Turkey’s latest crisis squeezes business

On 10 August, the Turkish lira took its biggest one-day hit since the country’s 2001 financial crisis, plunging up to 18% against the dollar and reaching a record low, following months of accelerating losses. The drop was followed by a roller-coaster few weeks of volatility as the authorities grappled with the crisis.

The central bank, the government, and the Banking Regulation and Supervision Agency deployed a range of tools, including regulatory easing and tax changes on lira and US dollar accounts, before the central bank sharply but belatedly raised interest rates by 625 basis points on 13 September.

At the time of writing, September looked to be the first month of lira appreciation in 2018, thanks in part to the rate increase and a newly announced government plan intended to stabilise the economy. While the currency is widely expected to trend downward in the coming months, there is hope that the worst may be over.

As a result of the currency crisis, however, many companies in Turkey are now firefighting, and the crisis is expected to lead to a rethinking of corporate strategies.

“The sharp depreciation of the Turkish lira has changed the risk perception of the [multinational corporation] senior management at C-suite and board of directors level,” says Murat Kasimoğlu, a consultant and professor at Istanbul Commerce University. “The new environment, with its vast negative repercussions on corporate balances and income structure, brought to the fore how vital early warning systems and strictly applied risk management practices are.”

The crisis has brought sharply back into focus one of the Turkish economy’s long-standing weaknesses: an overreliance on external financing. The lira’s plunge has thus put significant pressure on the balance sheets of the many Turkish companies with foreign currency debt (mostly dollar and euro) but which earn most of their revenue in lira.

“The impact of the depreciation of the lira was destructive for companies which have an unhealthy financial structure,” says Müren Güler, managing director of Global Energy, a Turkey-based international project development and advisory company. “We are starting to see many well-known companies at the pre-bankruptcy stage, which may initiate a domino effect across the economy.”

Sectors particularly affected include construction, which faces a squeeze from high foreign currency indebtedness, income largely in lira, low levels of working capital, and sagging demand. Businesses in modern retail have been under pressure both from paying rents in foreign currency (as most malls were built with foreign currency loans) and the rising cost of imports.

“Financial managers have started to respond with severe cost-cutting measures,” says Nusret Cömert, chairman of the board of directors of Damnus Energy & Investment Inc.

“They are cutting marketing and promotions expenses, staff costs, and administrative costs. This will have an impact on companies’ growth,” he says. “Companies will need to revisit their business models, try to rely on less imports in their goods and services mix, refrain from fx [foreign exchange]-denominated leverage, and increase their efficiency.”

As Güler notes, the process of unwinding from foreign exchange exposure had already started before the August lira crash.

Leading Turkish companies have been negotiating billions of US dollar debt with local banks since early in the year, while small and medium-sized enterprises have been helped by low-interest government credit and reduced social security contributions. A better match between local currency earning and borrowing would stand companies in stronger stead for the future, while the fundamental appeal of the market reasserts itself.

Companies are also adjusting quickly, according to Kasimoğlu.

“Although at first the recent market developments have caused some disruption to business plans, companies will adapt to the new conditions and form new networks, business collaborations to enhance their market segmentation and product differentiation, and implement industrial digital transformation to improve export capabilities,” he says.

Whatever happens with the lira, Turkish companies are now operating in a different arena. As economist and consultant Emre Deliveli points out, some foreign investors, such as retail chains, have been scaling back their branch networks in response to rising costs and lower demand while ensuring that their brands remain active on the market to prepare for a future upswing.

“Turkey is a large middle-income country of more than 80 million people; there’s still purchasing power there,” Deliveli says. “Companies like Starbucks aren’t going to exit Turkey just because of this. Once the political situation clears up a bit, the currency stabilises, and the economy stabilises, Turkish assets will look like a huge bargain.”

— Andrew MacDowall is a freelance writer based in France. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.