Sharp Decline in Turkey's Terms of Trade: Economic and Legal Implications for Investors in 2026

Introduction: Understanding the Deterioration of Terms of Trade in 2026

The concept of "Terms of Trade" is a vital indicator of a country's economic health, measuring the ratio of its export prices to its import prices. If export prices rise faster than import prices, the terms of trade improve, and vice versa. In 2026, the Turkish economy is witnessing a notable deterioration in this indicator, with initial data showing an 8% year-on-year decline at the end of 2025, continuing into the first quarter of 2026. This deterioration reflects a combination of global and local factors, including persistent global energy price volatility, supply chain disruptions, ongoing inflationary pressures, and shifts in global demand for Turkish goods. For investors and businesspeople operating in or interested in Turkey, understanding this dynamic is crucial for formulating informed strategies.

Turkey, by virtue of its geographical location and growing industrial economy, is a major importer of energy and raw materials, while its exports largely consist of industrial and agricultural products. This structure makes it particularly vulnerable to fluctuations in the terms of trade. A sharp decline means that Turkey has to pay more for its essential imports relative to what it earns from its exports, placing significant pressure on the balance of payments, exchange rate, and inflation rates. As legal and economic consultants at Barut Group, we believe this development necessitates careful analysis and strategic planning to address its challenges and capitalize on emerging opportunities.

Macroeconomic Impacts on Turkey

The economic impacts of the deteriorating terms of trade are multifaceted, ranging from direct to indirect, affecting all sectors of the Turkish economy:

* Worsening Current Account Deficit: As import costs rise and the relative value of exports declines, the current account deficit widens, increasing the need for external financing and putting additional pressure on the Turkish Lira. Projections indicate that the current account deficit could exceed 60 billion USD in 2026 if these trends persist.

* Inflationary Pressures: Imported inflation is an inevitable consequence of rising import prices, especially in the energy and raw materials sectors. Despite the Turkish Central Bank's efforts to curb inflation, the targeted 25% inflation rate is expected to be surpassed, reaching 40-45% in 2026, affecting purchasing power and living costs.

* Turkish Lira Depreciation: With an increasing current account deficit and inflationary pressures, the Turkish Lira is under continuous pressure to depreciate. The USD/TRY exchange rate could reach 38-42 Lira by the end of 2026, further increasing import costs in Lira terms and discouraging non-export-oriented foreign direct investment.

* Slowing Economic Growth: Rising input costs and the erosion of export competitiveness lead to a slowdown in the pace of economic growth. GDP growth estimates for 2026 may decline to 2-3%, compared to more optimistic forecasts in previous years.

* Increased Production and Operating Costs: Turkish companies face a significant increase in production costs due to more expensive imported raw materials. For example, the cost of importing a ton of raw plastic rose from 1,200 USD in 2024 to approximately 1,800 USD in 2026, squeezing profit margins and necessitating a re-evaluation of business models.

Expected Legal and Legislative Ramifications

In response to economic challenges, the Turkish government is expected to adopt a series of legal and legislative measures that will directly impact the business and investment environment:

* Foreign Trade Policies and Incentives: New incentive packages are likely to be launched to support exports and reduce import dependency. These incentives may include additional tax exemptions for companies achieving export growth exceeding 15%, encompassing a 5 percentage point reduction in corporate tax. The scope of existing export support programs managed by the Turkish Ministry of Trade may also be expanded.

* Support for Domestic Industries and Import Substitution: The government will seek to encourage local production of critical inputs. This could involve subsidized loan programs with low-interest rates (e.g., 15% annually in a high-inflation environment) for projects investing in the local manufacturing of components and raw materials currently imported in large quantities.

* Review of Customs Laws and Duties: Customs duties on certain goods may be reviewed to increase revenues or protect strategic local industries. Conversely, duties on the import of some intermediate raw materials may be eased to enhance export competitiveness.

* Facilitating Foreign Direct Investment in Strategic Sectors: Turkey will intensify its efforts to attract Foreign Direct Investment (FDI) into sectors that enhance value added, increase export capacity, or contribute to industrial localization. Focus will be on sectors such as renewable energy, advanced manufacturing, specialized chemicals, and pharmaceutical products, with customized investment incentives offered to these sectors.

* Foreign Exchange Control Measures: Despite Turkey's commitment to a free-market system, some precautionary measures related to foreign exchange may emerge, such as tightening transfer rules or increasing disclosure requirements, to ensure market stability and reduce speculation.

Practical Advice for Investors and Businesspeople in Turkey for 2026

To navigate this business environment, investors and businesspeople should adopt proactive strategies:

1. Re-evaluate and Diversify Supply Chains: Companies should seek local alternatives for imported raw materials or diversify import sources to mitigate risks associated with geographical and political price volatility. Investing in local partnerships can reduce transportation costs and exposure to exchange rate fluctuations. For instance, shifting to a local supplier for 20% of imported raw materials could yield a 5-7% reduction in overall costs.

2. Invest in Energy and Resource Efficiency: With rising energy prices, investing in energy efficiency and renewable energy solutions becomes more viable than ever. Investments worth 500,000 Turkish Lira in solar energy systems for industrial companies could save up to 150,000 Lira annually on electricity bills, with a relatively short payback period.

3. Focus on High Value-Added Exports: Turkish companies should concentrate on producing and exporting high value-added goods and services that are less sensitive to primary commodity price fluctuations and face stronger global demand. This requires investment in research and development and innovation.

4. Hedge Against Exchange Rate Volatility: Companies should utilize financial hedging instruments, such as currency forward contracts, to mitigate risks associated with exchange rate fluctuations between the Turkish Lira and major foreign currencies (e.g., USD and EUR). Expert advice in this area is crucial.

5. Leverage Government Incentives: Investors should keep track of new and existing government incentive programs, whether for export support, R&D investment, or industrial localization. For example, KOSGEB's new export support program provides up to 300,000 Turkish Lira for SMEs targeting new markets.

6. Localization and Local Production: Explore opportunities to produce inputs locally instead of importing them. This not only reduces exposure to global price volatility but may also qualify companies for additional government support.

Future Outlook and Barut Group's Role

The challenge related to terms of trade is expected to persist in the short to medium term, driven by global geopolitical and economic pressures. However, the Turkish economy possesses resilience and adaptability, and the government and private sector are likely to take strategic steps to address these challenges. In the long run, focusing on high value-added production, market diversification, and efficiency enhancement will contribute to building a more sustainable and competitive Turkish economy.

At Barut Group, we understand the complexities of Turkey's economic and legal landscape. As legal, financial, and tax expert consultants, we provide our clients with tailored solutions to navigate this environment. Whether it's understanding the latest changes in trade and customs laws, leveraging new investment incentives, or restructuring supply chains, our team is ready to provide strategic advice and practical support. We believe that proactive planning and expert consultation are key to success in 2026 and beyond, and we are here to be your trusted partner in Turkey.