Turkey Treasury & FX Update

Chair's commentary

In a recent call, one treasurer remarked that they were happy with a country “because it was boring”. “Boring” is a term which is seldom used to describe Turkey: situated geographically at the point where Asia meets Europe, it sits astride many different traditions and tendencies. It has many characteristics of a modern industrialised economy, while at the same time being an emerging market.

The economy is going through a difficult period: the Turkish lira (TRY) has depreciated from 7.4 to the USD in January 2021 to approaching 14 today. Interest rates are politically very sensitive. But with inflation close to 50% annually, the current rate of 14% leaves a substantial negative real rate – and the business environment is very difficult. The key tourism sector has been badly hurt by COVID.

Most treasurers on the call are managing the situation by invoicing in EUR or USD. They are relaxing corporate rules to allow local subsidiaries to hold foreign currencies – usually, EUR or USD – and hedge locally. However, they are all concerned that this will have a negative impact on business – though the consensus is that activity is holding up well for the time being. One is managing cash via a cross-border pooling arrangement, though most participants have been told by their banks that it is either not possible, or too risky.

The country does not have formal exchange controls, so it is relatively easy to convert TRY collected in country to USD or EUR. Many hold these currencies locally to avoid the (considerable) expense of hedging. Restrictions on remitting dividends have been in place for the past couple of years, making cash repatriation more challenging.

Bottom line: the concern is mostly about where the country is heading. Salary inflation has not kicked in yet, but this can only be a matter of time. Raising prices in TRY seems to be effective in protecting margins – but business has to suffer in the end. For many, Turkey is an important market, and the feeling is it will rebound – especially as the lower TRY will make exports more competitive. Others are more pessimistic, and don’t see anything positive on the horizon. One can even see their company withdrawing.

Watch this space…..