Business strain in Türkiye: Addressing economic pressures

Türkiye is facing a challenging economic period, marked by a significant increase in business closures and bankruptcy declarations. According to data from the Union of Chambers and Commodity Exchanges of Türkiye (TOBB), the first seven months of 2024 saw a 28.3% rise in the number of companies shutting down compared to the same period last year. 

• Companies established: Down by 14.5% 

• Sole proprietorships: Down by 31.3% 

• Cooperatives: Down by 8.2% 

In July 2024 alone, the situation worsened dramatically: 

• Companies closed: Up by 42.9% from the previous month 

• Sole proprietorships closed: Up by 56.5% 

• Cooperatives closed: Up by 35.1% 

This data indicates a severe economic contraction, pushing many businesses to the brink of survival. 

Rising bankruptcies: A symptom of financial distress 

The growing number of bankruptcies reveals the depth of the financial strain on Turkish businesses. Many companies, unable to meet their debt obligations, are resorting to bankruptcy as a last-ditch effort to avoid total collapse. 

Key drivers behind bankruptcy surge: 

• High borrowing costs: With interest rates soaring, companies are struggling to secure affordable financing. 

• Liquidity constraints: Difficulty in converting assets into cash is a significant barrier to maintaining operations. 

• Economic uncertainty: Businesses are hesitant to invest or expand due to unpredictable economic conditions. 

Industries hit hardest 

Certain sectors are experiencing a particularly severe impact, with construction and textile industries at the forefront. 

Construction sector: 

• High raw material costs and reduced demand have crippled many projects. 

• Delayed payments and cash flow issues are common, leading to an increase in bankruptcies. 

Textile sector: 

• Rising labor costs and shrinking profit margins are pushing large firms into bankruptcy. 

• Exchange rate volatility is a critical issue, making it challenging for companies to manage imported raw material costs. 

Misuse of bankruptcy proceedings 

The bankruptcy process, intended to provide relief for struggling businesses, is being misused by some companies to evade financial responsibilities. 

Issues in the system: 

• Extended proceedings: Some companies prolong the bankruptcy process to delay payments, exploiting legal loopholes. 

• Temporary protection: Bankruptcy grants a temporary halt on debt collection, which some use as a tactic to reset operations and avoid liabilities. 

Economic consequences of widespread business closures 

The wave of company closures is having a ripple effect across the Turkish economy, contributing to rising unemployment and decreased economic activity. 

Impact on employment: 

• Companies that file for bankruptcy often begin cost-cutting by reducing their workforce. 

• As businesses shut down, the number of people actively seeking work increases, exacerbating the unemployment rate. 

The path forward: Navigating economic recovery 

To mitigate the impact of the current economic downturn, a multi-faceted approach is necessary: 

• Lowering borrowing costs: Reducing interest rates could help ease financial pressure on businesses. 

• Incentives for growth: Providing tax breaks and subsidies for key industries could stimulate economic activity. 

• Reforming bankruptcy laws: Introducing stricter regulations and oversight could prevent the misuse of bankruptcy proceedings. 

Breaking the cycle 

Türkiye’s economic landscape is marked by significant challenges, including a high rate of business closures and escalating unemployment. Recent reports indicate that thousands of businesses have shut down due to financial pressures, contributing to an increase in unemployment rates.

The prevailing economic conditions, characterized by high inflation and interest rates, have created a difficult environment for businesses. Many enterprises struggle to maintain operations, leading to a cycle of closures that exacerbates unemployment and hinders overall economic stability. Without changes in this trajectory, negative impacts on the economy are likely to persist.