Easier conditions will go into effect for borrowing in FX
Deputy Prime Minister Mehmet Şimşek announced last week that conditions for borrowing in foreign currencies have been eased. Those new rules will take effect this week. I personally believe those conditions will be eased further in the period ahead.
Şimşek has long argued that not only small but also large companies cannot effectively manage FX risks, thus companies that do have FX revenues should not borrow in foreign currencies.
We also know that the Business and Industry Association of Turkey (TÜSİAD) has been in touch with Şimşek and has demanded that the conditions for borrowing in FX be lifted, arguing that large companies are managing the risks well. The remarks made by the deputy prime minister on April 29 suggested the conditions would not be eased for large companies but only for FX loans for projects, which will contribute to economic growth.
He said companies with no FX revenues would not be allowed to take on FX loans starting on May 2. Şimşek also added that they have introduced new exceptions in order to help companies that will undertake in the above mentioned investment access credit.
In an interview with state-run Anadolu Agency, the deputy prime minister reminded that there are no restrictions for FX loans used by government agencies, banks, and financial and factoring companies, as well as FX loans for certain investment goods and to finance investments that secure government incentives.
He noted that the Central Bank’s Capital Movement Circular that will be effective as of May 2 foresees new exceptions. The restrictions do not apply to FX loans to be used in energy projects under the government’s purchase guarantee scheme, loans to be used by companies to pay for the bidding price in privatization tenders, and loans to be secured by residents to finance acquisition operations, Şimsek said.
Lower inflation and lower interest rates key
I suspect that if those new restrictions are applied to FX-indexed and FX loans less than $15 million, there will be problems. That is why I would be surprised if the authorities further ease borrowing conditions in the coming days. I also do not think the latest easing of restrictions will satisfy TÜSİAD, which is categorically against restrictions.
“We should not burn down the entire house because of a single mouse. We do not think this is the right approach,” said TÜSİAD head Erol Bilecik when voicing opposition against the new regulations. He added that many of the large and institutionalized corporations manage risks, but restrictions should not be imposed just because some companies fail to do so.
Bilecik underlined that the key to resolving problems is that inflation and interest rates on lira loans must decline. “If both inflation and this type of rates decline, companies would not borrow in foreign currencies,” he argued.
The TÜSAİD head reminded that our domestic resources fail to produce financing. Thus, we need to rely on foreign financing, which comes with a price. The interest comes from the cost of external financing plus the inflation and cost of financial institutions, he added. As a result, he stressed that inflation and interest rates on lira loans must come down.
To summarize, authorities resort to such restrictions because we fail to lower inflation. As they are left with fewer alternatives, private companies are against those restrictions.