Do you still get surprised when exchange rates go up?

I’ll cut to the chase: Yesterday, a television channel put me on air and asked me if exchange rates will keep rising. “Was it normal when they were down ?” I said. Do you want to know why I said that? Here’s the answer.

The first week of 2019 was off to a bumpy start for emerging markets. There’s been a sales wave in the Far East especially with the utterance of negative expectations for the US economy and the concerns about global economy. But these are not the only reasons why I made the statement above.

I held several meetings with the representatives for certain sectors while markets were experiencing such developments. I think the “debt risk” will continue to be the biggest problem of all sectors. Especially the firms that have engaged in long-term investments areas outside their areas of specialization relying on their high profit margins are facing great risk. The debt stock of Turkish private sector is slightly above 200 billion USD. And the Government doesn’t have enough money. This is not a secret.
At this very stage, the fact that CBRT holds its Extraordinary General Meeting obviously doesn’t go unnoticed. When we put two and two together, I think it wouldn’t be very realistic to expect exchange rates to fall down anytime soon.

“Scale is important, but….”

It’s possible that the firms I mentioned above can start racing each other for selling their “frozen” assets but the circumstances are neither suitable nor convenient. And it’s unlikely that investments that have not been yet fully completed would be finalized by others. Maybe the firms can initiate involuntary mergers.

Creditors that offer loans to firms depending on external financing and floating with low profitability because of fierce competition would undoubtedly consider firms’ scale. Large-scale firms cannot guarantee that they will not go bankrupt. However, as scale grows larger, firms operating in certain sectors may have more chance to survive. I even think that it would be rational solution to provide help to firms having intention to acquire smaller firms in order to become larger. Obviously, cash flow statement of these firms must be carefully examined.

In sectors that are mainly involved in design and R&D, on the other hand, it looks like a rather optimal capacity will be maintained throughout 2019. I can even foresee that firms whose more than 50% of total sales consist of exported goods will experience relatively fewer difficulties this year. Accordingly, Financial Institutions should start taking into account the “export” factor in financing from now on.

Naturally, no collateral other than a proper cash flow would be more assuring. In the upcoming period where assets sales will be more difficult than ever, the professionals who are capable of properly managing debt maturities will become more important than collaterals or other securities. Judging from my experience, organisations that are managed based on three pillars (Financial and Administrative Affairs, accounting-finance-reporting) are more resistant to economic impacts.

I suggest Financial Institutions to take into consideration the amount of experience of finance staff, especially of those who are responsible for managing the cash flow, when providing loans. As I’ve seen many firms that went bankrupt while making high profit, I must indicate that firms absolutely need human resources that are capable of “managing the good days in the most effective way possible”; because it’s not technically possible to learn how to swim instantly when you fall overboard. You have to have prior experience and knowledge.

PS: I find it unnecessary to talk about inflation rates any further. CBRT should avoid taking any hasty action before we see some improvement in core inflation. If CBRT does the opposite, this may lead to further rise in exchange rates. Better safe than sorry!