The Turkish lira oscillates with a new lending prohibition that will impact thousands of businesses. After the country’s banking authority declared a prohibition on lira loans to enterprises holding what is considered too much foreign currency, Turkey’s currency, the lira, experienced a much-appreciated boost on Monday and the prior Friday.
The lira had gained around 8% in only two days by the time trade opened on Monday in Istanbul; it was trading at 16.01 to the dollar, up from Thursday’s closing of 17.35. However, by late Monday afternoon, it had partially reversed those gains, dropping slightly to 16.5 Turkish Liras for every dollar after oscillating between 16 and 17 liras.
The actions show that investors have mixed feelings about the new loan ban, which states that for corporations in Turkey to obtain commercial lira loans, they must sell a sufficient amount of their foreign exchange to purchase lira. This helps support the struggling currency, which has lost about half its value in the past year.
According to the new regulation, companies holding more than 10% of their assets or annual revenues in foreign currency, or the equivalent of 15 million Turkish lira ($910,000 as of 3 p.m. in Istanbul), are prohibited from borrowing lira. Smaller companies are given an exception that permits them to borrow in Turkish lira as long as their FX position is net short.
The new regulation aims to support the Turkish lira, which has been significantly devalued over the last several years due to Turkey’s central bank refusing to hike interest rates to lower inflation at President Recep Tayyip Erdogan’s request. Inflation has already reached a startling 73 percent for the 84 million-person nation, drastically damaging the buying power of Turks.
The decision by Turkey “may have an impact on hundreds of enterprises,” Saxobank analysts warned on Monday. If these enterprises wish to continue receiving loans in the Lira, they may be forced to sell their foreign currency assets to make it happen.
According to a report from Deutsche Bank, the restriction will have a “severe” effect, although the lira may only see short-term gains as major corporations cut down on their foreign exchange holdings. Observing the development, some experts are unimpressed.
‘Poor policy. Desperate Regardless of how you look at it, short-termism and capital restrictions exist, according to Timothy Ash, an emerging markets analyst at Bluebay Asset Management.
When everyone agrees that Turkey needs straightforward interest rate rises, it overcomplicates matters for businesses and banks.
The restriction won’t affect Turkish firms’ need for foreign currency, he said, and any increase in the value of the lira is probably not sustainable.
Since Turkey already has limited foreign currency reserves, this presents a new danger to market liquidity, according to Ercan Erguzel, an economist at Barclays.
STOCKS AT RISK
With over two-thirds of the index’s components falling, the benchmark Borsa Istanbul 100 Index lost as high as 2.8 percent before cutting losses to 0.3 percent. According to Pinar Uguroglu Delice, deputy director of research at TEB Yatirim Menkul Degerler AS in Istanbul, 58 of the more than 400 listed businesses have foreign-currency deposits on their balance sheets that exceed the new legal criteria.
According to TEB, these companies might raise as much as $5.6 billion via market sales to maintain access to Turkish lira loans. She said in a report that these businesses also have the choice of investing money in Turkish foreign exchange and bonds, buying inventory by delaying imports, or moving to “protected lira deposit accounts.” Due to their significant surplus foreign currency liquidity, Enka Insaat, Turkcell, Ulker, Ford Otosan, and Kardemir are among the most susceptible to the legislation.