Polymers players shrug off Turkish lira, fears of capital controls rise

15 August 2018 14:18 Source:ICIS News

LONDON (ICIS)--The Turkish lira has recovered ground from last week’s historic lows but some petrochemical players trading with the country are shying away from the currency, which has prompted fears capital controls will be implemented in order to stop the freefall.

- Qatar could assist financially, but reforms pressing

- Austerity measures and tightening monetary policy likely

- Divided country has opposing narratives on crisis and its solution 

A Turkey-based large petrochemicals trader said on Wednesday the “party is over” for the country’s government, arguing that spending cuts and tighter monetary policies should be implemented in order to stop the downward financial spiral.

Moreover, this source added that tariffs implemented by Turkey’s President Recep Tayyip Erdogan on US products, as a response to President Donald Trump’s previous imposition of tariffs on Turkish products, would only harm the country.

“Our main supplier for PVC [polyvinyl chloride] is the US, so putting tariffs on US PVC is harming your investors in Turkey: Where will we get the PVC from? It’s not going to be sustainable in the long run,” said the source.

More and more voices in Turkey are also calling for belt tightening in the public finances.

In a rare deviation from the official policies, which may pit them against the president, two of the more important entrepreneurs’ associations in Turkey demanded on 14 August a prompt resolution to the standoff with the US, as well austerity measures to get the public finances back on track.

The Union of Chambers and Commodity Exchanges of Turkey (TOBB) and the Turkish Industry and Business Association (TUSIAD) prompted Erdogan to “urgently resolve the problems” with the US, as well as to restore a “positive framework” of relations with the EU, Turkey’s main trading partner.

The Turkish lira (TL) has stabilised this week (see graph by xe.com), trading at $1:TL6.1 by 14:00 on Tuesday, local time, but the ramifications of the harsh stance the country’s President is taking against an “economic war” orchestrated by other countries are yet to be seen.

Year to date, however, the lira has lost more than 35% of its value against the US dollar.

According to polymers sources in India, some buyers are already switching their transactions to US dollars as well as euros in order to avoid the unstable lira.

The sources conceded that if more players take this approach, the lira may be further weakened, prompting the government to implement capital controls.

Capital controls are used by a government or a central bank to limit the flow of foreign capital in and out of the domestic economy, and can take the form of taxes, tariffs, legislation or volume restrictions, for example.

An Indian trader who deals with Turkey said bankruptcies are likely, as companies with debts in foreign currencies find it an uphill battle to meet their maturities given the depreciation of the domestic economy.

A depreciated lira would also be an excuse for some companies to delay their payments, it added.

Turkey is a country practically divided in two halves. Those supporting Erdogan, with his strongholds in the provinces and among the most pious in the country, attribute this crisis to the US and foreign forces who want to derail the country’s successful economic development.

On the other hand, the middle classes, urban and educated voters who think this crisis is home-grown and blame Erdogan for splashing out on large projects with little productive returns, as well as accusing him of rewarding friends and relatives with public positions.

As the standoff with the US continues and Turkey’s finances keep deteriorating, many analysts and entrepreneurs are wondering where the financial help the country is likely to need will come from.

With former western allies distant, the International Monetary Fund (IMF) seems not to be an option.

Some have pointed to Russia, although it has financial problems of its own.

Others have looked at Qatar's liquid state coffers – as the country faced a blockade by Saudi Arabia, Turkey has been an ally helping overcome the embargo.

Not surprisingly, Qatar’s emir Tamim bin Hamad Al Thani started a visit to Turkey on Wednesday to show support to Erdogan, news agency Reuters reported.

“He never comes to Turkey with empty hands,” said the Turkey-based petrochemicals trader.

Qatar’s financial support can only stretch so far, however. Both due to domestic limitations but also not to enrage the US too much.

Qatar is home to some of the biggest US military bases in the Middle East, and a too-close relationship with Turkey could prompt the US president to turn away from the emirate.

“We will have to tighten our belts going forward. Turkey is a net importer of many goods, and a very cheap lira will only harm us,” added the petrochemicals trader.

“I hope the government will take serious precautions, forget about the politics and implement the reforms this country needs.”

Pictured: Lira coins and notes
Source: Veronica Garbutt/REX/Shutterstock

Focus article by Jonathan Lopez

Additional reporting by Malini Hariharan

By Jonathan Lopez