Turkey’s Economy Faces Rising Risks Amid War Uncertainty, Says Prof. Hayri Kozanoğlu

Global conflict is pushing growth forecasts lower and inflation expectations higher, increasing pressure on Türkiye’s already fragile economy. Despite a partial easing in market tensions following ceasefire signals, structural vulnerabilities—including a widening current account deficit, high borrowing costs, and rising indebtedness—remain largely intact.

Global Outlook Deteriorates as War Uncertainty Deepens

The economic fallout from the ongoing conflict is increasingly visible in global forecasts. The International Monetary Fund (IMF), which had revised its 2026 global growth estimate upward to 3.3% earlier this year, is now moving in the opposite direction—lowering expectations to 3.1%.

At the same time, global inflation is projected to rise from 4.1% to 4.4%.

The IMF has also shifted its analytical framework. Instead of relying on a single “baseline scenario,” it is now using a “reference scenario,” reflecting heightened uncertainty. This approach assumes a relatively short-lived conflict and a normalization in oil prices, while also outlining downside scenarios involving prolonged disruptions and damage to energy infrastructure in the Gulf.

Eurozone Weakness Adds to Türkiye’s Fragility

Türkiye’s vulnerability is compounded by weakness in the eurozone—its largest trading partner.

IMF projections for the region have turned more pessimistic:

• Eurozone growth is expected to slow to 1.2%
• Germany, Türkiye’s top export destination, is forecast to grow just 0.7%
• Italy, another key market, is expected to contract by 0.2%

This external environment suggests weakening export demand and deteriorating trade balances for Türkiye.

IMF Sees Limited Improvement for Türkiye

The IMF’s projections for Türkiye point to a challenging outlook:

• Growth: 3.4%
• Inflation: 28.6%
• Current account deficit: 2.8% of GDP
• Unemployment: 8.3%

However, these estimates may be overly conservative, as they do not fully account for downside risks stemming from energy prices and geopolitical tensions.

Ceasefire Brings Limited Relief to Markets

Although market sentiment improved slightly following signs of de-escalation, financial indicators remain elevated.

• The two-year benchmark bond yield, which rose from 36.2% before the conflict to 40.4%, is still hovering around 39.4%
• Foreign investors returned modestly, with $430 million in equities and $1.3 billion in bonds purchased in early April
• However, cumulative outflows since late February remain significant

Türkiye’s central bank reserves have shown partial recovery:

• Gross reserves: $170.9 billion
• Net reserves: $55.6 billion

After selling approximately $50 billion in reserves during the peak of the crisis, the central bank has resumed limited purchases. Exchange rates have remained broadly stable, suggesting active management to prevent both excessive depreciation and appreciation.

Currency Policy Benefits Corporates but Raises Risks

The current policy mix appears to favor large corporations with access to foreign currency borrowing.

With exchange rates rising more slowly than inflation, firms are incentivized to borrow in foreign currency and convert into lira, rather than take high-cost domestic loans.

As a result, the corporate sector’s net foreign currency position has deteriorated sharply:

• December 2023: -$70 billion
• January 2026: -$197.6 billion

This creates significant vulnerability. A sudden exchange rate shock could trigger balance sheet stress, potentially spilling over into the banking sector.

Current Account Signals Mounting Pressure

Underlying external balances are deteriorating rapidly.

• February 2026 current account deficit: $7.5 billion
• First two months: $14.5 billion
• 12-month cumulative: $35.5 billion

Notably, these figures predate the full impact of higher oil prices.

If energy imports rise by an additional $20 billion—as suggested by current price trends—the annual deficit could exceed $50 billion.

Tourism revenues, another key source of foreign exchange, are also expected to soften.

Trade Deficit Worsens as Imports Surge

Recent trade data confirms the negative trend:

• March exports fell 6.4% to $21.9 billion
• Imports rose 8.4% to $33.2 billion
• Monthly trade deficit reached $11.3 billion

The first-quarter deficit totaled $28.7 billion, pointing to a potential annual gap of $110–120 billion.

A relatively strong lira continues to weigh on exports while стимулиating imports, further exacerbated by rising energy costs.

Households Face Mounting Debt Burden

Unlike financial markets, households have seen little relief.

• Consumer loan rates remain around 61%
• Credit card debt has exceeded TRY 3 trillion for the first time
• Annual growth in consumer borrowing is above 50%, outpacing inflation

As of February 2026:

• Individuals unable to service personal loans: 1.73 million
• Credit card defaulters: 1.83 million
• Total affected individuals: 2.7 million

Including families, this suggests more than 10 million people are experiencing acute financial distress.

Economic Strain Fuels Social Risks

The growing financial pressure on households is also contributing to broader social tensions. Analysts warn that economic hardship may be a factor behind rising incidents of violence and social instability.

Conclusion: Structural Vulnerabilities Persist

Even if geopolitical tensions ease, Türkiye’s economic vulnerabilities—ranging from external imbalances to high debt levels—are unlikely to dissipate quickly. The current trajectory suggests that stabilization will require not only improved external conditions but also significant policy adjustments.

Who is Prof. Hayri Kozanoğlu?

Prof. Hayri Kozanoğlu is a Turkish economist and academic known for his critical analysis of economic policy and global capitalism. He has held teaching positions at several universities, including Istanbul Aydın University, and is a frequent contributor to independent media outlets. Kozanoğlu is widely recognized for his commentary on income distribution, financialization, and the structural challenges facing the Turkish economy.

From Kozanoglu  article in BirGün Gazette

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