What’s Going On with the Lira?

When Turkey sneezes, then the Turkish Republic of Northern Cyprus (TRNC) catches a cold. Nowhere is this more true than in the TRNC’s currency, the Turkish lira.

The Turkish Army bled to liberate the Turkish Cypriots in 1974. Turkish soldiers’ graves lie on TRNC soil. Since that legal intervention to protect Turkish Cypriots over four decades ago, Ankara has maintained a garrison in the North to deter any foolish Greek adventures. From this benevolent occupation many other things have flowed: Turkish taxpayers pay for the TRNC; Turkish money provides jobs and infrastructure; and, above all, the TRNC uses the Turkish lira as currency.

But of late something has gone badly wrong. In the past few months the Turkish lira has plummeted in value on the international money markets. The impact on the TRNC is cataclysmic.

So what has gone wrong? The simple answer is that Turkey, having emerged from the global financial crisis of 2008-09, borrowed heavily in foreign currencies to fund its government’s programmes. With interest rates at an all-time low this made sense. Cheap foreign money could boost growth.

This plan worked well initially. The Turkish economy has grown by 300 per cent since the early 2000s, riding an unprecedented wave of construction and consumption. Foreign investment poured in. Huge projects – such as the USD $11bn (GBP £8.6bn) Istanbul–Izmir motorway, a high-speed Ankara-Istanbul rail link and plans to build the world’s largest airport – have soaked up foreign loans. The economy grew by a whopping 11 per cent in 2011.

However massive borrowing at low interest rates cannot last for ever; it has to be repaid. Now the chickens have come home to roost. To make matters worse, many of Turkey’s big construction companies have borrowed too much the past decade and are finding it difficult to repay them. This makes the economy very vulnerable.

Also, the geopolitical game has changed. US interest rates have got tighter and the dollar is strengthening. Any country that has borrowed heavily from abroad to fill its budget deficit is suddenly under pressure. Now Turkey has to repay its debts in foreign currency and there’s the rub: it can’t afford to.

Turkey has a deficit in its international trade: it imports more than it exports, which means that it spends more than it earns. This deficit has to be financed, either by foreign investment or by more borrowing from the world’s money markets. There’s nothing unusual about that: Britain’s Treasury does just that, year in year out.

Turkey’s position is not like the UK, however. With a growing deficit of national income, or GDP, in 2017, investors are becoming increasingly wary of lending more money to Turkey, for three reasons.

  • Ankara has a lot of debt due for repayment in the near future – loans that have to be repaid or more money borrowed from someone else to pay them off. To the financial markets, the debt has to be ‘refinanced’. However, borrowing from Peter to pay Paul has never been good economics, either personally or nationally. Credit rating agencies like Fitch estimate that Turkey’s total debt is a whopping USD $223 billion – about a quarter of Turkey’s GDP – USD $50 billion of which falls due in 2019, USD $20 billion by December 2018. Where will Turkey find that money?
  • Since many big Turkish companies have borrowed in foreign currency, nervous investors suspect that the companies may have over-reached themselves. These loans become more expensive to repay if the value of the national currency declines – which it has. The result is that a number of major Turkish corporations, among them Doğuş Holding and Yıldız Holding, are already in trouble and need to restructure their loans. Türk Telekom has actually been taken over by its creditors after Oger Telekom defaulted on a USD $4.75 billion debt.
  • Investors are increasingly reluctant to put their money into Turkey. They are actually selling off their holdings of Turkish lira, forcing the value down. The nervous markets are causing a self-perpetuating fire sale of lira. Like lemmings going over a cliff, bankers everywhere are trying to dump their lira holdings as fast as possible at knockdown rates.

In other words, Turkey’s reliance on the foreign investment to keep itself afloat is drying up. For many years, this did not matter as interest rates in developed economies were at record lows, so borrowing from abroad remained cheap. Now those days are gone.

Exchange rate (TL-GBP): 2008-present

This growing currency weakness also aggravates Turkey’s persistent inflation problem, because as the lira grows weaker imports become more expensive. Just like the TRNC, Turkey relies on imports for much of its goods.

At the same time, markets are alarmed by the refusal to raise interest rates, which is the normal economic weapon to tempt timid investors back into lending their dosh. The recent US sanctions on Turkey have compounded this whole problem. ‘With a backdrop of rising rates and a stronger dollar, the imposition of US sanctions were the final ingredient for a perfect storm for the economy and Turkish assets,’ explains Nafek Zouk at Oxford Economics.

The impact of all this high finance has hit ordinary Turks and Turkish Cypriots hard. Tourist Janet Cowley, a foster carer and former police officer, said: ‘I’ve been paying for things in pounds sterling, just so the people here have some money. It’s terrible for them. Good for the tourists, though.’

Business owners are similarly concerned. In the TRNC many of the goods in the shops and supermarkets are imports bought in foreign currencies. The businesses that have taken out loans in dollars or in euros are suffering the most. One shopkeeper explains: ‘We have to pay for our stock in dollars, euros or pounds and then sell them for lira. We now need more lira – a lot more lira – just to pay our bills.’

The effect on inflation is obvious to anyone living in the TRNC. All energy has to be imported and oil is priced in dollars. Retail prices have shot up by at least 20 per cent on imported goods. Profiteering has become rampant and blatant, with some stores relabelling prices overnight on goods that have been on their shelves for weeks and were paid for months ago. Sadly we should never underestimate the Levantine temptation to grab a quick buck and let the customer rot.

The other great worry for the TRNC is that many high-value goods, such as houses or cars, are priced in pounds sterling. This means the buyer or a shopkeeper renting a shop and taking in lira as income has to find a lot more lira suddenly – as much as 40 per cent more in some cases. In turn, that means that a lot of shopkeepers will be unable to find enough lira to pay their increased bills. This leads to bankruptcies or worse: evictions. Pakistani Gastarbeiter (migrant workers) paying GBP £250 for a one room shared flat, suddenly find that TL Turkish lira symbol 8x10px.png1,800 a month won’t keep a roof over their heads, let alone a chicken on the plate. The social consequences, and dangers, of the collapse of the lira on ordinary working people throughout the TRNC will be profound – and worrying.

So what is the answer this financial crisis? The first step would normally be to put up interest rates or capital controls. Ankara has insisted it will not do that. Instead Turkey is buying time with a US $15bn loan from embattled Qatar, desperate for an ally in the Arab world. This is a fleabite, however, and the money won’t last long. In the background are Ankara’s new best friends, Moscow and Beijing. If China’s rack record is anything to go by, look out for the PRC bankrolling Turkey by buying up everything in sight, from Istanbul Harbour to factories and even an airport or two. Ankara is now looking to the East for salvation.

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