What does Turkey’s currency crisis mean for apparel?

Mark Lane | 5th September 2018

ISTANBUL – First the good news: holidaymakers in Turkey this year have received not far off double the amount of Turkish Lira for their respective US Dollars or UK Sterling compared to this time last year. For Turkey, sadly, that is where the good news ends. With the country’s currency having lost almost 50 per cent of its value over a 12-month period, there are fears a full-blown economic catastrophe could be just round the corner. But what does all this mean for Turkey’s textile industry, and apparel brands sourcing apparel from it?

There are several reasons for Turkey’s woes. One factor is worsening relations between Turkey and the US, with US President Donald Trump recently approving the doubling of tariffs on Turkish steel and aluminium following Turkey’s refusal to free an American pastor held in detention. The US might have bitten off more than it can chew taking China on in a trade-war, but in a battle between Turkey and the US, there is only one winner.

There are other concerns. International investors are worried that Turkish companies borrowed heavily to benefit from a rapid growth in the construction industry. It is believed they will now struggle to pay back loans in euros and dollars – using a rapidly depreciating currency to purchase these denominations – as borrowing costs rise to 18 per cent per year.

Inflation is also at dangerously high levels. Inflation goes hand in hand with a weakened currency, and is currently running at 18 per cent in Turkey. Only by raising interest rates will the Turkish government be able to stop the rot here – but will it be prepared to take such an unpopular decision?

For Turkish apparel and textile exporters, there are short term benefits to a devalued currency and we may already be seeing that. Apparel exports from Turkey increased by 7.4 per cent in the first seven months of 2018, according to data from the Turkish Statistical Institute. Expect a similar increase, perhaps even greater, in the next half year.

The problem for exporters in Turkey is raw materials. Most mills source raw materials from international markets in denominations of Euros or US Dollars. With raw materials making up more than half of fabric costs, the challenges for mill owners here are obvious.

Can these price increases be passed on? Many mills will be locked in fixed price term contracts in Turkish Lira, yet with raw materials costs effectively increasing by 30 per cent more, their bottom line is being hammered as they absorb cost increases internally.

What does all this mean for the long term? There are several concerns for us. Firstly, Turkey needs to get inflation down. It may have to make some hard decisions in the short term, the most obvious being to raise interest rates. Venezuela, where inflation is currently running at 1,000,000, per cent is a lesson to all on the dangers of allowing inflation issues to go unchecked.

It also needs to sort trade relations with the US. Europe is Turkey’s biggest trading partner but relations with the US remain hugely important. An ongoing public spat with the US damages investor confidence and may discourage brands from placing orders in Turkey.

Will the textile industry in Turkey contract? On the condition of anonymity, one international mill owner told us the next six months “would be critical … it is the uncertainty and volatility [around currency prices and inflation] that is causing the problems … for exporters. We need a period of calm.”

 

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