The Turkish lira lost 16% against the dollar in the past 3 quarters and has been one of the worst-performing emerging-market currencies this year. This trend has already started to hit bottom lines and companies are planning to hedge against losses.
There are winners and losers from the lira’s weakness through: local companies and MNCs operating in lira and importing heavy raw materials or parts into Turkey are suffering from rising input costs. On the other hand, companies producing locally and exporting from Turkey are benefitting from Turkey’s stronger export position.
What is causing the lira’s weakness? There are two leading indicators that are driving the lira’s underperformance. First, the country’s rising current account deficit is pressuring Central Bank reserves and the exchange rate. Second, the sovereign debt crisis in Europe is driving investors away from emerging market currencies and toward the dollar, further weakening the lira.
While Turkey’s central bank could hike interest rates to strengthen the lira, the bank has resisted such a move as it would slow down the economy at a time when exports to the EU are already being hit by the sovereign debt crisis. Plus, an exchange rate hike will only be effective if there is exchange rate stability. If the lira is rapidly depreciating against the dollar, interest rate hikes will be seen as a desperate move by the central bank, causing additional portfolio investment flight and further driving down the lira.
As a result, MNCs should anticipate the lira to remain weak through year-end 2012, before appreciating against the dollar in 2013: “The Turkish lira depreciation is not a permanent trend, but a short-to-medium term one,” says Frontier Strategy Group Expert Advisor Kerim Kotan.
Companies producing in Turkey should anticipate lower exchange rate-adjusted costs through next year, while companies selling indirectly to the market should anticipate reduced buying power for dollar-denominated goods. Fahhan Ozcelik, FSG Expert Advisor, also recommends that MNCs operating in Turkey take advantage of the government’s planned incentives for local exporters. One way MNCs can do this is by partnering with local suppliers for semi-finished goods, especially in industries such as textiles, motor vehicles, and electrical machinery.