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What are the possible effects of the BRSA decision on businesses and the economy?

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The latest regulation introduced by the BRSA restricts the use of TL loans by companies holding large amounts of foreign currency.

As a result, companies that have to pass an independent review and have more than TL 15 million in cash will not be able to take out commercial loans in TL if this amount exceeds 10 percent of their total assets or annual sales revenue.

The application in question aims to limit the increase in the exchange rate by increasing the supply of foreign currency on the market by allowing companies subject to this restriction to sell their foreign currency. So does it work?

With the latest application we are once again witnessing the effort to combat the side effects created by the problem, by not developing a permanent solution to the underlying problem.

Inflation must be kept in check for TL to appreciate. Because the purchasing power of that currency determines the value of a currency in terms of other currencies. Expressing “growth with inflation” as a conscious political choice in our country states that inflation will not be reduced and the monetary policy necessary to fight inflation will not be implemented.

Interest rates are kept low to support growth. Low interest rates trigger inflation. When interest rates are prevented from rising in line with inflation, personal and business savings shift into foreign currency this time around.

As TL-denominated assets are unattractive in a low interest rate environment, there is no foreign exchange inflow. Conversely, the domestic currency supply is also slipping away with increasing fragility and risks. For this reason, we have long seen a serious shortfall in foreign currency liquidity.

Capital inflows cannot be increased unless policies are developed to raise interest rates, strengthen institutional infrastructure and support productivity. In this case, there are measures that will limit the demand for foreign currency inside.

KKM was one of the most important of these regulations. However, these “patch” regulations have side effects by themselves.

As the underlying problem persists, these products expire at some point when there are no additional incentives such as tax exemptions. At that point, new tools and regulations are introduced.

When we look at the BRSA regulation that went into effect over the weekend in this framework, we can see it as a new incentive developed for the continuation of the KKM. In this context, it is difficult to expect a permanent effect, even if it creates a temporary relief in the exchange rate.

WHAT IS THE EFFECT OF THE NEW REGULATION?

Before we talk about possible scenarios, let us remember that the fact that companies hold foreign currency is the result of the expectation of an increase in the exchange rate.

Turkish lira

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Upside risks to the exchange rate increase. On the one hand, it was stressed on every occasion that no monetary policy measures would be taken to protect the value of the TL, while on the other hand the major central banks initiated aggressive interest rate hikes.

Despite the need for foreign exchange, rising inflation continues and these vulnerabilities increase the risk premium. The increase in the risk premium, on the other hand, raises our financial costs, increasing the upside risks on the exchange rate.

A company that expects an exchange rate to rise naturally keeps its income in foreign currency and allocates resources for its future foreign exchange expenses.

The way to prevent this is to leave the preference of “growth with inflation”, the way to exchange rate stability, price stability the way to exchange rate stability, and the way to price stability.

If this is not done, any new measures to be taken will perhaps create temporary relief, but in the long run it will lose its effectiveness and create more side effects that need to be corrected.

WHICH CHANNELS IS THE BRSA REGULATION ABOUT COMPANIES?

  • Companies sell their foreign currency to get TL loans:

Let us again remember that the fact that companies hold foreign currency is the result of an “optimization” they do to bring financing costs to the lowest possible price when they need foreign currency in the future.

If they have to sell their foreign currency today and buy it at a more expensive price tomorrow, even if this situation calms the foreign exchange market in the short term, it will come back as a higher cost in the long run, negatively impacting the company’s balance sheets and rising. inflationary pressures.

Furthermore, since such a deal will not provide foreign exchange inflows, it will only change existing foreign exchange hands in the short term and bring no relief in the long term.

  • Businesses can use secondary avenues to obtain TL loans without dissolving their foreign currency assets: How to buy Eurobonds, hold foreign currency assets in a personal account rather than a corporate account, transfer them to foreign accounts, swap with banks, and show foreign currency in their hands as out of their hands and get them back later. In this case, it is not possible to obtain the desired relief in foreign currency and production suffers negatively as companies spend their energies, which they should focus on production, on financial scammers.
  • Instead of holding foreign currency, companies buy and store intermediate goods in advance that they intend to buy with that foreign currency. and have to bear the costs of storage. This cost increase translates into higher inflation.
  • Companies try to borrow by issuing bonds rather than bank loans: In countries like ours, where the depth of financial markets is not very deep and the banking system is the backbone of the financial system, non-bank financing opportunities are both limited and more expensive. As companies get smaller, the costs of borrowing by issuing bonds increase because they are exposed to more asymmetric information problems. This triggers cost inflation once again.
  • Slowdown in loans: The new regulation could slow down lending on both the supply and demand sides. On the supply side, banks can hold back the attempt to understand which companies are subject to this regulation.

On the other hand, companies that are more comfortable in terms of working capital prefer to hold foreign currency rather than TL loans and there will be a decrease in demand for loans. It is certain that the government, which has put forward the “growth with inflation” preference, would not like such a side effect. Because a slowdown in lending means a slowdown in growth. Such an outcome would be beneficial in terms of inflation control. However, in the event of a slowdown in lending, the aforementioned regulation is likely to be withdrawn, as growth will be halted this time around.

It appears that all of these channels will return as either higher inflation or lower growth over the medium to long term, neither of which is a desirable outcome.

However, the effect on the dynamic structure of the economy will not only be with these companies, but the wave effect will spread throughout the economy. At this point, it is difficult to predict such an effect.

It is likely to fuel dollarization as further foreign exchange market regulations underscore an increasingly tight need for liquidity.

Likewise, each new regulation solidifies the belief that a low-interest policy will not be resumed and the underlying problem will continue to worsen.

The volatility observed in asset prices after the BRSA decision also reflects this uncertainty.

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