Take a stroll in Istanbul’s famous Grand Bazaar or any of the multiple storied shopping malls built in the city in the past decade. The possibility of you running into a disgruntled merchant is quite high. The slide in the value of Turkish lira has been distressing for them. The currency has lost more than 37 percent against the US dollar since the start of 2018.
A significant number of merchants pay their shop rents based on the value of the US dollar — every time the dollar bills strengthen they either hedge against it by buying foreign currency from an exchange dealer or pay more in liras to landlords at start of the month. On September 13, the Turkish government intervened to discourage that practice.
President Recep Tayyip Erdogan signed a decree, banning the sale and lease of real estate property and cars in any other currency other than Turkish lira. The companies have been given a month’s time to renegotiate their existing contracts and convert them into liras from other currencies.
“It’s a good move,” Adem Disli, a 44-year old salesman at an optic store in Carrefour Shopping Center, told TRT World. “We have been talking about it for years now. Retailers weren’t happy about paying rents indexed to dollars and euros.”“But we need to see how this gets implemented,” he added. The decision came hours before Turkey’s central bank announced its main interest rate at 24 percent, raising it by 6.25 percent.
Erdogan’s directive, which came as an amendment to a regulation called Act 32, didn’t specify the exchange rate that will be used to renegotiate the existing deals. Treasury and Finance Minister Berat Albayrak last month said the move was needed to “leave the problem of dollarisation behind.”
Emre Alkin, a monetary economist, says the practice of charging rents and quoting prices in dollars in domestic transactions had become widespread in recent years. “It’s one thing if your input costs are denominated in foreign currency. But what we see happening right now is that people are renting their apartments in dollars even though they have not incurred any costs in dollars or euros.”
How did it all start?
The economic boom Turkey experienced after 2001 also strengthened the value of lira. The interest rates on debt in foreign currency were lower compared to what the Turkish banks offered.
“The exchange rate was stable. And even though we saw de facto devaluations from time to time like when the lira dropped to 3 against the dollar from 1.5 it was easy for companies to adjust their revenues, their margins were high and they were still making money.”
That changed with a sharp drop in lira this year. Businesses and landlords began to face difficulty in increasing the price of rentals and goods and services they offered with the same proportion, Alkin said.
Turkey’s corporate sector has borrowed heavily in foreign currency, making its private sector debt to GDP ratio one of the highest among the emerging markets. The total foreign exchange debt of the corporate sector is $337 billion, according to the central bank. Alkin says the firms which do not “earn a single penny in foreign exchange” have accumulated at least $180 billion in debt. They have no export earnings, no revenues in foreign exchange but yet they decided to borrow in US dollars or euros,” he said. “Now they have to pay the price.”
The problem is especially endemic in the construction and hospitality industry where companies overburdened with foreign-currency denominated debt are mounting financial pressure on customers, Alkin says. The central bank took steps to limit the exposure of Turkish companies to seek loans from foreign banks in May this year, or those indexed in foreign currencies.
A divided view: Some businesses have raised concern about the measure, however. Hulusi Belgu, the head of Turkish shopping malls association, said in a statement that his members were sitting on a debt of $15 billion and 70 percent of rental contracts were priced in foreign currency. The statement didn’t say how much of it was denominated in US dollars or euros.
Bilgu said the measure will lead to a financial gap and his association expects the government to establish a special fund which can help mall owners to survive the losses. On the other hand, the association of large retail chains such as the Media Markt have come out in support of the government’s decision.
Alp Onder Ozpamukcu, the CEO of Koctas and deputy chairman of the Chain Stores Association, says it is absolutely important for Turkey to do away with “dollarisation” of the economy.
A high percentage of the association’s members pay rent in foreign exchange, he said in an emailed response to TRT World. The bigger problem is that the slide in the value of lira, the currency they use to sell their products in, has been faster than the rate at which the stores can increase the prices of their goods, he says.
“Exchange rate has gone up by 50 percent since beginning of the year. Even the highest performing brands were able to increase their revenue by just 10 to 30 percent,” Ozpamukcu says. “Looking at this figures alone shows that such high increase in rent cannot be endured by the retailers.” The government’s directive has given one month to owners and tenants to negotiate and revise existing contracts in Turkish liras. Ozpamukcu says it is important for the parties involved to realise that current exchange rate is too high.
“The renter should take into account not the extraordinary exchange rate of today but at the least what was prevailing in the first quarter of this year. This is to ensure that the deal is just and sustainable.”
Firms exposed to foreign currency debt will find it difficult to pay their debt installments once the contracts are converted into liras.
But Emre Alkin says there is no other way to curb the excess use of foreign currency in everyday transactions.
“Yes, some companies will go down. But is there any other way around this problem? We need a surgery and surgeries are painful. We can’t just fine-tune this.”