like the EU and the US also dampened, resulting in a double whammy effect on the country's textile and apparel industry, which experienced multiple bankruptcies and closures. Consequently, the country faced reduced exports and higher production costs.

The main drawback here is the textile and apparel industry's reliance on the import of raw materials to produce apparel and textiles. Paired with the depreciating value of the Turkish Lira against the dollar, the Turkish industry had to bear the additional cost of production, which led to a further reduction in Turkish production and a consequent reduction in supply, again increasing prices and further reducing demand.

However, the country is addressing the import reliance with new initiatives like the production of sustainable apparel, where it is collaborating with US institutions for innovation, exchange of ideas, and production of apparel on home turf. This is a positive step towards sustainable production. Therefore, with the fall in inflation, sentiment in the economy is expected to improve, which will speed up production, increase employment, and enhance the profitability of textile companies.

Fibre2Fashion News Desk (KL)