Turkey limits lira lending to companies with large foreign currency holdings

Ankara continues to work to halt the depreciation of the Turkish lira. In its line of not tightening monetary policy and not raising interest rates that could put limits on galloping inflation, the Central Bank of the Republic of Turkey (TCMB) has opted to focus its efforts on restrictions on commercial lending. 

Last Friday, the Banking Supervision and Regulation Agency (BRSA, or BDDK in Turkish) announced new limitations on commercial loans in Turkish lira in cash to companies with large foreign currency assets, such as dollars or euros. A measure that, according to the institution itself, is intended to "ensure the effective use of credit systems, prevent companies from buying foreign currency solely to preserve their exchange rate position, and reduce and stabilise fluctuations in exchange rates". 

Companies that would be affected by this decision would be those with foreign currency assets of more than 15 million Turkish lira (equivalent to around $900,000 in today's dollars), as well as those with more than 10% of their total assets - or annual net sales revenue - in foreign currencies (at equivalence). However, requests for loans through direct debit systems, or any other non-cash method, are considered outside the scope of these restrictions, as long as they are not converted into cash loans. 

A number of economists and analysts of the Turkish economic scene have argued that this move, one of the most important to date, is just another step in the "tightening of capital controls". This is how economist Güldem Atabay described it for the Analiz portal, pointing out that several companies will be "forced to sell foreign currency".  

In fact, according to Al-Arab, according to statements by Barclays economist Erkan Erguzel, foreign lenders "may be reluctant to fully refinance their debts and sell their foreign currency liquidity, (...), and may consider delaying investments until lira liquidity improves", reducing the country's foreign liquidity and damaging the economy in general.

"This new law may create new challenges for Turkish economic activity in the medium term, including a drop in companies' interest in investing in the country", said experts Fatih Kiliç and Christian Witowska of Deutsche Bank for Bloomberg. 

Despite the positive initial impact that caused the Ottoman currency to grow by 5.2%, the evolution of its devaluation over the last few days has proved economists and experts right: the Turkish lira has once again lost half of what it had grown and shares in Istanbul have fallen once again. 

Fifty-eight institutions, out of more than 400 listed on the Turkish capital's stock exchange, have a number of foreign currency deposits that would prevent them from accessing lira loans, said Pınar Uğuroğlu, vice president of research at TEB Yatırım Menkul Değerler Group. The group includes Turkcell, Ford Osan and Inca Insaat. 

The move is part of Ankara's efforts to stem the decline in its cash reserves, support the value of the lira and keep out of control inflation. Indeed, inflationary figures are over 73 % - their highest level since 1998 - while the lira's value has fallen by around 20 % against the US dollar since the beginning of the year.

Turkish President Recep Tayyip Erdogan assured last week at a press conference after a cabinet meeting that hyperinflation would fall to "acceptable levels" by March 2023, and took the opportunity to request a supplementary budget of some 900 billion liras for the Turkish government (about 53 billion dollars) because of "price fluctuations resulting from inflation", he said. This has been strongly opposed by the opposition. 

Against this backdrop, the mistrust of Turkish society and businesses in the country's economy continues to plummet. While experts warn that measures such as the restriction of commercial lending (aimed at tackling the need to raise interest rates) may have high long-term costs, economic indicators reflect the insecurities of the country's population. 

Official indices published by the Turkish Statistical Institute showed these declines. All recorded significant declines from the previous month, with the exception of the construction sector. Thus, Turkey's economic confidence index fell by 3.3% to 93.6%; the retail trade index by 2.3% to 118.7%; and the consumer confidence index, which has recorded the largest decline, fell by 6.2% to 63.4%. 

Looking at these data, figures below 100 percentage points reflect a negative perception of confidence in the economic situation, and figures above 100 percentage points reflect a positive assessment of the economic situation.