Turkish car market goes into reverse as reforms start to bite

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Nezih Allıoğlu is deploying a strategy to sell cars at his Peugeot showroom in Ankara that would have been extraordinary only a few months ago: big discounts.

Allıoğlu, chair of Göral Otomotiv, said his dealership off a motorway in the Turkish capital was doling out discounts of 10 to 15 per cent on new cars — the biggest incentives his group has offered in five years and the first price cuts since 2020.  

The second-hand car market has taken an even bigger hit, with used vehicle marketplace Otomerkezi.net seeing prices cut by up to 20 per cent in the three months to the end of November.

This slowdown in Turkey’s car industry is one of the clearest signs of how an economic overhaul after President Recep Tayyip Erdoğan’s re-election in May is cooling the $900bn economy. Car sales had surged in recent years as scorching inflation and low interest rates sent Turks rushing to find assets that would hold their value.

“Before [the election] you were waiting in line for three months [to purchase a new car],” said Allıoğlu. “Now you get your car in a week or 10 days.”

A top executive at a major Turkish car distributor, who asked not to be named, added: “The last two years were extraordinarily good, now it is returning to normal.”

Turks have in recent years turned to purchasing cars, home appliances and gold as stores of value because inflation, which peaked at over 85 per cent in 2022 and remains above 60 per cent, and a falling lira have seriously eroded the value of their savings.

Erdoğan’s insistence on holding interest rates at ultra-low levels turbocharged the idea of cars as investments because interest rates on bank deposits were far below the rate of inflation. By the same token, borrowing costs for car loans were very low when compared with inflation.

The rush among local savers to buy cars as investments, combined with the lingering effects of supply-chain disruptions related to the pandemic, led to a big imbalance between the roaring demand for vehicles and the limited supply available, said industry executives.

Retail car sales jumped to 841,000 in the first 11 months of 2023, compared with 593,000 over the whole of 2022, according to Turkey’s Automotive Distributors’ and Mobility Association, a trade body. Sales for 2023 were the highest in at least a decade.

Prices for vehicles in Turkey have surged 214 per cent in the past two years as Turks clamoured to buy cars, data from the country’s statistical agency showed. The rate of price increases was particularly vigorous around the May election when Erdogan’s government launched a wave of stimulus measures to prop up the economy before voting day. In July alone, prices rose 16 per cent from the previous month.

“When there was 80 per cent inflation and 25 per cent deposit interest, everyone wanted to buy goods. That’s why they came to us to buy three to five cars and keep them in their garage,” said Allıoğlu.

Turkey’s new economic management team, which was appointed in June, has launched a sweeping overhaul in policy to cool consumer demand for goods such as cars and tame inflation.

The central bank, led by former Goldman Sachs banker Hafize Gaye Erkan, has raised the benchmark interest rate from 8.5 per cent in June to 42.5 per cent, as Erdoğan has at least temporarily abandoned his long-held objection to high borrowing costs.

Other policy changes were also made, including a tripling of taxes on petrol and curbs designed to slow the rate of growth in car loans.

Interest rates on consumer vehicle loans have shot up from 25 per cent before May’s election to 37 per cent, central bank data showed. Although that is still below the current inflation rate, growth in vehicle loans, which had reached an inflation-adjusted annual rate of nearly 300 per cent in February, has cooled to just 61 per cent, according to Turkey’s banking regulator.

At the same time, the returns Turks can earn simply by leaving their liras in the bank has more than tripled from April’s level to reach 38 per cent, significantly reducing the appeal of purchasing cars and other goods as investments.

Erkan noted in a recent interview with Turkish newspaper Hurriyet that as a result of the new economic policies, “we see a decline in [markets for] products such as automobiles, white goods and furniture, which are most affected by monetary policy”.

The car executive said: “When [consumers] think inflation is going lower, then demand [for cars] goes lower.” He added that with higher deposit rates “it makes more sense to leave money in the bank rather than buying things like cars”.

Additional reporting by Funja Güler in Ankara