[New York Times]Turkey Braces for Yet Another Currency Crisis

When the Turkish lira plunged to a new low against the dollar and euro this month, Hakan Bulgurlu did not panic. This was not the first time that Mr. Bulgurlu, the chief executive of Arcelik, a Turkish maker of home appliances, had steered through a currency crisis.

“We’re doing business in Pakistan, in Bangladesh, in India, in Turkey, in South Africa,” said Mr. Bulgurlu, who is 48 and has an M.B.A. from Northwestern University. “You get hardened. You learn how to deal with crises.”

But for Turkey the currency crisis, the second in less than two years, combined with the pandemic, presents a heightened risk of economic collapse.

Economists are predicting a sharp downturn after the decline of the lira raised the specter of another round of soaring prices for imported goods like medicine and fuel. International investors are alarmed by the financial maneuvering and flood of cheap credit that President Recep Tayyip Erdogan has used to prop up the lira and fuel economic growth.

As a matter of policy, Arcelik, which has 32,000 workers, half of them in Turkey, had already bought protection in financial markets that shielded the company against foreign exchange turbulence. It was one of the ways that Mr. Bulgurlu and other members of Turkey’s battered entrepreneurial class have adapted to the country’s volatile economy. And it helps explain why Mr. Bulgurlu believes that Turkey will skirt disaster, just as it has in the past.

“I’m a believer in Turkey,” he said in an interview. “Turkey always seems to get through these things on a knife’s edge.”

Turkey’s economic fate has geopolitical ramifications. Recently, Turkish armed forces have behaved aggressively in the Mediterranean toward France and Greece, which are NATO allies. Analysts view the confrontations as an attempt by Mr. Erdogan to stir up nationalist sentiment and distract Turks from their money problems. His hold on power was shaken last year after his party lost control of the municipal government in Istanbul.

The sharp devaluation of the lira, which lost 7 percent of its value in August, has already led to higher prices for food and other basics, stirring resentment.

“Everything is unbelievably expensive,” said Derya, a 41-year-old math teacher, who did not want to give her last name because she is a government employee. She said she was mixing more onions into her meatballs to make them go further. Because of the lira’s decline, she said while shopping at an Istanbul market, “we have gotten poorer.”

Mr. Bulgurlu argues that Turkey still has underlying strengths, such as a strong work ethic and a young population eager to consume. Turkey’s future, and its role in the Western alliance, may hinge on whether Mr. Bulgurlu’s faith in the country’s resilience is justified.

Arcelik is emblematic of the rapid economic development that Turks enjoyed until recently. From 2000 to 2013, average incomes more than tripled, poverty fell by half and Turkey entered the ranks of middle-income countries. But economic output per person has slipped back to 2010 levels, according to World Bank data.

Founded in 1955, Arcelik prospered by supplying washing machines, refrigerators, televisions and other appliances to Turkey’s growing middle class. It also expanded abroad, proving that Turkish companies could compete around the world.

Arcelik is Europe’s second-largest home appliance manufacturer by market share after the German electronics giant Bosch. It has rejuvenated Grundig, a classic German label that passed into Turkish hands after going bankrupt in the early 2000s. Internationally, Arcelik is probably best known for its Beko brand.

Mr. Bulgurlu became chief executive in 2015 after holding a number of management positions at the company, including head of sales in Asia. He has tried to position Arcelik as a technology innovator with a social conscience. The company has invested heavily to reduce its appliances’ energy use, he said, and invented technology for washing machines that filters out plastics shed by synthetic textiles, so that they don’t end up in the oceans.

When the pandemic hit, Arcelik adapted its manufacturing operation to produce 5,000 ventilators, which the company donated to countries unable to afford the lifesaving equipment. Arcelik also provided ventilators for field hospitals at refugee camps along Turkey’s border with Syria.

Arcelik’s sales have held up relatively well during the pandemic in part because being stuck at home prompted many people to upgrade their appliances. Still, the company reported a 7 percent drop in revenue from April through June, to 7.8 billion liras or $1.1 billion. Sales have begun to recover in Western Europe and some other markets.

“We are working at full capacity and having trouble meeting the demand,” Mr. Bulgurlu said.

During past currency crises, Turks could take comfort that a devalued lira brought a few benefits, like an influx of bargain-hunting tourists.

But that upside no longer applies in the pandemic. On Turkey’s Mediterranean coast, which is popular with European and Russian vacationers, many hotels did not open at all and most of those were at least half empty during the peak beach season, said Ahmet Akbalik, owner of the Ela Quality Hotel in the resort city of Antalya.

“Everyone considers this year as lost and have their eyes on 2021,” Mr. Akbalik said by telephone.

In theory, a weaker lira makes Turkish goods cheaper abroad and more competitive, helping manufacturers like Arcelik. But that advantage works only when the foreign customers are still buying.

Muhittin Tokus, 55, used to employ more than 100 people, including his four sons, at a factory in Istanbul that made swimsuits for larger manufacturers. But sales evaporated because of the pandemic, and the company went bankrupt. All that remained of the business was a market stand Mr. Tokus rents in Istanbul market to sell excess inventory.

He said he took in about 2,000 liras, or about $270, on a recent day. “It is all because of the pandemic,” Mr. Tokus said.

For Arcelik, any cost advantages from a weaker lira are canceled out by the reduced buying power of consumers in Turkey, which remains an important market. “As a nation, we become poorer,” Mr. Bulgurlu said.

Mr. Bulgurlu, who went to college in Texas in addition to Northwestern and speaks flawless English, said he supported efforts by Mr. Erdogan’s government and the Turkish central bank to brake the lira’s decline. It was trading as low as 7.4 to the dollar this month, down from 5.9 to the dollar at the beginning of the year. The lira rose after Mr. Erdogan announced last week that Turkey had discovered a major gas field in the Black Sea, but the rally was short lived.

The government has pressured banks to lend more, helping to prop up consumer spending but also feeding inflation, which is at an annual rate of almost 12 percent. The declining buying power of the lira is one reason it has been losing value against other currencies. In addition, many foreign investors lost faith in Turkey during the last crisis, in 2018, meaning there is little demand for lira assets.

The central bank has tried to intervene by buying liras in currency markets, but it is running out of dollars to do so, analysts say. Economists say the central bank has begun borrowing dollars deposited in Turkish banks by businesses and residents, a strategy that is likely to end badly.

“This is a train wreck in slow motion,” said Ugur Gurses, a former central banker who writes about the Turkish economy.

The central bank has so far refused to raise its benchmark interest rate. That would be the standard remedy for a falling currency but would conflict with Mr. Erdogan’s unorthodox view that high interest rates cause inflation. The current official rate of 8.25 percent, which the bank left unchanged at its meeting last week, is effectively negative because it is below the pace of inflation.

Burned by past crises, many Turkish businesses have scaled back one risky practice that was once rampant: borrowing in foreign currencies. Loans denominated in dollars or euros come with lower interest rates, but they can be ruinous for a company that earns its revenue in liras. The more the lira depreciates, the more expensive the foreign currency loan becomes to repay.

Foreign currency loans still account for 40 percent of all loans made, according to official data, and remain a threat to the solvency of Turkish businesses.

About half of Arcelik’s debt is owed in dollars, normally a red flag. But Mr. Bulgurlu said the company had enough revenue in euros, a currency that has been gaining in value against the dollar, to cover its dollar debts. It hedges the rest.

“We hedge everything. We don’t take any currency risk,” he said. “That’s a principle we adopted a long time ago. It helps us management just focus on our business and not worry what happens in the currency markets.”

Carlotta Gall contributed reporting.