US rate cuts to ease Turkey’s debt and benefit exports

Murat Kulu/PPO/Handout via Reuters

• US interest rate cuts to stimulate growth
• Positive impact on dollar-denominated debt
• Cuts could spark boom in export markets

For Turkey, long-anticipated US interest rate cuts could be more significant in terms of stimulating growth in its major export markets than easing the costs of servicing its spiralling foreign currency debt.

Turks have faced a deepening cost of living crisis as veteran president Recep Tayyip Erdoğan’s unorthodox economic policies exacerbated a collapse in the country’s currency and propelled inflation to dizzying highs.

Erdoğan was nonetheless re-elected last May and has since changed economic strategy, although his ruling AK Party lost March’s municipal elections in Ankara and Istanbul in votes that underscored growing popular dissatisfaction.

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Turkey’s public foreign currency debt was $140 billion in 2022, up from $100 billion a decade earlier, World Bank data shows.

Its broader public debt, which includes lira-denominated borrowings, will equate to 20 percent of GDP in 2024, according to S&P Global.

Interest payments as a proportion of government revenue will be 17 percent in 2024, up from 13 percent last year.

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As Turkey’s debts increase so too does the risk of lending to the country, which in turn lifts its borrowing costs.

“That’s why the interest rate burden is getting heavier every day,” says Arda Tunca, an independent Turkish economist.

This has also “deterred foreign investment in Turkey,” says Ryan Bohl, senior Middle East and North Africa analyst at the RANE Network.

“Gulf Arabs have become major partners for Turkey in a lot of its infrastructure,” says Bohl.

“Turkey relies significantly on trade with Russia where Russia has been forced to give discounts for energy and food, which has helped Ankara weather some of the effects of its rising debt burden.”

US rate cuts

Sustained US interest rate rises have lifted the Federal Reserve’s benchmark rate to a two-decade peak of around 5.3 percent from near-zero in February 2022. In March chairman Jerome Powell said the Fed aimed to make three rate cuts this year.

Such reductions will “have a positive impact on Turkey because there’s a substantial amount of dollar-denominated debt within the country, particularly in the private sector,” says Bohl.

“Could US interest rate cuts spark a boom in Turkey's primary export markets such as Europe? That would be considerably more significant for Turkey and would start to ease debt pressures on private sector institutions [and] … put Turkey into a much more favourable economic situation in the medium term.”

Reuters/Elizabeth Frantz/File Photo

US and European central bank rates have been closely correlated and Tunca also agreed that rate cuts will be beneficial to Turkey.

“But not as much as the government expects because cuts will also help other, better-run developing countries and Turkey will fall behind them,” he says. “If Turkey cannot find sufficient financing for its imports then economic growth will slow.”

Turkish exports

Europe received 56 percent of Turkish exports in 2022, Trading Economics estimates.

According to government data Turkey is the world’s 12^th largest automaker and is also a major producer of electronic goods, although it relies mostly on imports of raw materials to make these products.

Turkey’s real GDP will expand 2.4 percent in 2024, S&P Global forecasts, down from 4.5 percent last year and the smallest increase since pandemic-hit 2020.

“Turkey has almost a ‘whack-a-mole’ economic strategy where it tries to push down on whatever is putting pressure on the overall Turkish economy,” says Bohl. “This doesn’t solve the underlying problem but moves it onto something else.”

Following his re-election, Erdoğan eschewed his previous commitment to lowering interest rates to combat inflation – an approach contrary to conventional economic wisdom. Turkey’s one-week benchmark interest rate is now 50 percent, up from 8.5 percent less than a year ago.

This has done little to slow surging living costs, with annual inflation hitting a 17-month high of 69 percent in March, although the rate rises have helped steady the lira. Turkey’s currency has fallen 94 percent versus the dollar over the past decade but has declined a relatively modest 8 percent in 2024.