Turkey: food exporters trapped in vicious circle

Lira in free fall

Recent media coverage stipulates that the Turkish lira is in free fall. The currency lost 17.8% in value last week alone. Record lows are constantly being recorded against other currencies with the lira currently trading at 7.3324 USD and at 8.6074 EUR. Economists uniformly blame Erdogan’s policy of cutting interest rates to keep credit flowing. Problem is that this fuelled a credit binge with loan growth rising to 40% and driving up inflation to 11.76% year-on-year in July. To make matters worse rising imports drove up the need for foreign currencies and the coronavirus pandemic has accelerated the problem as the massive drop in tourism means less US dollars and euros. Exports have also slumped amid the coronavirus crisis. Economists agree that the only sensible option left is a hike in interest rates.

Fines generate fear

Market players report that Erdogan is instead responding like a tyrant to the crisis. He has imposed fines on any individual or media reporting on the free fall of the lira and the growing possibility of a currency crisis in a desperate bid to avoid panic. A move, which is, however, generating the opposite as it is rather expected that the devaluation may well continue into October. Additional worry is also created by a change in the money transfer law as the banks were granted authorisation to hold foreign currencies for up to ten days. Banks are reportedly also refusing to pay out euros and US dollars to individuals, which are either offer Turkish lira instead or asked to wait for one month.

Exporters avoid long-term contracts

This climate of fear is also impacting the export market. Dried food exporters are currently holding back on long term contracts as it is currently impossible for them to fix long-term prices and there is no guarantee that they will be able to receive payment foreign currencies. The situation is especially precarious in the raisin market. Suppliers are eagerly eying up competitors in China and in Iran with rumours over extremely low prices circulating. Traders, however, agree that the situation is not quite as bad in the hazelnut market since Turkey holds such a large market share it will be impossible for buyers to compensate for the large volumes obtained in Turkey elsewhere.

Erdogan’s vicious circle

Turkey’s central bank, which is regarded as Erdogan’s extended arm, started buying up government debt even before the pandemic hit and has spend billions of dollars to prevent a free fall. Goldman Sachs estimates that gross currency buffers have slumped by more than a third. A rise in interest rates is urgently required to cool down the overheated economy. This is, however, precisely what Erdogan is desperately trying to avoid. Covid-19 has driven up unemployment rates to the highest level in more than ten years and the economy is expected to shrink by 4% this year. A situation which calls for low interest rates to boost jobs and spending. In 2019 he suffered crushing defeats in Ankara and Istanbul and he certainly fears that his popularity will take a massive dent if he fails to boost the job market. Problem, however, is that trust in his policy will crumble further if he fails to take effective action to combat the currency crisis.

Hush-hush policy fails to promote trust

Erdogan is certainly suffering a decline in popularity as the mood against him is building with the opposition calling out for early elections. His handling of the pandemic is also being sharply criticised, albeit only behind closed doors. Contrary to Erdogan’s official line that everything is under control and that there is no need to panic, Covid-19 patients requiring hospital treatment are reporting that they are being deferred to other district hospitals as some hospital have clearly reached their capacities. Daily infections have already soared to around 1,400 cases and a further upsurge in cases is expected when people return from the holiday resorts at coast in around 1-2 weeks. Concerns are circulating that hospital may not have enough treatment facilities for this potential rise in Covid-19 cases and Erdogan’s hush-hush policy is failing to generate trust.