A number of events in recent months have increased concerns that economic decision-making in Turkey is becoming highly politicized. This will have a negative impact on multinational corporations for most of 2015 as volatility remains high and currency depreciation squeezes profits.
Implications for Multinational Corporations
An operating environment where economic and legal decision-making is increasingly politicized, poses numerous risks for multinationals, mainly further depreciation of the Turkish lira (TRY) against the U.S. dollar (USD) and increased unpredictability in the operating environment. Multinationals can expect:
- Profit margins to be squeezed by a weaker Turkish lira
- Political uncertainty to depress new investments and consumer expenditure in H1 2015
- Elections to disrupt public-sector demand between May and September
- Local exporters to be hurt by deeper depreciation of the Turkish lira against the dollar, compared to the euro
In order to anticipate the direction of the Turkish lira, multinationals will need to monitor the following:
- The interest rates decisions by the Turkish central bank
- The economic health of the U.S. and the subsequent:
- Strengthening of the dollar
- Timing of the U.S. Federal Reserve’s decision to increase interest rates
- The economic situation in Russia and Greece as these influence financial investors’ risk perception of Europe/Eastern Europe where Turkey is often included
- Who is on the new economic team of the government after the June parliamentary elections
Fueled by the global strengthening of the dollar, many emerging market currencies have been depreciating. However, amongst similar emerging markets, the depreciation of the Turkish lira is only beaten by the Russian ruble and Brazilian real. In 2015 alone, the lira depreciated by almost 7 percent. Domestic developments, mainly the concerns over a politicization of economic decision making are fueling the extra depreciation of the lira.
(Graph: Interest rate cut followed by political pressures for further cuts fueled a steep depreciation in the lira)
Factors driving risk perceptions
Three factors are driving risk perceptions among financial investors and undermining the stability of the lira:
- Public debate over economic theory
- Regulatory predictability and fairness (controversies of the Bank Asya takeover)
- The upcoming elections
Check back next week for a full discussion on these three factors, and follow me on Twitter for more Turkey insights.