Lira crash: German economy records slump in exports

The Turkish lira fell to a record low ahead of the renewed rate cut expected this week. At the beginning of the week, its course temporarily fell to as much as 14.99 against the US dollar, a decrease of around seven percent.

The central bank therefore intervened in the foreign exchange market for the fourth time within two weeks: because of “unhealthy pricing”, it sold dollars to support its own currency. The lira has lost around half of its value since the beginning of the year.

In addition, the central bank has rapidly lost its reputation among investors, which is also damaging the value of the Turkish currency. President Recep Tayyip Erdogan contributed to this by repeatedly calling for interest rate cuts and wearing out three central bank governors within two and a half years, which massively calls into question the independence of the monetary authorities.

For this Friday, economists surveyed by the Reuters news agency expect the central bank to lower its interest rate again – from the current 15.0 percent to 14.0 percent. The inflation rate is currently more than 21 percent.

Germany is the most important trading partner and one of the largest foreign investors in Turkey: in 2020 the bilateral trade volume was 36.6 billion euros. But the weak lira not only makes goods and services more expensive within the country, it also disrupts the pattern of trade.

For example, exports to Turkey fell by 30 percent in August as well as in October, reports Dirk Jandura, President of the foreign trade association BGA. Export goods such as machines, cars and auto parts as well as chemical products are particularly affected.

Some German companies, on the other hand, are benefiting from the lira crash

According to the current “AHK World Business Outlook” from the DIHK, 73 percent of the German companies surveyed in Turkey see the exchange rate as one of the greatest business risks for the next twelve months – a record. Second is the economic framework at 62 percent.

The export crisis could make itself felt elsewhere in German company balance sheets: through write-offs on outstanding payments. A large number of Turkish companies are indebted in foreign currencies, which in the wake of the decline in the lira also significantly increases their risks, says credit insurance expert Stamer. “In 2022 alone, corporate and bank debts in foreign currencies of around 120 to 150 billion US dollars will be due for repayment.”

Depending on the exchange rate at the time the repayment is due and the financial situation of the respective company, it is questionable whether all of these debts can be repaid.

Not all German companies suffer. Those who only produce in Turkey and then sell abroad, there are positive effects such as lower real wages and cheap exports. If the company itself reports in euros or dollars, the real wages paid in lira decrease. Investments in Turkey are also becoming cheaper.

The German pharmaceutical manufacturer Boehringer Ingelheim, for example, recently entered into a partnership with Abdi Ibrahim Pharmaceuticals, Turkey’s largest pharmaceutical manufacturer. The German company plans to invest 150 million lira in the medium term. At the beginning of the year that would have been a good 17 million euros, now it is nine million euros.

Two theories as to why the Turkish government is running the economic crisis

In the short term, they are happy about lower prices from Turkish exporters, said Marc Brüning, managing director of Heinrich Brüning, a company that buys nuts and dried fruits from Turkey, to the “Lebensmittelzeitung”.

“Because the suppliers cannot raise prices as quickly as the Turkish lira is falling.” In the long term, however, the Turkish companies could not keep up the currency decline. Bankruptcies are not excluded.

In addition to the usual volatility in day-to-day business in Turkey, there is a measurable loss of business by German corporations. At the same time, Turkish companies increased their own exports like never before.

In November, the exports of Turkish companies rose by 33.4 percent compared to the same month last year. The Turkish stock index BIST 100 has increased by 56 percent since October.

There are currently two theories in circulation as to why the Turkish government under President Erdogan is allowing the currency crisis to run. The first could be called “Turkish mercantilism”.

The government is trying to use the crowbar to overcome the Turkish economy’s notorious trade deficit. Imports have been significantly higher than exports for decades. As a result, Turkish companies and households have to take out loans every year to finance their consumption.

A weak currency makes imports more expensive and exports cheaper. This would turn the trade deficit into a surplus in the medium term. But the road to get there is long and real success is unpredictable. After all, Turkish exporters also have to import many intermediate products. It just doesn’t work out for some Turkish companies.

The Mannheim-based company BLG Kardesler, which produces food for sale in Germany at external locations in Turkey, refers, for example, to expensive packaging and preliminary products that would have to be bought “on a euro or US dollar basis from abroad”.

According to the second theory that is currently circulating, the government could consciously accept the current crisis in order to later declare a political state of emergency. The logic: the polls of Erdogan and his AKP are so bad that they would probably lose the next election.

With the politically induced weakness of the lira and the resulting chaos, the government would have a reason to declare a state of emergency. And then head of state Erdogan could either hold the elections under strictly limited freedoms or cancel them straight away.

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