TRAUMA

After a traumatic year for the economy in 2023, 2024 has been equally harsh. From a company perspective, every undesirable factor has impacted the activities and sustainability of companies. Low demand, high inflation, high cost of funding, increasing employee cost both nominally and also proportional base in the cost of goods and services sold all have huge impacts on the financials of the companies.
If someone is up to draw a picture of economic trauma, below is a very good interpretation. Starting with 2022 Turkiye is classified in the list to apply IAS29 Hyperinflation Accounting for IFRS purposes, the list goes as follows:  Argentina, Ethiopia, Ghana, Haiti, Iran, Lebanon, Sierra Leone, Sudan, Surinam, Venezuella, Zimbabwe and Turkiye.

EXPORT

From an exports perspective, Turkey has traditionally benefitted from its strategic location and low labor costs in USD terms, giving it a pricing advantage. Yet, in the current economic environment where the 10-Month compounded inflation (CPI) is 39.7 , yet the devaluation is limited to ~16%. By this mismatch, the Turkish companies lost the competitive pricing advantage in export markets where the costs exponentially increased, but the TL equivalent prices did not.  As a reminder, in highly dollarized economies like Turkey—where 70-80% of money in circulation is in foreign currency—hard currencies are expected to appreciate in line with inflation.. In Turkiye this correlation was disputed.
At this point let us also remember that Turkiye is a net importer, export-to-import coverage ratio is 80.4% as of October 2024, this means a vulnerability to hard currency. Companies who have high reliance to exports to cover their open positions, lost their weapon with the loss of export sales mostly due to price disadvantage as well as the low economic activity is low (Euro Zone PMI year average below 50).

WORKING CAPITAL
The other issue companies have been trying to manage is the funding of increased working capital needs. In an hyperinflationary environment like Turkiye, the replacement cost creates higher impact on working capital need. The replacement cost can mainly be defined as higher expense required to restock or produce goods sold, as escalating inflation drives up production costs over very short periods.
Other working capital elements include receivables and payables, both of which are impacted by a 'butterfly effect' in the market. Due to the shortage of funds in the market, trade receivables tend to accumulate, and companies try to minimize this impact by extending to suppliers.

FUNDING/PROFITABLITY
As an outcome of what has all been discussed so far, the companies need funding for their working capital needs, in other words “to survive”.  In a cycle where the company still needs working capital funds due to insufficient operational cash flow and at the same time uses loans to pay the interest of previous loans (snowball effect) can also be called as Zombie Companies.
The companies who want to survive and maintain their market shares simultaneously may face a challenge to sacrifice their profitability because there is ceiling that customers will accept even for brands who have high recognition. 
In summary, companies have high working capital needs, which require funding at rates between 45-55%. However, they cannot pass on all these costs to customers through pricing. This creates a fight for survival.

2025 AT A GLANCE
As we started with macro at the beginning, l Turkiye PMI and Euro Zone PMI forecasts which both show an increase in economic activity with figures above 50.

The biggest question is inflation and USD/TRY movement in 2025.

The Central Bank of Republic of Turkiye (CBRT) recently announced the  Mid Term Plan indicating a 17.5% inflation. Considering the forecasting performance and historic variances on the forecast, it is fair to say we as Staty App team expect the inflation to realise around 26-28%, and interest rates to start dropping at the end of  Q1’25 with an expected closing rate of 30%.
 

The forecasts indicate a 2024 close between 34.5-35 and 2025 to close around 42.

As a risk-averse approach, we can estimate the year end of 2024 as 34.5, add the Turkiye inflation and deduct the USD inflation out to calculate a metric based forecast which is roughly 44-45 levels for year end.





The base salary increase by the government is another question mark for companies which is a big driver for the going forward performance of the budget.  Most companies expect the increase to be in line with 2024 y-o-y inflation as there was no adjustment through the year of 2024.

To summarise, we can expect a fairly better economic activity in 2025.
Staty App Team wishes the best for all the companies, may 2025 be a year of over achieved budgets.