Rankings report: Turkiye

Inflation starves Turkish economy

Runaway inflation rates are still hampering the Turkish economy. Local firms are struggling with its effects on fees and wages and the government seems to be finally taking action. Che Golden reports.

Soaring inflation rates have prompted the Turkish government to take a hardline approach but it may be some time before interest rates cool to a reasonable level. In the meantime, local firms struggle to stay ahead of it in a cutthroat market that drives down fees.

Turkiye’s central bank surprised economists and investors in March 2024 with a big rate rise as policymakers struggled to cool inflation. The central bank increased its main interest rate five percentage points to 50%. Policymakers cited a ‘deterioration in the inflation outlook’. According to TURKSTAT data, annual inflation in Turkiye rose to 68.5% in March. According to the Inflation Research Group (ENAG), this rate is 124.6%.

The rising interest rates are a desperately needed reversal from the unorthodox monetary policy that has been in place for years. President Erdoğan’s has long believed that raising interest rates would increase inflation rather than reduce it.

Ozgur Demirdoven, executive vice president, Global Commerce at Allinial Global

The pandemic and Russia’s invasion of Ukraine caused inflation to soar worldwide. While almost every central bank raised interest rates in response, Turkiye went on an interest rate cutting spree. Keeping rates artificially low contributed to the rise in domestic inflation, and it has now become an urgent problem.

“As things stand, there are three areas of risk for Turkiye,” said Ozgur Demirdoven, executive vice president, Global Commerce at Allinial Global. “The first risk is that inflation will not head down to 36% from 65% in December 2023. The Central Bank’s latest Inflation Report, forecasts that inflation will peak somewhere between 70-75 % in April. Therefore, the decline in annual inflation will only start to become evident from June. The second is that the budget deficit may get out of control. Thirdly, we still do not know the inflation targets for 2024-2026. There is a medium- term target of 5%. It is clear that this does not shed light on the forward shopping, lending, borrowing and wage agreements signed in long-term contracts to the extent that they shape inflation expectations.”

While the overall opinion amongst those who responded to this article was one of optimism over the measures the government is taking to slow inflation, Ersel Barlak, partner at Kreston ATA in Turkiye, expressed concern that Turkish citizens and businesses are getting too used to high inflation. People have adapted to their version of normal and he fears that irreversible harm is being done to the economy.

Mustafa Bulut, chief auditor at Ecovis Diplomat Denetim ve Yeminli Mali Müşavirlik  A.S

“In the short term, the business community is complaining about interest rates being so high, they cannot afford to borrow,” he said. “But it has also had a huge effect on income distribution, which has crept up on us. One per cent of the population owns 27% of the wealth in Turkiye, and the remaining 73% is not being evening distributed. This is having an adverse effect on our society, and all because of high inflation.”

The government has been praised for acting swiftly and decisively on inflation but Barlak said there is one area that the government fell down on, and that is in implementing the IAS 29 reporting standard.

IAS 29 applies to any entity whose functional currency is the currency of a hyperinflationary economy. In such an economy, money loses purchasing power at such a rate that comparing amounts from transactions and other events that have occurred at different times, even within the same accounting period, becomes misleading. According to Barlak, this inflation accounting should have been made mandatory two years ago, but the government did not act.

Hakan Şahin, audit partner at IŞIK Yeminli Mali Müşavirlik ve Bağımsız Denetim A.Ş, a BKR member firm

“The problem with implementing it this year was that there were no experts in inflation accounting left in the industry, they are all now partners,” said Barlak. “This caused a lot of panic amongst firms and a flurry of intensive training to get staff up to speed.”

The business environment is hard for local firms at the moment. While inflation rates erode their margins, they are also struggling with a customer perception that devalues what they offer.  According to Mustafa Bulut, chief auditor at Ecovis Diplomat Denetim ve Yeminli Mali Müşavirlik  A.S, tax amnesties, which have been continuous in recent years, have reduced the importance of accountants in the eyes of customers. “This translates to service price rather than service quality becoming a deciding factor when choosing an accountant,” he said. “This situation has negatively affected the sector due to the increase in unfair price competition. On the other hand, wage expectations and demands of accounting personnel have increased due to the high cost of living caused by the high inflation. This has made it difficult to employ highly competent personnel in the field of accounting.”

Although there is a very detailed fee tariff for the CPA profession, the applied fees in the market are not even close to each other, according to Hakan Şahin, audit partner at IŞIK Yeminli Mali Müşavirlik ve Bağımsız Denetim A.Ş, a BKR member firm. “Fees in the market are varied and are affordable for almost all companies. Where the approach to the profession has to change is that there has to be value placed on CPAs providing good services when companies make their decisions.”

Baycan Aksu, partner at MGI Bağımsız Denetim A.Ş

Inflation is also putting pressure on fees and recruitment.  Inflation is driving wages up so quickly that it has become almost impossible to find quality personnel at an affordable cost, according to Demirdoven.  “The chance of survival of small offices is becoming impossible day by day,” he said. “When companies are paying high wages, they cannot achieve the desired earnings. When they cannot get the increase they want from their customers, they have to take it from their margins.”

As firms around the world are finding, attracting and retaining skilled auditors is challenging. “The demand for qualified independent auditors has really increased in private and public companies,” said Baycan Aksu, partner at MGI Bağımsız Denetim A.Ş. “But recently we have started to notice that the younger generation of auditors are not very committed to their companies. Once they get experience and knowledge, they can easily leave the company for a small wage increase. As competition in independent auditing drives down fees, this makes the wages less attractive to new graduates.”

While clients might not value the services of their accountants as much as they should, business is increasing in certain areas. Tuğrul Özsüt, chairman of Nexia Turkiye, has seen growing demand for IFRS reporting services, support services in relation to inflation adjustment, and independent auditing and reporting during the IPO (Initial Public Offering) process. Fikret Turhan, managing partner, Platin Outsourcing, a PrimeGlobal member firm, has seen an increasing appetite for accounting and payroll outsourcing especially in professionally managed corporations in the Turkish market. “We expect a significant increase in service exports and opportunities and are investing in growing our Business Process Outsourcing (BPO) services,” he said.

Fikret Turhan, managing partner, Platin Outsourcing, a PrimeGlobal member firm

Turkiye has also had to contend with the after-effects of the earthquake disaster that struck in February 2023. The confirmed death toll was 53,537 people while 1.5 million people were left homeless. An estimated 14 million people were affected.  The economic aftershocks will be felt for some time as people fear returning to the region.

Özsüt pointed out that while the export volume in Turkiye increased by 0.6% in 2023 compared to the previous year, there was a contraction of approximately 13% in the earthquake region. “This means that the earthquake region suffered a loss of approximately 2.8 billion dollars in exports,” he said. “Due to the lack of labour force, infrastructure, and access to finance, it could be estimated that the pre-earthquake level of national income and exports will be reached again only by 2026.”

“Estimated damage was around USD 150 billion which is 9% of Turkish GDP,” said Turhan. “The recovery period continues in the disaster zone and both Turkish state and NGO’s are working in harmony for fast recovery. The governmental spending is creating a pressure on the Turkish budget and increasing the budget deficit, which will have repercussions such as increased tax rates.” 

İsmail Vefa AK, partner at Vizyon, an MGI worldwide member firm

The mood for the future is cautious – inflation, inflation, inflation, and the drag it has on the business community, is on everyone’s minds. İsmail Vefa AK, partner at Vizyon, an MGI worldwide member firm, is expecting economic activity to slow down in Turkiye alongside a tight monetary policy. “I anticipate inflation in Turkiye will start to decrease, leading to gradual interest rate cuts,” he said. “The cooling economy in 2024 will gradually get back on track in 2025.”

Bulut observed that the Ministry of Finance has stated that it will terminate some tax amnesties and exemptions as part of tight fiscal policies. These policies will certainly create decline in the volume of business and profits in 2024. Özsüt predicts that interest rates will take three to four years to cool to a reasonable level.

Cemalettin Turan, partner, BDO Turkiye

Cemalettin Turan, partner at BDO Turkiye, thinks there will be at least one more interest rate increase in the near future. “Monetary tightening is not enough,” he said, “I believe the government must also use fiscal policy tools against inflation without delay. If inflation can be controlled, funding opportunities can be found from abroad and Turkiye can again enter a growth trend starting from 2025.”

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