Desperate steps – Erdogan’s economic decisions drive investors to escape
Continuing Erdogan’s incomprehensible economic policies, the Turkish government has revealed its decision to ban new loans to companies that have surplus foreign exchange funds in order to support the lira, which has weakened significantly over the past few years.
There are fears that such a decision would spread fear among investors, and that some of them might be forced to flee the Turkish market in order not to face more strange decisions to save the economy, which may backfire after a few months.
Muddled decisions
The American network CNBC, confirmed that the Turkish currency saw a slight rise after this decision, but it fell again. These moves reflect conflicting feelings on the part of investors regarding the new loan ban, which states that if companies in Turkey want to obtain commercial Lira loans, they should sell enough foreign currency to buy the Lira instead; The new rule stipulates that companies with the equivalent of 15 million pounds in foreign currency (about $910,000 as of 3 p.m. in Istanbul) cannot borrow the lira if their foreign currency money exceeds 10% of their assets or annual sales. An exception is allowed for small companies that cannot borrow in foreign currency for those who still borrow the lira as long as their position in foreign currency is short-term. The network reported that the new rule aims to support the lira, which has weakened considerably over the past few years, as the Turkish Central Bank, at the request of President Recep Tayyip Erdogan, refused to raise interest rates to curb the rise in inflation. Now, for a country with 84 million people, the inflation rate has reached an unprecedented 37%; Turkey’s purchasing power has been severely crippled, analysts at Saxo Bank said, adding that Turkey’s move “is likely to affect thousands of companies, and these companies may be required to relinquish their foreign currency holdings if they want to continue to receive credit in Turkish lira.” Deutsche Bank noted that the rule will have a “severe” impact, but that the benefits to the lira may be short-term as large companies reduce their foreign currency holdings.
Erdogan ‘desperate’
Commenting on Erdogan’s decision, Timothy Ashe, Emerging Markets Strategist at Bluebay Asset Management, said: The Turkish president is really desperate. He complicates matters further for businesses and banks when what everyone knows Turkey needs is a clear and simple increase in interest rates. He made it clear that any increase in the lira is likely to be unsustainable and that al-Qaeda will not change Turkish companies’ demand for foreign currency. It may provide a short-term boost to the lira but it doesn’t change the basic story, arguably making it worse in the long run by pushing trade, clandestine business and investors fleeing the Turkish market.
Barclays economist Ercan Ergozel says this poses a new risk to market liquidity because Turkey’s foreign reserves are already disappearing. “We may see more pressure on the already tight foreign currency liquidity at the system level,” he said. “In addition, some companies may consider delaying investments so they have a better image in terms of foreign currency liquidity and the lira.”
