Turkey Country Risk Report & Analysis

Türkiye's economic trajectory is currently dominated by persistent inflationary pressures and a complex monetary policy landscape. The Central Bank of Türkiye (CBRT) has embarked on a cautious path of monetary easing since late 2024, with the real interest rate slightly positive at 3-3.5%. This policy shift aims to navigate the fragile disinflation process, yet significant risks remain. Average consumer price inflation is projected at around 34% on average in 2025, potentially closing the year at around 25%. Achieving the central bank's target inflation band of 21-26% is contingent on external factors, such as global energy prices and the repercussions of US trade policies, which could derail these efforts.

In the short term, Türkiye's GDP growth is expected to moderate to +2.5% in 2025, a slight decline from 2024 and below the 2010s average of +5.9%. This reflects the constraints imposed by tight fiscal policies and fluctuating international demand for Turkish exports. The automotive industry, a key contributor to Türkiye's economy, experienced a slowdown in 2024, with motor vehicle production declining by 7.5% year-on-year to 1.4mn units. Despite these challenges, the sector's export value reached USD36.8bn, underscoring its resilience and global standing.

Inflationary pressures are exacerbated by sticky pricing and backward-looking tax revaluations, which complicate the CBRT's efforts to maintain economic stability. The central bank's cautious approach, involving a gradual reduction in interest rates, aims to balance the need for economic growth with inflation control. However, the potential for premature rate cuts poses a significant risk, potentially undermining the disinflation process and investor confidence.

Fiscal policy will play a crucial role in supporting the central bank's objectives. The budget deficit is expected to narrow to 3.5% of GDP, aligning with efforts to curb demand-side inflation pressures. However, this fiscal tightening may disproportionately impact low-income households, who continue to face economic hardships despite a notable 30% increase in the minimum wage. The government's stabilization efforts, while necessary, may encounter social resistance, complicating the path to economic recovery.

In summary, Türkiye's economic outlook is characterized by a delicate balance between inflation control, growth stimulation and sustainable corporate margins. External risks, including volatile energy prices and geopolitical tensions, pose significant challenges to achieving these objectives. The resilience of key sectors, such as the automotive industry, provides a glimmer of hope, but sustained efforts are required to navigate the complex economic landscape and ensure long-term stability.

The political stability afforded by President Recep Tayyip Erdogan's administration, supported by a parliamentary majority, provides a semblance of continuity. However, the unpredictability of policy decisions, historical interference on monetary policy and geopolitical tensions introduces significant risks to the business climate and economic outlook.

The potential for early elections in 2025, driven by the AKP-MHP coalition's strategic calculations, adds a layer of political uncertainty. While the coalition seeks to leverage geopolitical gains in Syria to bolster domestic support, the approach to courting Kurdish voters remains fraught with risks.
Internationally, Türkiye's foreign policy often conflicts with NATO and EU interests, creating friction with key allies. Despite these tensions, pragmatic and transactional relationships are likely to persist, driven by mutual economic and security interests. The fall of Syria's Assad regime presents both opportunities and challenges, with the potential to facilitate the return of Syrian refugees and alter regional dynamics. Although no significant impacts from US trade policy on the country are expected, the relationship with President Donald Trump will remain as tense as in the past.