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Assessing Impact of Turkish Currency Devaluation on Procurement

by Govindarajan Parthasarathy , Principal Analyst

1 February 2022

What is the Current Situation in Turkey?

Turkey has been facing a devaluation of the Lira.

Procurement Impact

Pharmaceuticals: The crash of the Lira has increased the procurement cost of raw materials for domestic pharmaceutical manufacturers, impacting their profit margins. Due to devaluation of the Lira, Turkish manufacturers can consider increasing imports from South Korea, as the Lira is stronger than the South Korean won. In addition, India currently accounts for 4.6 percent of Turkish imports, respectively, by value. Imports from India could also increase.
Fertilizers: Prices of urea and DAP fertilizers have risen from 1,800 and 2,200 Turkish Lira (TRY), respectively, to 14,700 TRY, due to an increase in raw material import costs. Government intervention in the form of purchasing fertilizer and raw material imports to sell it at discounts to farmers is a feasible option to mitigate the high fertilizer prices. China can also be considered as a sourcing region for cheaper fertilizer imports.
Fruits and Vegetables: Devaluation of the Lira is likely to have a positive impact on Turkey’s export share, making the country’s exports more competitive. However, Turkey also imports a considerable amount of fruits and vegetables, and import prices can potentially rise, due to devaluation, along with the increase in fertilizer prices. This can be countered by government intervention.
Construction: Prices of cement, ready-mixed concrete, and sand are rising on a daily or weekly basis. Costs for rebars, concrete, and other construction materials have risen by over 40 percent. Sourcing raw materials, like concrete, from the top exporters in Asia, such as China and Vietnam, respectively, could mitigate the high costs of importing from the EU.
Automobiles and Textiles: Automotive exports to Europe, Russia, the UK, and other regions could increase. The textile sector is already experiencing increased exports, due to higher competitiveness from the depreciation of the Lira. The impact on these sectors is positive.
Steel: The export market for rebars is not likely to exhibit a rapid growth, despite the Lira devaluation, since safeguard measures in the EU and the US limit Turkish exports.

Which are the Markets Vulnerable to the Procurement Impact of Currency Devaluation in Turkey?

Current Situation (1,13)

Turkish currency (Lira) has declined in recent months, to about a quarter of the value of the US dollar in November 2021 and falling past 14 to the dollar in December 2021
The Lira has overall weakened by 48 percent compared to the US Dollar so far and is considered to be the worst-performing currency in the emerging markets
Turkey requires exporters to convert a quarter of their revenues to Liras, which is causing a loss

Reasons for Decline (2)

Turkey’s broad money supply rose by 3.5 times between 2014 and 2020, while the US dollar has risen by only 0.5 times, which has made the Lira drop in value against the Dollar
Turkey has a large current account deficit, with a value of imports higher than exports, and foreign investors reluctant to purchase Liras, due to its’ unpredictable exchange value
Low interest rate policies to increase prices of bonds and debts have used money supply and prices to rise

Focus Markets for Assessing Procurement Impact

The primary impact of Turkish devaluation can be broadly determined to affect the country’s markets associated with trade
The pharmaceuticals sector is experiencing supply losses and disruptions, due to increased import prices
The fruit and vegetable market and the fertilizer market are also likely to be impacted by the currency devaluation

Potential Impact on Procurement (2,3)

The markets that depend on imports are likely to be most affected, due to potentially higher import costs
Higher priced raw materials can increase the cost of production
Low interest rate policies could continue in the future, and so this can cause a further drop in the value of the Lira, thus creating a need to adapt to this trend

Pharmaceuticals Market – Procurement Impact The pharmaceuticals market is affected in the form of higher raw material costs and a supply crunch.

Current Situation (4)

Supply: About >90 percent of the entire pharmaceuticals market in Turkey is made of prescription medicines, with >85 percent reimbursed. Originator brands represent approximately 70 percent of sales by value. Approximately 70 percent of the market share by value is held by foreign-affiliated companies, which have bases in the country
Demand: The bulk of demand primarily comes from growing and aging population, as well as by improvements in access to healthcare and service quality
Reference Price: This is determined by the lowest price of similar products at Manufacturer Selling Price (MSP) in countries, like France, Greece, Italy, Portugal, and Spain. Single source originals have an MSP of 100 percent of reference price, while originators and generics have a price that becomes 60 percent of the reference price post-patent

Procurement Impact (4,5)

The crash of the Lira has increased the procurement cost of raw materials for domestic pharmaceutical manufacturers, impacting their profit margins
The reference pricing system in which the lowest price among the five European countries is taken as the reference price is responsible for higher import costs, due to the devaluation of the Lira
Some manufacturers have also cut down on imports of expensive raw materials or pharmaceutical products, which, in turn, has created a supply crunch
The primary supply disruptions are associated with children's painkillers, fever suppressants, nasal sprays, and cough syrups

Mitigation Strategies (6)

The primary challenge facing the Turkish pharmaceutical sector is the import of pharmaceuticals from the European countries, which entails high input costs, due to the devaluation of the Lira
Major sourcing regions for Turkey and their market shares by value include Germany (22 percent), the US (14.1 percent), Switzerland (10 percent), South Korea (9.6 percent), and Italy (9.1 percent)
Due to the devaluation of the Lira, Turkish manufacturers can consider increasing imports from South Korea, as the Lira is stronger than the South Korean won
In addition, India currently accounts for 4.6 percent of Turkish imports, respectively, by value. Imports from India could also increase, in addition to South Korea, for manufacturers to access cheaper raw materials, reduce cost of production, and ensure sustained supply

Fertilizer (7)

Supply: Turkish supply of fertilizer is in general lower than that of demand, being approximately between 80 and 90 kilograms per hectare. As costs for fertilizer increase, this drives up the prices of commodities, such as crops as well
Demand: Annual consumption of fertilizer is usually between 120 and 130 kilograms per hectare, growing at the rate of 5.26 percent annually

Procurement Impact (4)

Prices of fertilizer have increased by 72 percent compared to the previous year
Prices of urea and DAP fertilizers have risen from 1,800 and 2,200 Turkish Lira (TRY), respectively, to 14,700 TRY
Gübretaş, a major Turkish fertilizer producer, has terminated a government procurement contract, citing volatility in raw material import costs

Mitigation Strategies (8)

Government intervention in the form of purchasing fertilizer and raw material imports to sell it at discounts to farmers is a feasible option to mitigate the high fertilizer prices
A fixed exchange rate could also regulate the price movement

Fruits and Vegetables (9)

Supply: Turkey is a major exporter of fruits and vegetables, with export volume amounting to 3.3 MMT of fruits and >1 MMT of vegetables. Revenue from exports estimated at $5.7 Billion in 2020–2021
Demand: Russia accounts for approximately 18 percent of Turkish exports of fruits and vegetables

Procurement Impact (10)

The devaluation of Turkish Lira makes Turkey more competitive in the export markets
Cheaper exports of mandarins and hazelnuts are likely to increase export share compared to competitors, like Georgia
Turkish apples are likely to be more competitive in exports compared to Ukrainian or Moldovan exports
However, a rise in prices of fertilizers can offset this by reducing supply

Mitigation Strategies (10)

In general, devaluation of the Lira will increase Turkish export share, which can be viewed as a positive impact
Turkey also imports a considerable amount of fruits and vegetables, and import prices can potentially rise, due to devaluation, along with the increase in fertilizer prices
Government intervention to ensure fertilizers can be procured by farmers at affordable prices can also have a knock-on effect for the fruits and vegetables market
Fertilizers can also be imported from China

Construction (11)

Supply: The construction sector accounts for 6 percent of the country’s GDP. The country mainly imports building properties and raw materials
Demand: With rising inflation (~20 percent) and living costs, there is a lesser demand in the residential construction sector

Procurement Impact (11,12)

Most of the raw materials for the construction sector are imported, and thus, this has led to higher input costs
Prices of cement, ready-mixed concrete, and sand are rising on a daily or weekly basis
Costs for rebars, concrete, and other construction materials have risen by over 40 percent

Mitigation Strategies (11,12)

The three main challenges facing the construction sector are cost increase, deteriorating profit margin, and delay in construction projects
The sector could be supported by new loan packages offered by state banks (and) tax incentives
Sourcing raw materials, like concrete, from the top exporters in Asia, such as China and Vietnam, respectively, could mitigate the high costs of importing from the EU

Automobiles (14)

Supply: Turkish output of automotives amounted to 70,974 units in November 2021, which was a 22.1 percent decline. The country is ranked 15th in the world, in terms of automobile production and engineering
Demand: Demand has weakened for new and second-hand vehicles, owing to increasing prices

Procurement Impact (15)

Turkey is a major exporter of automotives. Exports have risen by 16 percent to $26.4 Billion in 2021 Y-o-Y
The devaluation of the Lira has caused fluctuations in prices, thus decreasing demand
French manufacturer, Renault, temporarily stopped selling cars, since prices had to be repeatedly updated

Mitigation Strategies (16)

Turkey is a major automobile exporter, and the devaluation of the Lira could make the country competitive
While exports to Europe, Russia, the UK, and other regions could increase, local production is likely to fall, due to depreciation in the value of the Turkish Lira, which, in turn, can impact exports
However, the minor drop in production is not likely to impact exports to a great extent, which are projected to pick up in a post-COVID 19 market
No mitigation strategies are required, since exports are projected to grow

Steel (17)

Supply: Turkey is a major exporter of steel, with steel production estimated to exceed 40 MMT in 2021. Turkey is the largest steel producer in Europe and the 7thlargest in the world
Demand: Russia accounts for approximately 18 percent of Turkish exports of fruits and vegetables

Procurement Impact (18)

The steel industry has increased its export value by 2021
Italy, Spain, and Belgium are the primary export destinations for Turkish steel, accounting for close to 50 percent of the exports by volume

Mitigation Strategies (18)

The devaluation of the Lira has exerted pressure on steel export prices, and thus, Turkish steel is very competitive in the export market
However, the export market for Turkish rebar is currently slow, since the depreciation of the Lira is offset by steel import safeguard measures (quotas) in the EU and the US
Since the exports by Turkey to the EU and the US are limited, due to the safeguard measures, the country can consider increasing exports to regions, like Singapore and Hong Kong

Textiles (19,20)

Supply: Turkey is one of the largest producers of textiles. The sector accounts for 40 percent of the country’s industrial production and contributes to 10 percent of the country’s GDP
Demand: Exports have risen by 5 percent, due to the devaluation of the Lira

Procurement Impact (21)

Turkish exports of apparel increased by 25.7 percent between January and September 2021 compared to the same period in the previous year
Currently, the devaluation of the Lira has increased pressure on export prices, thus making exports competitive
However, input costs have gone up as well

Mitigation Strategies (22)

Despite the current competitiveness of Turkish exports, it is likely that a rise in raw material costs will be experienced by Turkish exporters, due to the devaluation of the Lira
The costs of fabric, thread, and other raw materials have risen, since they are priced in US Dollar
Turkish exporters can consider local sourcing or importing some of the raw material from countries, like Egypt, since the Egyptian pound is weaker than the Lira
Despite this minor challenge, the textiles industry is likely to experience an increase in global market share

Conclusion

The Turkish Lira has devalued compared to the US Dollar and Euro. The major implications of these are higher input costs and more expensive imports, which can affect the pharmaceuticals, fruit and vegetable industry, and the construction sector. The primary mitigation strategy is for Turkey to consider importing raw materials and finished products from Asian countries, like China, Vietnam, and India, which would enable cost reduction. China and Vietnam are the top exporters of steel and concrete, while China is also a major exporter of fertilizers. Though the Turkish Lira still has lesser power than the Chinese Yuan, importing from China would still incur lesser costs than the EU or the US imports. South Korea would represent an ideal sourcing region for pharmaceuticals, since the Lira is stronger than the South Korean Won. India is also a viable sourcing destination. The devaluation of the Lira is likely to increase exports of automobiles and textiles. Despite a potential increase in raw material costs, the export shares are likely to increase, due to higher competitiveness. In the case of steel, the EU and the US safeguard measures make it challenging for Turkish exports to grow, despite the devaluation of the Lira. Increased steel exports to regions, like Singapore and Hong Kong, are options for exporters to increase market share.

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