Turkish manufacturers squeezed by rising costs

During her 37 years as a carpenter, Ahmet has seen many ups and downs of the Turkish economy. But there has never been a challenge like the one he faces today, with soaring inflation and a weakening lira crushing his small business.

“The cost of inputs has increased so much that we cannot keep up,” said the carpenter, who manufactures kitchen cabinets, wardrobes and doors from his workshop in an industrial area in the Turkish capital Ankara. said.

“Just before the pandemic, cardboard – our main input material – was 94 lira [per panel]. Now it’s 380 lira,” said Ahmet, who claimed to be identified only by his first name.

The spike in consumer price inflation, which in October was at 20% annually, has dominated the discussions of opposition parties and the Turkish media because of its impact on struggling households. difficulty.

But for businesses, the acceleration is even worse. The country’s producer price index rose 46 percent year-on-year in October – the worst rate in President Recep Tayyip Erdogan’s 19-year rule, and a warning sign that consumer prices will increase more likely to go down.

However, the central bank, which is facing growing interference from Erdogan, is expected to cut key interest rates again on Thursday even if the lira – falls 28% against the currency. dollar since the beginning of the year – fell to a new record low. In recent days, it has been trading at over $10.

Erdogan is a notorious opponent of high interest rates and has repeatedly pushed the central bank to reduce borrowing costs to stimulate growth, despite warnings from economists that inflation risks spiraling out of control. control.

The graph shows the annual percentage change in producer prices in Turkey and selected countries

Selva Demiralp, an economics professor at Istanbul’s Koc University, said that as an importer of energy and intermediate goods, Turkey has faced global inflationary pressures due to oil prices and gas surge, international supply chain disruptions and a move towards normalizing life after the coronavirus lockdown.

“Unlike the rest of the world, our central bank doesn’t really help because higher input prices are multiplied by weaker exchange rates to achieve an even higher domestic price. ,” she said.

Some analysts have questioned the gap between producer and consumer prices, which have historically closely watched each other, amid accusations that Turkish authorities may be manipulating consumer price inflation data, a claim they deny.

The graph shows the annual percentage change in producer and consumer prices in Turkey

The disparity can at least partially be explained by businesses choosing to reduce some costs for fear of killing consumer demand.

“We can only reflect half the price increase [in the costs quoted to customers],” said Ahmet, the carpenter. “Sometimes we take a loss or just the price, just because of the cash flow. People come to ask for the price, but when they hear it, they won’t believe it.”

Mustafa Gorkem Elverici, chief executive officer of publicly-listed glass maker Sisecam, said big players also had to look for “attractive points” on pricing. “We have the market power to be able to reflect [rising input costs in] price – that’s our advantage. But if you reflect on them too strongly then eventually this starts to sabotage demand. ”

Exporters like Sisecam have at least been able to take advantage of strong demand in Europe, Turkey’s most important market.

According to Ece Mandaci, an analyst at consulting group Unlu & Co. based in Istanbul, larger firms “have the tools to navigate”, such as using hedging tools to insulate themselves against rising input costs and currency fluctuations, According to Ece Mandaci, an analyst at consulting group Unlu & Co. based in Istanbul. to pass most of the increased input costs on to their customers, she added, and save money through cost-cutting efforts since the pandemic broke out.

The boom in exports, which grew 60% year-on-year in the second quarter of 2021, is expected to push gross domestic product growth above 9% this year.

However, even Tusiad, a business association whose members account for 85% of the country’s foreign trade, excluding energy, has called on the government to prioritize tackling inflation over short-term growth.

Gizem Oztok Altinsac, the group’s chief economist, said inflation fears – and the accompanying financial instability – meant the central bank’s recent rate cuts did not translate to long-term loans. Cheaper term for businesses. She added that, with European manufacturing growth losing momentum and domestic demand showing signs of slowing, “there is now a big question mark about the sustainability of growth”.

Meanwhile, small businesses and traders say they have been suffocated.

“How is our business doing? I could barely stop myself from crying,” said Fatih, who runs a laundromat that caters to the hospitality industry. “It’s very, very difficult.”

“Every day, our input costs are increasing. One day it’s natural gas, the next day water, the next day electricity, detergent, gas. Bags for wrapping [clean laundry] was 12 lira at the beginning of the pandemic. Now they are 30 lira”.

Like many in the business world, Fatih is bracing for the government to announce a sharp increase in the minimum wage — currently set at a take-home pay of 2,800 TL ($270) a month — early next year. He doesn’t know how he can afford to keep paying his nine employees if, as many predicted, wages increase by 25 or even 30%.

“Small businesses are in real trouble,” he said. “We’re thinking hard about every penny we spend.”

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