Corporate Treasury & FX in Turkey

Commentary

Turkey has been in some form of economic crisis for a long time. CXC discussions on it always highlight the many challenges: high inflation, funding issues, FX shortages etc. At the same time, there has always been an array of workarounds: the country typically avoids official regulatory measures. For example, there have never been official exchange controls – it was just that banks had very limited access to foreign currency, and had to prioritise their customers.

Last year, following the elections, Turkey adopted some very conventional – and painful – economic policies. The currency devalued by 35% between June and July 2023 – from 19 to the USD to 26. The benchmark interest rate was fixed at 50%. Prior to this, there had been a series of unconventional measures: official interest rates were low, but banks were required to buy bonds issued by the Turkish government for between 60% and 200% of the value of any loan they made, effectively killing the loan market. With the new measures, the situation seems to have stabilised: foreign currency is now freely available, the exchange rate continues to decline, but is more stable. It is now significantly less difficult to obtain local funding. Inflation has reduced: it was at about 85%: it is now closer to 30%.

Interestingly, three other countries which have been in very difficult positions have adopted similar austerity measures: Argentina, Egypt and Nigeria have all been through significant devaluations and greatly increased interest rates. This leads to short term economic contraction, but seems to be having positive results for the fundamentals.  

How has this affected business and the people? The consensus on the call was that the situation was difficult, but improving. Some participants were wondering whether they should change their business model to reduce the risk, but all feel it is a country and an economy which is too important to ignore.

Specifics:

• Cash management operations have been normalised. One participant has excess foreign currency, which they place in an offshore bank account in Abu Dhabi – this process has been in place for some time.
• Banks are once again willing to accept deposits and pay interest on them - at around 30% vs the lending rate of over 50%.
• Foreign exchange can be handled. It is expensive to hedge, and the documentation requirements are onerous – but even big FX orders can be satisfied, with only prior notification to the central bank.
• Given the level of inflation, most participants have designated Turkey as hyperinflationary from an accounting point of view. This has tended to reduce hedging requirements, as this means only the net asset position in TRY needs to be hedged – and many elect not to do so.
• Onshore transactions within Turkey must be settled in lira. Most participants handle the devaluation issue by invoicing in EUR or USD, and agreeing that the customer will settle the amount in lira using the rate of exchange on the day.
• This approach works well for B2C and companies selling through local distributors. But it does create a credit risk with distributors. Participants are aware of this, but think it can be managed. Cash continues to flow into the economy, especially through the international community.
• Managing working capital is a challenge: imports usually have to be settled at the time of importation, or undergo a substantial duty surcharge. Given the long customer payment times, this creates a funding need. Intercompany loans are possible, but it is not easy to obtain approval, and they create currency hedging issues. Some participants have increased equity to handle this issue, but that is usually a last resort.
• One potential solution for a lot of these issues is to manufacture locally. Some participants are actively considering this.
• One participant is considering closing the onshore entity and moving to an offshore model using a local distributor. Their situation is more complex than most: in most markets, they offer leasing to their customers via a captive financing company. In Turkey, they have to fund the deferred payment options out of the cash flow of their trading entity.
• Finally, there was a discussion about banking operations: one participant finds that things tend to be more manual than in other countries, even when dealing with the local branch of a global relationship bank. Others find the automated systems work. The main outcome was that Turkish regulations require an email confirmation for deposits: any fully automated system will have to give a return which is 5% lower.

Bottom line: Turkey has moved from some highly unusual economic approaches to ones which are more conventional: devaluation, higher interest rates. This is causing problems for the population, but there is cautious optimism that the situation is improving, even if it will take time to be certain of a positive outcome.

In the meantime, it remains a difficult place to work: interest rates are high, cross border intercompany loans are difficult, hedging is expensive. Some people are taking a second look at their business model – but everyone seems to agree that it is a strategic country which cannot be ignored.