No hike in exports despite lira at historic lows

LONDON - Reuters

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The Turkish lira’s fall to record lows has ramped up the cost of repaying predominantly dollar-denominated external debt while failing to deliver any boost to exports, which remain focused on Europe with its weak currency.

Cheaper currencies usually make exports more competitive, ultimately boosting growth. But in Turkey, the currency’s plunge may instead be raising financial stability risks, because so far it has not seen any improvement in terms of trade while firms earning revenues in lira will find it costlier to repay dollar debt.

The clue lies in the lira’s exchange rate to the euro, which is actually up 1.6 percent over the past year. 
Versus the dollar, the lira has fallen 20 percent in this period. On April 24, the battered currency hit record lows near 2.74, pressured by upcoming elections and the central bank’s reluctance to irk the government by raising interest rates.

“In a way Turkey has had the worst of both worlds,” said William Jackson at Capital Economics.

Government data shows that more than 40 percent of Turkish exports go to the European Union and Jackson said the euro zone accounted for a third of the total.

“Most of their liabilities are in dollars and a large part of their exports go to the euro zone. The fact the lira has depreciated against the dollar is bad for their liabilities, but they have not seen much benefit on the trade side.”

Turkish exports last month were 13.4 percent below year-ago levels, while imports declined only 5.6 percent.
The March trade deficit was 14.8 percent wider year-on-year.

The other negative for Turkey is oil, prices for which have risen a lot more in lira than in dollars.

SEB analyst Per Hammarlund says that unless the lira depreciates meaningfully against the euro, Turkey’s central bank is unlikely to defend the lira.

He notes, however, that since the end of January, the lira has depreciated 9 percent to around 2.95 per euro. A fall to 3.10 is when the central bank will turn hawkish, he reckons.