LONDON (Reuters) – The Turkish lira’s move towards the 8-to-the dollar mark will compound its 25% slide this year, amplifying existing pressures on companies and the broader economy.
Below are three charts illustrating the pressure points for Turkey, where the currency is enduring its eighth straight year of losses, having lost more than 80% of its value in the past decade.
1/ PRIVATE SECTOR FX DEBT
Turkey’s external public debt burden is deemed manageable but its companies and financial institutions face hefty repayments of nearly $10 billion in the next two months.
“Further lira depreciation would distort corporate balance sheets more and thus would have negative impact on investment prospects,” said Ugras Ulku, head of emerging Europe research at the Institute of International Finance (IIF).
More currency weakness would constrain companies’ ability to increase investment at a time when stronger capital spending is crucial in order to improve productivity, employment, competitiveness and exports, Ulku added.
Graphic: Turkey private sector external loan repayments – https://fingfx.thomsonreuters.com/gfx/mkt/ygdvzkgrjpw/Turkey%20private%20sector%20external%20loan%20repayments.PNG
Price pressures are a sore point for Turkey, which has a history of hyperinflation – overcoming it just 17 years ago. Below-inflation interest rates have failed to check price growth while offering little incentive to foreign capital, further weakening the currency in a country with a persistent current account deficit.
Data on Monday is expected to show inflation rose further in September.
“We expect the depreciation of the lira to be the main driver of the increase in inflation,” Goldman Sachs’ Kevin Daly told clients. In fact, last month’s figures likely underestimated the pace of core inflation, given tax cuts in various sectors, he added.
Graphic: Turkey CPI and interest rates – https://fingfx.thomsonreuters.com/gfx/mkt/jbyprmajwve/Turkey%20CPI%20and%20interest%20rates.PNG
3/ NOT-SO-CHEAP OIL
International oil prices have dropped around 40% since the start of the year, providing some relief to importing nations. Yet lira weakness means Turkey has reaped just around half that benefit. Any further lira weakness would wipe out more of that gain.
Turkey’s import-to-GDP ratio stood at nearly 30% at the end of 2019, according to World Bank data, with fuel imports making up around 8% of those.
Graphic: Crude oil prices in select EM currencies – https://fingfx.thomsonreuters.com/gfx/mkt/bdwpkknnapm/Crude%20oil%20prices%20in%20select%20EM%20currencies.PNG
(Reporting by Karin Strohecker; Editing by Alex Richardson)