Capital movements in Turkey: forced exchange against the lira crisis

Status: 01/19/2022 12:07 p.m

Companies in Turkey have recently had to exchange a quarter of their export earnings for lira. This is intended to support the currency and provides the central bank with foreign exchange. But the companies and the country are threatened with negative consequences.

By Oliver Mayer-Rüth, ARD Studio Istanbul

For years, the government in Ankara has been desperately trying to attract direct investments. Foreign companies that create a production site with many jobs are the most sustainable engine for economic growth in an emerging country. The company “Invest in Turkey” was set up to promote the location despite the lack of legal certainty and foreign policy aggression. In autumn 2021, a delegation from the German business association BVMW was in Istanbul. The interest in the Turkey location was also great due to the favorable personnel costs.

Oliver Mayer-Rüth
ARD-Studio Istanbul

But now the Turkish state is once again irritating potential investors. On Jan. 3, without prior notice, the state issued a decree introducing “a milder form of capital controls,” according to Ulrich Leuchtmann, an analyst at Commerzbank. According to this, companies based in Turkey have to sell 25 percent of their export earnings to a private bank in euros, dollars or pounds and are paid Turkish lira in return. The Turkish central bank sets the daily exchange rate for the exchange.

There is talk of “forced exchange” among German managers on the Bosporus. According to managerial circles, the aim is obviously to improve the central bank’s cash-strapped foreign exchange reserves.

FX Source for Lira Support by Central Bank

Capital controls are the specter par excellence for investors because they can lead to massive profit losses. Between early December and early January, the central bank in Ankara provided about $14 billion in support for the nosedive lira. The opposition speaks of $20 billion because private banks are said to have sold a significant volume of dollars during this period. Apparently this hole in the cash register needs to be plugged. Commerzbank analyst Leuchtmann fears: “We will see additional steps in this direction as long as the lira remains under pressure.”

That would be a problem for companies like the automotive supplier Farhym, which produces in Ankara. Managing director Bülent Akgöl, who grew up in Baden-Württemberg, explains that he has many Turkish suppliers that he pays in lira and that he pays his Turkish employees’ salaries in lira. According to Akgöl, Farhym can still handle 25 percent of all export invoices that are over US$30,000. 30 percent went too. Anything above that could cause trouble. When he first heard about the decree and the measure at the beginning of January, he shrugged. Less because of the 25 percent, but because you don’t know what’s coming.

Fear of long-term damage

Commerzbank analyst Leuchtmann believes that capital controls are in principle suitable for reducing the pressure on the lira to devalue. But there is a risk that Turkey will become less attractive as an investment location for foreign capital in the long term. According to Leuchtmann, the long-term damage would be considerable, because Turkey is dependent on the injection of capital.

Managing directors of foreign companies in Turkey are usually reluctant to make comments critical of the government. You know how quickly the Turkish soul feels attacked. Thilo Pahl, Managing Director of the German-Turkish Chamber of Industry and Commerce, speaks on behalf of almost 900 companies. Pahl warns that the new regulation is unsettling companies and is reducing earnings in many cases. The mandatory exchange of export earnings into lira leads to exchange rate losses when exchanged back in a foreign currency. According to Pahl, this new regulation is certainly not a measure to promote additional investments in Turkey. Not good testimonials for the Turkish government, which is constantly soliciting direct investment.

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