Tight Monetary Policy Curbs Turkish Business Formation
New company registrations in Turkey have dropped by 13% as tight monetary policy impacts the business climate. The country's policy rate, currently at 37%, is yielding positive real rates against an inflation rate of approximately 25%. This economic pressure is a direct result of policies aimed at curbing inflation.
- The current tight monetary policy is a significant shift from President Erdoğan's previous unorthodox view that high interest rates cause inflation. This policy reversal began after the May 2023 elections with the appointment of Mehmet Şimşek as Finance Minister and Hafize Gaye Erkan as the central bank governor, who aggressively raised interest rates to restore economic stability. Erkan resigned in February 2024 and was replaced by her deputy, Fatih Karahan, who is expected to maintain the orthodox policy direction. - Despite the high-interest-rate environment, the Turkish startup ecosystem saw a record-breaking year in 2024, with investment volume soaring by 423% to $2.6 billion from $497 million in 2023. The number of investment deals also increased from 297 to 331 in the same period. - A significant portion of the 2024 investment surge was driven by acquisitions and late-stage funding rounds, which accounted for 87% of the total volume. Notable deals include the acquisition of over 65% of e-commerce giant Hepsiburada by Kazakhstan-based Kaspi.kz for $1.1 billion and a $500 million investment in SaaS startup Insider. - While overall investment is up, seed-stage investments dominated in terms of the number of deals, with 280 transactions in 2024. Fintech was the leading vertical in deal count, followed by biotech and artificial intelligence. The government's TÜBİTAK BiGG Fund has been a key player in pre-seed investments, particularly in biotech, healthtech, and AI. - The Turkish government is actively fostering the startup ecosystem through various initiatives. These include the "Start in Türkiye" program to support scaling, the "Türkiye Tech Visa" to attract foreign talent, and the ambitious "Terminal Istanbul" project to create a global hub for technology and entrepreneurship. - There is a growing focus on deeptech in Turkey, with venture capital firms like Diffusion Capital Partners specifically targeting companies with a competitive edge derived from technological superiority. The government is also fostering international partnerships, such as the collaboration between ITU ARI Teknokent and InnovationQuarter to help Turkish deeptech scale-ups enter the Dutch and European markets. - The artificial intelligence sector in Turkey is rapidly expanding, with approximately 1,200 AI startups, 70% of which were founded after 2020. While most Turkish AI startups are enterprise-focused and at an early stage, there is a push to transition from being a consumer of AI technology to a producer of globally competitive solutions. - Projections for the Turkish economy anticipate a moderation in GDP growth in the short term due to the tight monetary policy, with forecasts around 3.1% to 3.5% for 2025. Inflation is expected to gradually decline, with forecasts around 25% to 29% by the end of 2025.
