Lira Inflicting Pain

Ercan Cercioglu is holding off on investing in new technology for the Turkish maker of car parts that he runs as the lira's slide makes it harder for companies to service foreign-currency debt.

The cost of importing raw materials like steel jumped as the lira tumbled 13 percent in the past six months, according to Cercioglu, chief executive officer of Aydin, Turkey-based Jantsa Jant Sanayi ve Ticaret AS. The company, whose third-quarter financial debt was 41 million liras ($19 million) and was almost fully denominated in foreign currencies, is hesitating to pass additional costs onto customers, he said.

“Foreign-currency debt used to be less costly for companies, but now many will post FX losses,” Cercioglu said in a phone interview on Feb. 5. Jantsa has shelved some investments as it “waits for stability, to see what's ahead,” he said.

Net foreign-currency debt of Turkish companies surged 21 percent to $170 billion last year through November, according to central bank data. Their Polish counterparts held the equivalent of $23 billion of foreign-exchange liabilities that month, up 13 percent, official data show. The debt burden for businesses from Istanbul to Ankara may have worsened in December as a corruption probe entangling the government sent the lira sliding 6 percent that month. 020714_Bloomberg_Pq1

It took a surprise central bank interest-rate increase on Jan. 29 to halt a rout that drove the currency to successive record lows. A more than doubling of the benchmark rate to 10 percent turned it into the world's best-performing emerging-market currency from the second worst.

Even after the recovery, the exchange rate's implied volatility is the fourth-highest among developing countries at 13.7 today, surpassed only by the South African rand, the Argentine peso, and Brazil's real. The lira weakened 0.3 percent to 2.2168 per dollar at 9:57 a.m. in Istanbul. It slumped to a record 2.3900 on Jan. 27.

“I hope the lira settles at around 2.1 per dollar,” Erol Bilecik, chairman of Istanbul-based technology company Indeks Bilgisayar Sistemleri Muhendislik Sanayi ve Ticaret AS, said by phone on Feb. 5. “There definitely is a lack of motivation and energy in the market.”

Bank Debt

The foreign-exchange swings are weighing most on small and medium-sized businesses, which dominate Turkey's corporate landscape, Suleyman Onatca, chairman of the Turkish Enterprise and Business Confederation, said on Jan. 24. Banks are reluctant to allow SMEs to roll over loans, he said.

Out of every 10,000 companies, only two aren't SMEs, a classification for businesses employing fewer than 250 workers and/or posting annual sales of under 40 million liras, according to data of the state-run Small and Medium Enterprises Development Organization.

The lira lost a fifth of its value against the dollar and single European currency in the past 12 months. That's mirrored drops in South Africa's rand and the Indonesian rupiah, also victims of souring sentiment in emerging markets amid Federal Reserve reductions of monetary stimulus.

“It is tough to digest such an appreciation in the dollar and the euro,” Onatca said by phone on Feb. 5. “I don't want to talk like a doomsayer, but God help companies with bank debt.”

Turkey's currency has recovered since the rate decision, while investors piling into the nation's stocks lifted the Borsa Istanbul 100 Index up 3.4 percent yesterday, the most among 94 global benchmarks monitored by Bloomberg. Yields on Turkey's two-year notes are down 37 basis points from a two-year high on Jan. 28, to 10.69 percent.

The central bank resisted calls to raise rates since August to support the economy. Growth in the nation of about 80 million people is set to slow to 3 percent this year from 3.9 percent in 2013, according to the median of 31 forecasts compiled by Bloomberg.

As companies like Jantsa delay investments, that's a drag on the economy, according to Zsolt Papp, who helps oversee $2.6 billion of emerging-market debt at Union Bancaire Privee in Zurich.

“Some companies with a material currency mismatch in assets and liabilities could be forced to seek restructuring,” Papp said by email yesterday.

Frozen Investments

As clients pressure Jantsa to hold prices even as costs rise, Cercioglu is delaying plans to spend more on research and development to enhance productivity. “We want to protect ourselves against a possible crisis,” he said.

Cercioglu isn't alone in reconsidering business plans. Suleyman Gerdan, chairman of Germaksan Makina Sanayi ve Ticaret Ltd., a machinery maker, cut production and is working at about 35 percent of capacity at its factory in the southern city of Adana following a slowdown in orders.

It will struggle to surpass 2013 sales of 45 million liras this year as costs for everything from electricity to transportation climb, according to Gerdan.

“We recently froze an investment of about 7 million euros ($9.5 million), thinking it's better to stay liquid,” Gerdan said by phone on Feb. 5. “That investment would have allowed us to expand in Africa. After the surge in the dollar, we can't see what's ahead.”

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