Banking

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.....

Commentary

Saudi Arabia occupies a pivotal, and highly unusual, place in global politics and the world economy. As the world’s largest exporter of oil, and the holder of the second largest reserves of oil and gas, it is an essential part of the global economy – and has traditionally been relatively aligned with western and capitalistic countries. At the same time, it is a profoundly religious absolute monarchy, which practices a particularly conservative brand of Islam. This has always placed limits on its co-operation with western countries – limits which are being tested even more than usual in the current environment.

The current situation is particularly complex, as was clear in the call. Saudi Arabia has always imposed severe restrictions on foreign companies and banks, requiring local partners, and imposing local signatories and approvers for most, if not all, transactions. Limitations on where foreigners could live, and what they could do, have meant that many expatriate employees preferred to live with their families in Dubai, and commute to Saudi for the work week. However, the country has recently launched “Vision 2030”, which aims to open up the country and prepare it for a post oil future. This ranges from promoting tourism, allowing women to drive cars, and potentially allowing alcohol sales in specific places, to mega projects such as building a new city in the desert. It also includes pushing MNCs to transfer their regional headquarters to the kingdom. At the same time, foreign ownership is now allowed, either using a Saudi sponsor (with fees), or by paying 20% taxes. 

These developments are viewed positively by the participants – though several cautioned that there are many conflicting undercurrents in Saudi society, and the situation can always change at short notice. In all cases, Saudi Arabia is a large, and profitable, market, to which all our participants are fully committed, irrespective of the operational challenges.

Treasury practicalities:

• Nearly all participants sell into Saudi from an offshore location, usually in USD. The currency is pegged to the USD, and there are no exchange controls, so things generally work well.
• Several participants have opened local branches or subsidiaries, either to provide services or to act as sales offices, or technical offices to manage regulatory issues.
• To participate in the mega projects being run by the government, it is a requirement to transfer any regional headquarters operation to the kingdom. There is direct competition with other countries in the region for this, particularly the UAE.
• Saudi regulations state that the bank signatories and transactions mus