Turkish lira leaflets after new loan ban set to affect thousands of businesses

A money changer holds Turkish lira and US dollar notes at a currency exchange office in Ankara, Turkey, December 16, 2021.

Kagla Gordogan | Reuters

Turkey’s currency, the lira, enjoyed a huge welcome the previous Monday and Friday after the country’s banking regulator announced a ban on lira loans to companies holding what it considers a lot of foreign currency.

By Monday morning in Istanbul, the lira had gained nearly 8% in two days, trading at 16.01 per dollar, up from Thursday’s close of 17.35.

But by late Monday afternoon, it pared some of those gains, dropping slightly to 16.5 against the dollar, after falling in the range of 16 to 17 lira to the dollar.

These moves reflect conflicting sentiments from investors about the new loan ban, which states that if businesses in Turkey want to obtain loans in commercial lira, they must sell enough foreign currency to buy the lira instead, which helps prop up the embattled currency that has been lost. Half its value last year.

The new rule states that companies holding the equivalent of 15 million lira in foreign currency (about $910,000 as of 3 p.m. in Istanbul) cannot borrow lira if their foreign currency funds exceed 10% of their annual assets or sales. An exception is allowed for small businesses that cannot borrow in foreign currencies for those who can still borrow lira as long as their foreign exchange position is net.

The new rule aims to support the lira, which has weakened significantly over the past few years as Turkey’s central bank, at the request of President Recep Tayyip Erdogan, has largely refused to raise interest rates to curb rising inflation. Now for the country of 84 million people, inflation has reached a staggering 73%, severely crippling the purchasing power of Turks.

A man sells slippers in Eminonu on May 5, 2022 in Istanbul, Turkey. The country has enjoyed rapid growth for years, but President Erdogan has for years refused to purposefully raise prices to cool the resulting inflation. The result has been a lower Turkish lira and much less spending power for the average Turkish citizen.

Burak Kara | Getty Images News | Getty Images

Analysts at Saxobank wrote on Monday that Turkey’s move “is likely to affect thousands of companies”. “These companies may be required to give up their foreign currency holdings if they want to continue to get credit in Turkish lira.”

Deutsche Bank wrote in a note that the impact of the rule will be “severe”, but the benefits to the lira may be short-lived after large companies reduce their foreign exchange holdings.

Some analysts watching the change are not impressed.

“Bad policy. Really desperate. Short term and actual capital controls, whichever way you look at it,” Timothy Ash, emerging markets strategist at Bluebay Asset Management, wrote in an email.

“It complicates matters further for companies and banks when what everyone knows Turkey needs is a clear and simple increase in interest rates.”

He added that any increase in the lira would likely not be sustainable, and that the rule would 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-term by driving trade and business in the dark and potentially out of the system,” he said.

This poses a new liquidity risk in the market because Turkey’s foreign exchange reserves are already running out, says Erkan Erguzel, an economist at Barclays.

“We may see more pressure on the already tight FX liquidity at the system level,” he wrote in a note, adding that “in addition, some companies may consider delaying investments until they have a better picture in terms of FX and lira (lira) liquidity.” .”

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