Turkey’s economy avoids contraction under Covid pressures due to government stimulus

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 report on public finances published by ICAEW in June 2020 painted a bleak picture of Turkey’s prospects, suggesting that the country’s economy would contract by 5% in 2020 as a result of shrinking exports, lower tourism revenues and sectoral shutdowns.

As it happens, by the time the report appeared the economy was already on the mend. After a contraction of 10.3% in the second quarter, it expanded by 6.3% in the third quarter and 5.9% in the final three months of the year, which ended with annual growth of 1.8%. Kemal Ozturer, partner at MSI Global Alliance member firm Promesa observes that this was driven by growth in a number of sectors, most notably financial and insurance services and information technology and communication services. “National market chains, e-commerce companies, pharmaceutical companies, food manufacturers and technology companies have benefited from the pandemic, reporting revenue and net income increases,” he says. “Tourism and construction companies have been particularly damaged - shrinkage in the tourism sector last year was about 70% and the government declared sectoral supports for virus-related incentives, such as low interest mortgages.”

On a sectoral basis, the agricultural sector grew by 4.8% and the heavy industry sector grew by 2% observes MGI Worldwide CPAAI member firm Vizyon partner, Veysel Ekmen, noting that the construction sector contracted by 3.5% and the service industry shrank by 4.3%. “We have had a promising period in terms of new investments,” he says. “Investments grew by 10.3% in the final quarter of 2020 and the increase in machinery and equipment expenditure was 21% last year.”

A survey on the impact of Covid-19 on enterprises conducted by the Business for Goals Platform in conjunction with the Turkish enterprise and business confederation, industry and business association Tüsiad, and the United Nations Development Programme found that more than one third (36%) of micro- and small companies had suspended their activities.

While the percentage of companies whose revenue fell by more than half exceeded 50%, this rate reached 71% in south eastern Anatolia. Only 3% of respondents stated that they were not impacted at all. According to the survey, the top three expectations of SMEs were postponement of payment of bills/taxes/social security contributions, tax discounts, and financial support.

“However, GDP at current prices stood at approximately $717.1 billion last year according to the Turkish statistical institute,” says Ozgur Demirdoven, CEO of Allinial Global member firm MED Group. “Turkey emerged as one of only a few countries globally to avoid a contraction due to the coronavirus pandemic, propelled by a burst of credit by the state banks and stimulus packages in the middle of the year.”

However, Kreston ATA partner, Sryfettin Erol, acknowledges that a low base also helped to avoid a full year recession since the economy grew by just 0.9% in 2019 as a result of a prolonged homemade financial crisis that lasted over much of 2018-2019 and hit consumer and capital spending particularly hard. “Looking ahead, the shift to monetary tightening should result in a rebalancing of the economy and slower quarter-on-quarter growth in 2021,” he adds. “A continued relatively tight monetary policy stance by the Central Bank of Turkey should slow the recovery somewhat but will be counterbalanced by ongoing fiscal stimulus, which should mitigate pressures on individuals and corporates.”

In response to the impact of the pandemic on business, the authorities introduced a set of regulatory changes in tax and social security, including direct income support. “In summary, there was a dividend distribution limitation of 25%, postponement of payments to the social security and tax authorities, discount on withholding and VAT rates, prohibition of termination of employee contracts, and restructuring of debts to government authorities,” explains Hakan Sahin, audit partner at BKR International member firm IŞIK.

Other measures included postponement of execution of legal proceedings due to delinquency or bankruptcies and increased availability of government-supported bank loans to small businesses, especially through state owned banks. “Measures taken to alleviate the burden on state coffers included increased tax and excise duties on some goods and services (most notably vehicles and communications services); increased import taxes on certain goods; increases in the amount and coverage for VAT withholding; and restructuring of public debts,” says Cagri Gurses, partner Kreston Sura. “The government also proposed the introduction of advance taxation of dividends.”

Murat Eristi, chairman of Abacus Worldwide member firm Arti Değer Uluslararası explains that payment of withholding tax, VAT and social security institution payments due in April, May and June were deferred for six months in the retail, iron and steel, automotive, logistics and transportation, cinema and theatre, accommodation, food and beverage, textile and event organisation sectors.

“Credit payments for firms facing cash flow disruptions due to coronavirus will be deferred for three months and additional support will be provided to these companies,” adds Eristi.

The customs union agreement with the European Union has been extended to agriculture, services, and public procurement in collaboration with EU partners. “Turkey’s prospects for 2021 are promising since significant growth is expected in technology, telecommunication, e-commerce, electronics, retail, oil, iron and steel, energy, tourism, transportation, logistics, and major appliance sectors,” adds Serhat Umut Aydın, partner at Ecovis member firm GM.

From a regulatory perspective, Ozan Arikan, audit director Nexia Turkey notes that the requirement for independent audit of the financial data of companies whose total amount of foreign currency cash loans and indexed loans is $15 million and above as of the last business day of the relevant accounting period has been abolished.

Özcan Aksu, partner at MGI Worldwide CPAAI member firm MGI Bağımsız Denetim observes that pursuant to the new regulation on corporate income tax in February 2021, companies whose utilised foreign liabilities exceed their equity - except for credit institution, financial institutions, financial leasing, factoring and financing companies - are unable to deduct 10% of the total of the expense and cost items related to the utilised foreign liabilities as an expense in determining tax base. “The depreciation of the lira increases the debt burden of the corporate sector,” adds Aksu. “The use of central bank reserves to defend the value of the lira has increased the vulnerability of the economy to foreign exchange shocks.”

Incentive periods granted with respect to technology development zones and R&D/design centres have been extended until the end of 2028 explains Emrah Cebecioğlu, partner PKF Istanbul. “The special communication tax rate of 7.5% applied on facility, transfer and communication services related to the transmission of radio and television broadcasts through satellite platforms and cable environments, internet services and electronic communication services other than these has been increased to 10%,” he says. “The withholding tax rate on payments made for construction and repair works extending to more than one calendar year has been increased from 3% to 5% and applies to payments made in cash or on account including advances as of 1 March 2021.”

Another significant regulatory development in the Turkish market over the last 12 months is the application of the digital services tax application general communique. This provided further clarification of the digital services that fall within the scope of digital services tax.

Elvan İnanlı, managing partner Crowe Turkey notes that the tax will be imposed on revenues generated from the following digital services that are performed in Turkey:

• All types of online advertising services
• The sale of audio, video or any digital content in the digital environment; or any services performed in the digital environment that enable such content to be listened, watched, played in the digital environment; recorded or used in the electronical devices
• The provision and management services of the digital environments that allow users to interact with each other (including services that are performed to mediate or facilitate the sales of goods or services among the users)
• The intermediary services performed in the digital environment in relation to the services

With the gradual reopening of businesses, governmental authorities published sector specific guidelines setting out the minimum requirements and general principles to be adopted in workplaces. “As Turkey enters the ‘normalisation phase’, different working models such as home working are expected to be sustained,” explains Kaan Sertcan, managing partner at PrimeGlobal member firm Universal & Partners. “In the new normal, employers must ensure they comply with their occupational health and safety obligations and the requirements set out in their workplace guidelines. Occupational health and safety inspectors are likely to conduct inspections during this phase and fine those employers in breach of the required measures.”

Umut Denetçi from Morison KSi member firm Lisans observes that his firm’s revenue remained stable last year and says the outlook for 2021 is positive. “In addition to the development of vaccines, our clients believe that the end of lockdown and increasing demand for goods and services will positively affect their production and earnings.”

Cemalettin Turan, managing partner & international liaison partner at BDO Turkey refers to expectations of growth in manufacturing industry, including chemicals, metals, textiles, and automotive. “Turkey is increasingly using the logistical advantage of being close to a large market such as Europe,” he says. “The positive effects of this were seen in 2020 and are expected to continue during 2021.”

According to Arikan, there are more than 100 companies preparing for IPO with a number waiting for the approval of the Capital Market Board of Turkey. “Since there is a great interest from domestic investors in the companies that have initiated the IPO process, independent audit services have become one of the important components and we predict a material acceleration effect on the independent audit sector.”