Turkey’s Hike Is Just What’s Needed to Break Vicious Debt Circle

A third interest-rate hike in less than two months by Turkey’s central bank may be just what the country’s corporate sector needs to break out of a spiral of currency depreciation and rising debt.

Liabilities of Turkish companies more than doubled to $337 billion over the past decade, prompting firms to stock up on foreign exchange as the lira weakened and in turn fueling the currency’s decline.

This trapped Turkish companies in a “vicious circle” that, in the absence of higher rates, could only end when all corporate net foreign liabilities are closed and demand for foreign exchange is satisfied, according to Inan Demir, an economist at Nomura International Plc in London.

Debt Surge

Turkish corporates' fx debt has more than doubled

Turkish Central Bank

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Read more here about Turkey’s rate increase

“We see foreign-exchange buying by the domestic companies even as the lira depreciates because of their foreign-exchange liabilities,” said Demir. “Typically, the only way to stop this cycle is central bank interest rate hikes, the kind that we have seen on May 23 and today.”

The lira rallied as much as 2.2 percent on Thursday after the central bank raised its one-week repo rate by 125 basis points to 17.75 percent and signaled that it’s willing to stand up against political pressure and fight double-digit inflation.

— With assistance by Constantine Courcoulas

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