Effective from 13 September, Turkey has restricted foreign currency-denominated or indexed payments among residents in Turkey in relation to the:
- sale of movable and immovable property;
- lease of movable and immovable property, including without limitation financial leasing and fleet leasing; and
- employment agreements, service contracts and work contracts
unless the transaction falls within any of the exemptions to be determined by the Ministry of Treasury and Finance (“Ministry”). As of the date of this publication, the Ministry is yet to announce the exemptions.
For existing contracts, the parties to such contracts are required to convert the contract value into Turkish Lira until 13 October 2018.
The recent depreciation of Turkish Lira is one of the most substantial financial incidents of this year. Since the beginning of the devaluation, certain affected parties have been calling out the government to regulate foreign currency denominated payment obligations, especially in relation to the rent payments in shopping malls where rents are usually denominated in Euro or US Dollar.
Answering to such demands, the President has now issued an executive order to restrict foreign currency-denominated or indexed payments among residents in Turkey by amending the Decree No.32 on the Protection of the Value of the Turkish Lira (“Decree No.32”), as explained above.
Certain Potential Implications
At this stage, it is not possible to evaluate the impacts of this restriction in full. We will have better clarity once the Ministry announces the exemptions and sets out the enforcement rules. As in the case of other restrictions under the Decree No.32, we expect that banks in Turkey will have overall liability to ensure compliance. To that end, banks are likely to require the resident transferor and/or transferee of any payment denominated in foreign currency to prove that the payment is exempt from the restriction.
Nevertheless, shopping mall investors in Turkey seem to be the most affected parties by this restriction. Because it was almost a norm that rents at shopping malls are denominated in Euro or US Dollar, investors have relied on foreign-denominated loans to finance their investments. Until today, shopping mall investors were therefore benefiting from a “natural hedging” against the depreciation of Turkish Lira. However, with this restriction in place, they may need to shoulder the effects of the depreciation vis-à-vis their financing requirements. Coupled with the restrictions on foreign-currency loans (on which we reported earlier), we may expect that investors would either take the depreciation risk or re-finance their loans into Turkish Lira, which may result in higher financing costs due to the current interest rates in Turkey.
Another sector that is expected to be affected by this restriction is the importers of foreign specialty goods (such as laboratory equipment and products or special machinery). There is a commercial custom in Turkey to denominate such products in foreign currency for sales to residents in Turkey, protecting the importer against currency risks. In that respect, the effect of this restriction would be that importers would either require a full payment at the date of order or would not make some products available in the market. In either case, associated costs of the consumers/customers is likely to increase.