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Turkish devaluation to fuel growth

27 August 2014

The devaluation of the lira has not yet produced a major benefit to the economy but the effect appears only to have been delayed by a few months, finds Nicholas Clayton

Read more: devaluation lira M&A FDI

Across the renewable space, she added, foreign investors thinking of entering would need to be comfortable with the risks attached to being a pioneer in the sector.

But beyond the lowered barriers to entry for tenders and privatisations, the depreciation of the lira over the past year may also make private sector acquisitions more feasible. In addition to favourable exchange rates bringing down asking prices, many Turkish companies may be more amenable to buyout offers now that they have seen their debt ratios climb after years of borrowing in foreign currencies.

Most active Turkish companies have some form of foreign currency denominated debt on the books.

However, it is unclear just how much dollar and euro-denominated debt is outstanding. Emre Deliveli, an economics correspondent for Hurriyet Daily News, says that in 2012, Turkish companies had easy access to dollar financing at 4%, while lira debt was often nominally around three times as expensive at 11% or above. When the lira hit its nadir in January, those companies were suddenly looking at debt burdens that were at least 20% higher than previously.

Dependent lira
But the Istanbul-based banker says Turkish banks have remained liquid and domestic financing continues to be relatively easy to obtain. Therefore, he says he sees no obvious cheap deals in the market, provided the lira remains stable.

The lira’s stability, however, is difficult to bank on. "The lira is totally dependent on the global environment," Deliveli says, noting that if current conditions persist, "we will not see the same pre-crisis liquidity in Turkey again for another 10 years".

Throughout the summer, the central bank has made modest cuts to interest rates, dropping the one-week repo rate from 8.75% to 8.25% on July 17. Meanwhile, inflation hovers just above 9%. In a statement at the time of the cut, the bank said the adverse exchange rate issues were "gradually tapering off" and pointed to rising food prices as the main factor delaying the decline in inflation.

The bank added that it expected the current account deficit to continue to improve. But developments in the region could still pose problems. The worsening conflict in Iraq in particular is already putting a dent in the recovery of Turkish exports. Iraq is Turkey’s second-largest export market, worth $12bn annually, and the Turkish Exporters’ Assembly announced on July 15 that exports to the country had already declined 30% over the year.

Deliveli says the central bank will continue to make small stabilising adjustments, but the full end to QE expected in October will still make a mark

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