Loan Ban Caused The Turkish Lira To Whipsaw, With Thousands Of Firms Affected

Last Friday, Turkey’s banking regulator announced a ban on Lira loans to local companies owing excess foreign exchange. The Lira received a boost on Monday. The Istanbul market on Monday morning showed that the Lira had made about an 8% gain within forty hours.

It trades at 16.01 to the end, an increase from 17.35 at the close of trading last Thursday. However, by Monday’s late afternoon, it had shed some gains. It dropped 16.5 to the greenback after trading range-bound around 16 and 17 Lira per dollar.

Effects Of The Loan Ban

The price movement reflects the market bias following the loan ban. According to the ban, any local firm willing to get commercial Lira loans must sell an amount of FX that will be sufficient for the Lira they want to buy. Thus, boosting the Lira, which has been down by over 50% over the past 12 months.

According to the new loan ban, any corporate owing approximately 15 million Lira worth of foreign currency (about $910K based on current conversion rates) is ineligible for a Lira loan unless their FX funds are lower than 10% of their yearly sales or assets.

However, small businesses that can’t borrow in FX can still borrow in Lira so long they have a net short FX position. Turkish authorities hope the new rule can strengthen the Lira. The Lira has continued to weaken in the last couple of years.

The nation’s president (Recep Tayyip Erdogan) hasn’t authorized the central bank to increase rates despite the increase in inflation. It is no surprise that Turkey’s purchasing power has been crippled after inflation rose to 73%.

As a country of 84 million residents, that seriously weakens their purchasing power. Saxobank’s analysts claim that the ban would likely affect thousands of local firms. “If these firms want to keep accessing Lira credit, they would need to dump their foreign currency holdings.”

According to a Deutsche Bank report, this rule will have a severe effect. However, they also claim that large firms would lower their FX holdings. Hence, the benefits of this ban on the Lira would only be temporary.

Economic Analysts Are Unimpressed

A Bluebay asset management strategist, timothy ash, said that the move suggests bad policy, desperation, capital controls, and short-termism.” Ash added that everybody knows Turkey needs to raise rates. But this move only complicates things for businesses and banks.

Any boost for the Lira would be short-term. Also, that doesn’t lessen Turkey firms’ demand for forex. A Barclays economist, Ercan Erguzel, agreed with ash’s submissions. He said the move poses a new risk to the market’s liquidity as Turkey’s foreign currency reserves are currently running low. Erguzel added that some companies might delay investments until they better understand how this ban will affect FX and Lira liquidity.