Lira Depreciation And Slowing Demand Distort Companies' Cash Flow

The sharp rises in exchange rates and the credit restriction measures introduced by Banking Regulation and Supervision Agency (BRSA) in 2014 which slowed down domestic demand, distorted the cash flows of the companies, making it difficult for companies to collect their receivables, according to a report released by Coface, on Monday.

"The sharp depreciation of the lira at the beginning of 2014 coupled with the slowdown in the pace of economic growth caused a deterioration in cash flow management of these companies and resulted in delays in payments" said Seltem İyigün, MENA Region Economist at Coface.

In line with those developments, impairments had started to be observed in the payment capacities of sectors with production and sales concentrated predominanliray on the domestic market, she said and added: "The rises in both protested bills and bad checks confirm this impairment. Bad checks amounted to 15.9 billon lira in the first 10 months of 2014, up by 5.4 percent. The amount of protested bills also rose by 9.1 percent y-o-y in the first ten months of 2014, due to rising interests and slowing domestic demand."

GEOPOLITICAL RISKS

"Developments in the global economy, geopolitical risks, the expected process of interest rate hike by FED and the upcoming general elections in Turkey signal the persistence of exchange rate risk. This suggests that we are entering a period when companies must manage their cash flows and borrowing much more consciously. Coface highlights the risks in construction and non-iron and metal sectors in particular."

ENTROPRENEUR INFORMATION SYSTEM

According to Entrepreneur Information System (EIS) data announced by Ministry of Industry, total number of enterprises in Turkey reached 2 million 973 thousand in 2013, up by 11.4 percent relative to 2012. Given that the number of enterprises in Turkey was 1 million 806 thousand in 2006, when records were started to be regularly integrated, it is evident that stable growth and lower inflation and in-terest rates relative to past years have contributed to improvement of investment climate in Turkey. The average number of enterprises entering Turkish economy annually is around 160-170 thousand.

POLITICAL UNCERTAINITIES

"It is noteworthy that the exchange rate losses of companies have surged significanliray due to the rises in exchange rates at the end of 2013. Due to the political uncertainties and global risk aversion against the emerging countries, the lira weakened 15 percent against the dollar in December 2013-January 2014 period. Accordingly, exchange rate losses jumped 163 percent in 2013 compared with 2012" İyigün said

EXCHANGE LOSSES

In the manufacturing industry exchange rate losses grew by 122.7 percent during the same period while in the wholesale and retail trade sector these losses rose around 187 percent. The construction sector, one of the leading sectors of Turkish economic growth, exchange losses jumped 130 percent between 2012-2013.

"This is an important indicator of the vulnerability of companies to volatility in exchange rates. In the light of these data, net average profit margins of the construction, manufacturing and wholesale & retail trade sectors during the last five years have been calculated as 4.3 percent, 2.9 percent and 1.6 percent, respectively" she said.

According to the barometer prepared by Coface by taking as a basis indicators like sector payment performances, macroeconomic balances, sector supply and demand developments and risks in export markets, sector risks are assessed as follows:

METAL SECTOR

Risk level: very high. Import-dependence in raw material supply declines in raw material prices and the negative impacts of changes in exchange rates on borrowing costs are the main risks facing companies. The high cost of energy in Turkey poses a risk for metal sector which is highly dependent on energy for production, and leads to the weakening of competitiveness.

FOOD SECTOR

Risk level: medium. The greatest risk for food producers is the rise of production costs due to drought experienced during 2014. Small and medium size producers, in particular, are negatively affected by the increases in costs. On the hypermarkets side, problems are observed in the management of cash flows due to extended payment terms.

CHEMICAL SECTOR

Risk level: high. Almost 70 percent dependence on imports in raw material supply, the vulnerability to volatility in exchange rates due to borrowing cost and the impacts of slowdown in the construction sector are assessed as high risk factors.

CONSTRUCTION SECTOR

Risk level: very high. This sector represents 6 percent of GDP and accounts for 7.5 percent of total employment in Turkey. Construction sector is characterized as faster growth during times of economic growth and faster slowdown during times of economic slowdown.

RETAIL SECTOR

Risk level: medium. Household spending accounts for some two thirds of GDP in Turkey. Average monthly consumption spending per household reached 2,572 lira in 2013, up from 2,120 lira in 2011 and 2,366 lira in 2012. Nonalcoholic drinks accounted for 19.9 percent of household spending in 2013, followed by household appliances with 6.6 percent, apparel and shoes with 5.3 percent and alcoholic drinks with 4.2 percent.

TEXTILE-APPAREL SECTOR

Risk level: medium. The volatility in cotton prices, the primary raw material for this sector, rises in exchange rates and the fact that companies produce predominanliray for certain large foreign buyers are among the key risks. However, factors such as the recovery in the EU, the largest export market, the advanced machinery stock of the sector, advantages of geographical position, and the high flexibility of producers in terms of market and product diversity support the rise in the sector's sales.

PHARMACEUTICALS

Risk level: low. Turkey is among the major markets for the pharmaceutical sector, on account of its growing population and per capita income as well as easier access to pharmaceutical products. In Turkey, per capita healthcare spending amounted to 1,110 lira in 2013, up from 987 lira in 2012. - Istanbul