Currency crisis in Turkey increases cost of living and threatens financial system

ISTANBUL — Turkey monetary crisis increases the cost of food, medicine and other essentials for average Turks, and poses a threat to the country’s banks and large corporations if the reading slide is not stopped, according to economists.

The sharp drop in the lira, which has lost more than a third of its value against the dollar in eight months, is shaking a Turkish company that has long boasted of being a bottom-up economy rivaling its European neighbors. Ordinary people are now grappling with a deterioration in their living conditions, with rampant inflation putting pressure on wages and cutting back on savings.

“My life has completely changed,” said Kemal Ince, an Istanbul trader from Rize, the conservative Black Sea stronghold of President Recep Tayyip Erdogan. Mr Ince says he is ashamed of having to raise the prices of coffee, olives and cheese, and that even though he charges his customers more, he still feels in a rush.

“I don’t have the luxury of spending money on anything,” he said.

The spike in inflation and the depreciation of the pound were triggered by the interest rate cuts demanded by Mr Erdogan as part of the an unconventional economic strategy that it supports will encourage growth. Typically, central banks raise interest rates when inflation is high to cool demand. However, Turkey’s central bank cut interest rates for the third time in as many months on Thursday despite inflation hitting nearly 20% in October.

Turkey’s current crisis is the worst the country has seen since 2018, when the pound also fell sharply amid a crisis in relations with the United States. to extend loan maturities and facilitate debt restructuring.

Major Turkish banks and companies, many of which are responsible for large foreign currency loans, now face risks of long-term instability if Mr Erdogan continues to cut interest rates, economists and researchers have said. businessmen here.

“This kind of imbalance could end in a run on the banks,” said Omer Gencal, a former executive with several Turkish and international banks and now head of an opposition party. “The current situation is not tenable.

Turkish banks are facing the problem that companies carry a large debt in foreign currency. The lower the lira, the more difficult it is for borrowers to repay their loans in US dollars or euros.

According to Turkey’s central bank, non-financial corporations held around $ 160 billion in foreign currency assets and $ 280 billion in liabilities as of August. The gap has narrowed since 2018, but it is still wide. According to Fitch Ratings, bank loans in foreign currencies represented between 24% and 45% of their total loans in the first half of the year.

As banks have controlled their NPLs, including during the pandemic, Fitch warned in a report last month that “risks remain high given exposure to the volatile Turkish operating environment, segments and sectors to risk, large currency loans and the high value of the lira. interest rate environment.

Turkish President Recep Tayyip Erdogan.


Photo:

Burhan Ozbilici / Associated press

Jason Tuvey, senior emerging markets economist at Capital Economics, however, said the biggest threat to Turkish banks was their ability to refinance their external debt if investors were increasingly scared.

The banks’ short-term external debt stood at $ 84 billion, or nearly 10% of the country’s gross domestic product. Mr Tuvey said April next year will be a key month for banks as some of that debt will be due. Mr Tuvey said that in 2018, banks were able to withdraw their foreign currency holdings held at the central bank to meet external debt repayments.

“The upshot is that banks might get by for a short period of time like in 2018, but they might struggle to cope if access to international capital markets were restricted for a considerable period of time,” Mr. Tuvey.

Large Turkish companies may be able to weather the crisis for now thanks to the foreign exchange reserves which he says could be even larger than official figures show, and the ability to pass costs on to companies. consumers and government aid, including loans, according to Hakan Kara. , former chief economist at the central bank.

“The corporate sector is more resilient than it looks on paper,” Kara said.

The crisis has hit ordinary Turks the hardest, many of whom are exchanging their income for foreign currency or looking for ways to leave the country.

“I no longer trust the Turkish lira because we can no longer see what lies ahead in this country,” said a woman in her sixties who walked into an exchange office in Istanbul to change 50,000 pounds into dollars. The woman, who owns a pharmacy, demanded that her name not be disclosed for fear of retaliation from the government.

The government this week imposed a new rule requiring customers to present ID cards whenever they exchange more than $ 100 of currency.

Mr Erdogan does not seem likely to change course, despite the political risks of soaring inflation. It has stepped up its calls for low interest rates, and the central bank this week used language suggesting it would cut rates in December.

It favors low interest rates as part of a strategy to create economic growth. Mr Erdogan ruled Turkey for nearly two decades as prime minister and president, winning the election in part by significantly developing the country’s economy.

Today, Mr Erdogan’s tenure in power risks coming to an end as the fall of the pound erodes the standard of living of millions of Turks, pushing away potential voters.

“Erdogan runs everything. It does not allow the finance minister, the governor of the central bank, or anyone else to do their job, ”said the owner of a bureau de change in Istanbul.

Write to Jared Malsin at [email protected] and Patricia Kowsmann at [email protected]

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