By Frances Coppola
The Turkish lira has been falling against most major international currencies since 2013. But since the attempted coup d’état in July 2016, the rate of decline has sharply increased. In only the first three weeks of 2017, the Turkish lira’s exchange rate versus the dollar fell by at least 8 percent while exhibiting high volatility.2
In the early 2000s, Turkey’s economy grew at an average rate of nearly 7 percent per annum.3 Turkey experienced a “sudden stop” 4 after the 2008 financial crisis, losing about 9 percent of GDP in 2009, but growth resumed quickly and continued at around 3.5 percent per annum.5 During this period, global supply chain managers saw an increasing role for Turkish companies; for example, international automobile manufacturers invested the equivalent of US$12 billion in Turkish operations.6
Such foreign direct investment was the principle driver of Turkey’s growth. In turn, it fuelled domestic demand, much of it debt-driven. Turkey’s sophisticated banking system and financial openness made it easy for companies and households to obtain finance, while low interest rates encouraged borrowing.7 So, overseas retailers set up shops in Turkish malls, while domestic companies borrowed to finance both domestic and international expansion, often in dollars and euros.8 Their subsequent increasing role in global supply chains is why supply chain managers must focus on risk management in Turkey today. Meanwhile, much of the borrowing went into real estate, both residential and commercial: property owners then charged rents in hard currency, or in lira at a fixed exchange rate to the dollar.9
This has increased the FX exposure of Turkish businesses and households, and hence their fragility, which results in increasing uncertainty for international supply chain risk managers. When the currency exchange rate falls, foreign currency becomes more expensive to obtain, making it harder to service foreign-currency-denominated debt and expenses. Turkey’s external debt now stands at approaching 60 percent of GDP, which the International Monetary Fund (IMF) says makes the country’s financial position vulnerable.10 Over 41 percent of this is corporate borrowing, mostly in foreign currency, much of which is short-term — and the sharply falling exchange rate means that refinancing it will be increasingly expensive in lira terms.11 Some Turkish businesses are already cutting back expansion plans in light of the increasing cost of refinancing debt. Potentially, others could find their solvency threatened.12
For international businesses, debt distress in business partners within Turkey may create supply chain management risk for importers – though exporters may face risks of their own.
For importers, the falling lira exchange rate should improve their income due to translation effects (the impact of exchange rate fluctuations on companies that do business in multiple currencies). However, supply chain management is seldom simple: if Turkish suppliers to international businesses experience debt distress due to the falling lira, or are unable to accommodate the rising cost of imports and wages, they may have to raise export prices, eliminating the exchange rate benefit. At the extreme, they could go out of business, forcing international businesses to find alternative suppliers.
At the same time, exporters to Turkey could face payment defaults on B2B and retail sales if they invoice in dollars or euros. However, invoicing in lira exposes them to major FX risk. Businesses can use FX hedging techniques to protect themselves against adverse currency exchange rate movements, though these can be expensive for a highly volatile currency such as the Turkish lira. Alternatively, businesses could opt for pre-payment in hard currencies.
Whether Turkey’s falling exchange rate results in higher export prices, or defaults and business failures that cause rising supply chain management risk for international businesses, depends in part on the central bank’s actions. So far, the central bank has resisted raising interest rates to support the lira, 13 possibly because the Turkish president is known to be in favour of keeping interest rates low to encourage business development.14 The fact that the central bank is keeping interest rates low helps to protect highly indebted businesses. But, according to the Financial Times, the country does not have sufficient FX reserves to counter a sustained run on the lira.15 If the lira’s currency exchange rate continues to fall, the result could be an FX crisis leading to severe supply chain disruption.16
As economic, political and security uncertainties rise in Turkey, investors are selling the currency, causing high exchange rate volatility, imperilling the economy and risking high inflation. International businesses can protect themselves from FX risk, but face bigger issues if their Turkish suppliers go out of business. So the trading environment for supply chain managers at international businesses working with Turkey is highly uncertain, and supply chain management risk is rising. Businesses may wish to protect themselves, for example, by diversifying their suppliers, changing their credit terms, or using FX hedging techniques.
With 17 years’ experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
1. “Trade in Goods with Turkey”,” U.S. Census Bureau ;https://www.census.gov/foreign-trade/balance/c4890.html
2. "Turkey's lira eases as investors pause before critical central bank meeting", Reuters; http://uk.reuters.com/article/turkey-lira-idUKL5N1FD1WH
3. Turkey annual GDP growth percent since 2001, World Bank (graphic);http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2015&locations=TR&start=2001
4. An abrupt reduction in net capital flows into an economy. “Sudden Stop,” Investopedia; http://www.investopedia.com/terms/s/sudden-stop.asp
5. Turkey annual GDP growth percent since 2001,World Bank (graphic); http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2015&locations=TR&start=2001
6. Automotive, Invest in Turkey; http://www.invest.gov.tr/en-us/sectors/Pages/Automotive.aspx
7. "The lira’s fall and Turkey’s rise", Geopolitical Futures; https://geopoliticalfutures.com/the-liras-fall-and-turkeys-rise/
8. "Crumbling lira pressures retailers as economy slows",Spanish News Today ; http://spanishnewstoday.com/crumbling-lira-pressures-turkish-retailers-as-economy-slows_84704-a.html
9. The lira’s fall and Turkey’s rise, Geopolitical Futures; https://geopoliticalfutures.com/the-liras-fall-and-turkeys-rise/
10. "Turkey: Selected Issues, March 2016, "IMF; https://www.imf.org/external/pubs/ft/scr/2016/cr16105.pdf
11. External debt stock of private sector in Turkey, Central Bank of the Republic of Turkey;https://ekonomi.isbank.com.tr/UserFiles/pdf/ra_03_2016.pdf
12. "Crumbling lira pressures retailers as economy slows", Spanish News Today; http://spanishnewstoday.com/crumbling-lira-pressures-turkish-retailers-as-economy-slows_84704-a.html
13. "Decision of the Monetary Policy Committee January 24 2017",Central Bank of the Republic of Turkey; http://www.tcmb.gov.tr/wps/wcm/connect/tcmb+en/tcmb+en/main+menu/announcements/press+releases/2017/ano2017-04
14. Turkish lira slides as Turkish central bank loses credibility, Pound Sterling Live; https://www.poundsterlinglive.com/gbp-live-today/6085-turkish-lira-may-rise-if-central-bank-raise-rates-at-jan-24-meeting
15. "Turkey’s self-inflicted crisis of confidence",Financial Times; https://www.ft.com/content/17536a3c-d743-11e6-944b-e7eb37a6aa8e
16. "Turkey: the crisis candidate",Financial Times; https://www.ft.com/content/eb841274-d406-11e6-b06b-680c49b4b4c0