Arriving in Istanbul airport early last week, it was clear that the currency dealers were not going to be out of pocket as the lira crises raged on the back of the Turkish dispute with the US, writes John Whelan
The spread between the buying and the selling prices being offered for euros doubled within hours, leaving those trying to dispose of Turkish liras losing heavily.
Turkish President Tayyip Erdogan’s threat to boycott electronic products, including Apple’s iPhone from the US, retaliating in a dispute with Washington, helped drive the lira to record lows last week. The lira lost more than 40% this year and crashed to an all-time low of 7.93 to the Euro before rallying with EU support.
However, the falling Turkish currency has, so far, not impacted Irish exporters trade with Turkey which increased by 27% in the first six months of the year to €353m. The market is one of considerable importance to Ireland and ranks above 18 other EU countries in the volume of trade with Ireland.
But the big question is how long can Turkey hold out against an ever aggressive ratcheting up of tariffs by the US against the Erdogan regime. Irish exporters to the market are concerned that double-digit inflation and falling lira must eventually push many of their customers into insolvency.
However, Irish exporters to the market continue to be drawn to the market because of its large population, a rising middle-income class, and well-developed industrial base. And despite the political instability following the failed coup in 2016, Turkey’s economy recorded a solid growth rate of 7.4% at the start of 2018.
Despite the concerns surrounding President Erdogan’s politics, he did manage to introduce a series of stimulation packages in 2017. Regrettably, the strong resulting growth performance has exacerbated existing imbalances.
In May, its central bank held an emergency meeting and hiked its late liquidity window interest rate to 16.5% and raised it again in June 2018, to 17.75%. This tightening will likely weigh on domestic demand, which in turn will impact imports and trade with countries such as Ireland.
Earlier this year President Erdogan secured a new five-year term with nearly 53% of the vote and shifted the country to an executive presidency from a parliamentary system. Rating firm Moody’s and insurer s Euler Hermes continue to rate the Turkish economy in the second highest risk category globally, similar to countries such as Tunisia.
Hence, export credit insurance rates have increased substantially, taking some of the profit out of the trade with Turkey. The lack of a State-backed scheme to cover exporters risk on debt collecting on export sales to countries that become unstable has been a bone of contention for Irish exporters since 1998 when the State-backed credit insurance scheme was scrapped. Most EU member states support their exporters with such schemes, adding to the normal commercial cover available.
The immediate concern of Irish exporters is a continued depreciation of the lira. The current inflation rates suggest interest rates will increase again to around 19% and further rate hikes to counter the currency weakness would again add to borrowing costs. This scenario would deteriorate the cash flow of Turkish companies and their ability to pay Ireland’s exporters for their goods.