Lira’s Wild Ride Eclipses Rates as No. 1 Threat to Turkish Firms
(Bloomberg) -- Turkish producers say extreme volatility in the lira is hurting them more than high interest rates as President Recep Tayyip Erdogan wages a war against borrowing costs at the expense of price stability.
From machinery to packaging and construction, industry has for weeks been battered by unprecedented swings in the lira. The currency has shed just over a third of its value against the dollar since September amid Erdogan’s calls for the central bank to lower rates as he seeks to spur economic growth and shore up his waning popularity ahead of 2023 general elections.
The lira, the worst-performing emerging-markets currency in the world, clawed back some losses after Erdogan on Monday introduced emergency measures -- effectively an interest-rate hike in disguise -- in an effort to stem the volatility. But there’s been little let-up in the currency’s gyrations.
“The real problem is not high or low foreign-exchange rates but the uncertainty,” said Ahmet Resat Gorur, chief executive officer of Manas Enerji, which makes equipment for power and water utilities. “We can’t be sure of a profit until we actually collect the money even though we rely on future options for sales in liras.”
Erdogan has fanned a lot of that unpredictability. For years, he’s tried to coax the central bank to lower rates so businesses can take out cheaper loans, even at times when inflation is soaring. But time and again, the meddling backfired as prices accelerated and investors wanting central bank neutrality dumped Turkish assets.
Turkey Lira Volatility Eclipses Highs Seen in 2018
Most business executives say exchange-rate risks now outstrip rising borrowing costs as their top concern -- and that’s unlikely to change. The currency has gained 29% since Friday.
A key gauge of lira volatility has breached levels set back in 2018, when the currency was beset by a similar period of turmoil.
That’s not good news for EA Ege Ambalaj, an Izmir-based packaging firm that effectively lost 885,000 liras ($69,000) after purchasing 100 tons of the petrochemicals it uses to manufacture products, including plastic food wrap and duct tape, when the lira was weaker against the dollar.
“For me, a stable exchange-rate policy is way more important than lower rates because I only borrow in small amounts,” said owner Olcay Sevin, 42.
The central bank said this month it’s wrapping up its cycle of interest-rate cuts after stripping 500 basis points off the benchmark rate over four straight policy meetings. The bank’s key rate now stands at 14%, more than seven percentage points below consumer inflation.
But with Erdogan still urging further reductions in borrowing costs, foreign investors remain skeptical the bank will stick to its pledge.
Monday’s announcement was intended to mitigate retail investors’ demand for dollars and end the turmoil.
Semsettin Bozkurt, the 50-year-old owner of eastern Turkey-based insulation firm Bosas Group, says the steps don’t treat the currency’s fundamental crisis.
“The new measures are nothing more than addressing the wound,” Bozkurt said. “It’s almost impossible to do business amid this chaos. I can’t buy something at 18 liras per dollar and then sell it for 12,” he said. And the lira “might hit 25 per dollar by the time I collect my money.”
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