Turkey forces companies to exchange foreign currency

MWith new restrictions for companies seeking credit, Turkey wants to stop the depreciation of the national currency, the lira. Since a new requirement issued by the state banking supervisory authority BDDK on Friday evening, banks are only allowed to grant companies a lira loan if they have largely used up their foreign exchange cushion. The specified maximum limit of foreign exchange reserves is usually 15 million lira in foreign currencies, which is about 900,000 dollars.

Andreas Mihm

Business correspondent for Austria, Central and Eastern Europe and Turkey based in Vienna.

The foreign exchange market anticipated the now expected foreign exchange sales. On Monday afternoon, after some ups and downs, the lira was almost 5 percent higher than on Friday evening, but 16.51 instead of 17.30 lira still had to be spent for one dollar. The euro cost 17.44 lira instead of 18.30 on the Friday before the intervention. Turkey is once again interfering in the foreign currency management of companies. They have long been forced to keep 40 percent of their foreign currency balances in lira accounts.

Bad for the location

The tightening did not go down well in the economy. Thilo Pahl, Managing Director of the Turkish Chamber of Commerce, told the FAZ: “This new measure only stabilizes the value of the Turkish lira in the short term.” Some companies would now exchange foreign currency for lira in order to obtain loans for ongoing projects. “In the medium term, however, this measure will unsettle potential investors and will influence business decisions.” The volatility of the Turkish lira will remain a key risk factor for German companies based in Turkey.

In a recently published survey, German companies in the country described these as the greatest dangers alongside energy costs, inflation and the general economic and political conditions. German investors play an important role on the Bosphorus: If the EU is by far the country’s largest trading partner, then within the EU it is Germany.

Without lasting effect

A year before the presidential election, the economic situation is extremely tense. Officially measured inflation was 73.5 percent in May, and consumer confidence is falling fast as food prices officially doubled. The lira, which lost 44 percent in value last year, had already plummeted another 25 percent this year. This is considered dangerous, because with the falling lira exchange rate, the bill for energy and raw materials to be paid in dollars, as well as interest payments, continue to rise and imports thus further accelerate currency devaluation.

Analysts did not approve of the move to have a lasting effect on stabilizing the lira. The actual stress factor is the “far too loose monetary policy with interest rates that are too low,” judged Sandra Striffler from DZ-Bank. In fact, despite hyperinflation, the central bank is pursuing a policy of low key interest rates of 14 percent at the request of President Recep Tayyip Erdogan – this results in a negative real interest rate of 59 percent. Commerzbank also does not consider this policy to be expedient, but expects “further interventions of this kind” that could lead to erratic price swings.