How Turkey's star crashed and burned

Despite several warnings, the economy fell off a cliff in 2018, with a savage run on the currency and crippling credit crunch

Turkish President Tayyip Erdogan is pictured during an opening ceremony in Istanbul, Turkey December 8, 2018. REUTERS/Murad Sezer
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"Everybody has a bankruptcy story," says Cem Sari, who recently lived through his own, in a year that turned into a national trauma for Turkey.

The country's economy roared into 2018 with growth rates that were the envy of the world – and vulnerabilities that had been building over years. It was like a car that could still reach high speeds, so long as the driver ignored the multiple warning lights flashing.

And then it crashed, suffering a classic run on its currency and a brutal credit crunch.

Somewhere along the way, Mr Sari’s textile business went under, along with hundreds of other companies. Many more, including some of the country’s biggest corporate names, are still struggling to contain the fallout. The government and banks are still figuring out how to help them. On Bloomberg’s latest scorecard of emerging-market prospects, Turkey ranks lowest.

For President Recep Tayyip Erdogan, it was a financial nemesis. He came to power in 2002 after Turkey's last big crisis swept away his rivals. He has won every national and local election since, largely on the back of rising living standards. But 2018 was the year his growth model, fuelled mainly by cheap money, finally ran out of speed.

A woman looks at the Bosphorus from the terrace of a ferry as she travels from Europe to Asia during a storm in Istanbul on November 28, 2018. / AFP / BULENT KILIC
The Bosphorus strait separates Europe and Asia. AFP

Mr Sari's company, CERM Tekstil, was founded in Mr Erdogan's first year in office. Based in Bursa, a prosperous north-western city that has long been Turkey's textile centre, the company produced fabrics for sofa covers and curtains.

CERM's early years were good, coinciding with Turkey's economy. Demand was booming and foreign capital poured in. One result was a stronger Turkish lira. That helped Mr Sari, who bought his machinery and materials from abroad.

Another thing was helping business: cheap borrowing. Interest rates and inflation came down as the economy stabilised under Mr Erdogan, and credit flowed. Keeping the taps open would later become a fixation for the president.

In the meantime, Turkish companies were expanding their horizons – and piling on debt. Some of them did it with a swagger. 

Murat Ulker, who became the country’s richest man, went on a global shopping spree that culminated in 2014 when he bought the British company United Biscuits for $3.1 billion (Dh11.39bn), the biggest foreign acquisition by a Turkish company. Mr Ulker bragged that it took him only nine days to raise the money from local and international banks.

Ferit Sahenk, another billionaire, was transitioning out of banking to hospitality – buying swanky hotels all across Europe. As late as January this year, he opened a New York branch of the steakhouse chain fronted by stuntman chef Salt Bae.

Crucially, Turkish business did a lot of its borrowing in dollars and euros. However hard Mr Erdogan pushed his central bank, lira rates were never going to match the historic lows on offer in the rich world after 2008. Foreign-currency loans were cheaper – but for businesses that earned in liras, they represented a risk.

Mr Sari borrowed some euros but he mostly avoided that trap, keeping the majority of his debt in liras. He was not operating on the scale of Mr Ulker or Mr Sahenk, but he was thriving. By the start of 2016, CERM had around 90 employees at two factories, and annual sales of more than $10 million.

Looking back, he says, there were already signs of trouble.

The second half of the Erdogan era has been a rockier road. Civil war broke out in neighbouring Syria, and outside powers were quickly sucked in. Turkey was on the front line. In late 2015, Turkish forces shot down a Russian jet, sparking geopolitical turmoil and market jitters. Ties with the Kremlin were repaired, but partly at the expense of Turkey's long-standing alliance with the United States, which began to fray, further unnerving investors.

In the summer of 2016, the president survived a coup attempt and responded with sweeping purges. In the fall of that year, the lira suffered its first real downward leg.




By the end of 2016, Mr Sari had cut his staff by one-third. Around that time, he says, Turkey’s bankers first “smelt the approaching crisis”.

“We were a highly credible firm back then,” he says. “But you’d go to a bank to ask for a loan, and they started saying stuff like ‘Oh, we need to ask our regional HQ’.”

Whenever the lira wobbled, eyes turned to the central bank – and then to the president, who would forcefully rule out the higher rates needed to defend the currency.

After watching his predecessors get wiped out by a fiscal crisis, Mr Erdogan has kept government finances tight. Public debt has fallen sharply as a share of the economy. But it has been replaced, as the driver of growth, by private debt – and that required easy money.

So anytime the central bank did get a green light to hike interest rates, it came reluctantly and usually behind the curve. The lira continued its downward drift. Cost inflation caused by a weak currency was eroding Mr Sari’s margins, which fluctuated around 20 per cent in good times.

His dye, for example, came from Italy and was priced in euros. He was paying about 86 liras (Dh59) per litre at the start of 2017 – and 109 liras by November, a 30 per cent increase. Profits were “shrinking big-time. Some months, I had a negative margin”.

Making things worse, most of his business was on a buy-now, pay-later basis – not uncommon in Turkey. Customers would typically cough up several weeks after receiving their fabrics. 

By the time Mr Sari got his money, it was worth much less in terms of dollars or euros – or imported dye. It was worth less inside Turkey, too, as inflation accelerated.

Coming into this year, Mr Sari was in crisis-fighting mode. "We kept saying, we're going to be fine, inshallah," he says. He moved out of his two factories into one larger building, cutting his rent bill by 30 per cent.

It was too little too late.

By the end of February, Mr Sari realised the game was up. Losing money, he shut down CERM Tekstil shortly before the government introduced new procedures for bankruptcy protection in March.

More than 1,000 companies have applied for bankruptcy.

TOPSHOT - A boy sells tissues in front of Kadikoy ferry station at Eminonu during rush hour on December 4, 2018, in Istanbul. / AFP / BULENT KILIC
TOPSHOT - A boy sells tissues in front of Kadikoy ferry station at Eminonu during rush hour on December 4, 2018, in Istanbul. / AFP / BULENT KILIC

Mr Sari says that might have postponed the death of his business – but not by much. “We’d have gone bust a few months later anyway,” he says. “It’s a shame. It wasn’t easy to build two factories. But it’s all gone now.”

Some much bigger Turkish companies are fighting to avoid a similar fate.

In April, Mr Sahenk’s Dogus Holding started renegotiating with creditors on $2.5bn of loans. From Capri to Madrid, his luxury hotels are up for sale.

Mr Ulker, meanwhile, reached a deal with banks in May to refinance $6.5bn of debt.

The worst was still to come for the currency.

Mr Erdogan said in May, a month before elections, that he would exert even more control over the central bank if he won – which he did. But the currency plummeted to new lows in August amid another row with the US, which threatened unprecedented sanctions on its Nato ally.

The president finally relented and authorised the biggest interest-rate increase of his 16-year rule. The move succeeded in halting the lira rout. But the damage is still filtering through the banking system.

Turkish non-financial companies had $331bn of foreign-exchange liabilities at the end of August, almost triple their forex assets.

In November, The National reported The European Bank for Reconstruction and Development (EBRD) slashed growth forecasts for Turkey, its biggest lending market, but left the rest of its region largely unscathed despite growing pressures.

The development bank still expects all 38 of the economies where it works to grow this year and next, but cutting Turkey’s forecast a combined 4 percentage points, along with a possible recession there, will lower the region’s overall growth rate by 0.6 per cent points to 2.6 per cent next year.

“We have downgraded our Turkey forecasts to 1 per cent [for 2019] and that of course has a major impact on our overall forecast for the whole region,” said Sergei Guriev, EBRD’s chief economist.

Many economists predict the economy will shrink next year. The International Monetary Fund is more upbeat, forecasting growth of 0.4 per cent. But even that effectively amounts to a recession in a country such as Turkey, where population is increasing at more than three times the growth pace.

As for Turkish business, it is caught in a credit vice – the opposite of the loose conditions that have prevailed in the Erdogan years. Dollar borrowers got burnt, and now lira loans are prohibitively expensive, too.

“I used to cry when I had to borrow at 18 per cent,” says Mr Sari.

“Now people are borrowing at 40 per cent.”

It’s not his problem anymore. Mr Sari is scratching a living as a consultant to other textile companies. He says he is done with entrepreneurship.

“No one’s going to persuade me to employ a single person,” he says. “Let alone a hundred.”