۩Turkish Lira Slides: Implications
The Turkish Lira has devalued by approximately 10% over the last 2 weeks so those with major currency investments in the lira, or anyone in the process of arranging a currency exchange to buy their Turkish property in Turkish lira, is well advised to think carefully before acting. Good news for potential purchasers, not so for savers of lira.A little over 10 days ago the Turkish Central Bank rates for Sterling stood at YTL2.35 (New Turkish Lira), today the rate was YTL2.63 (rates on the 'Tools' page). Their has been speculation for about a year now that the currency was over-valued and this seems to have translated into action. Dow Jones News Wires report that large investors are dumping the currency with concerns over the country's ability to repay loans on time to the International Monetary Fund (IMF). Other concerns seem to be higher than expected inflation figures for April - driven by oil prices. More in our forum on future speculation or here for a Reuters report
In short- no. Our simple advice is to spread your investments and if you have large deposits in Lira, perhaps think about moving some elsewhere. The primary concern should be the reason for any currency investment in Turkey. If you live in Turkey, it makes sense to have more of your money invested there as costs of continual exchanges can add up in commissions. If you are a speculator, this probably isn't the right article for you to be reading but if you are planning to buy a Turkish property, you really need to understand the process even if the recent exchange rate movement means that the overseas (sterling) buyer actually benefits .
If we take the exchange rate today as £1.00=YTL2.60, then the YTL1,300,000 exchange would be equivalent to £50,000 (minus bank commission)
Two weeks ago, when the transaction was arranged, the exchange rate stood at £1.00= 2.35YTL. The YTL1,3000,000 exchange would have been equivalent to £55,319 (minus bank commission)
It is easy to see that the Turkish property has dropped in sterling price simply because of a currency adjustment but it is important to remember that the opposite would apply if the Turkish Lira strengthened.
This model assumes that the vendor of the property does not increase the price, knowing that this currency movement has taken place. This is an extremely underhand tactic and you are advised to walk away if this happens.
Essentially, there are two methods but both will involve using a specialist currency broker and while this might be useful for residents exchanging living expenses to Turkey, it is primarily for large exchanges. Currency brokers can remove some of the uncertainty of an exchange into Turkish Lira. The first method is known as a 'spot trade'. With this method, you buy all of your currency in advance at a fixed rate, which is fine if you have the money available to do this. If you do not have all the funds available in advance, you can use a second method known as a 'forward trade'. Usually, these trades are commission free and the following is an example of how this works:
- You take out a contract with a currency broker to buy £50,000 of Turkish lira in 3 months from 15th May at a fixed rate of £1.00=YTL2.60. Total you will receive=YTL1,300,000
- You pay a deposit of 10% on the contract for £5,000 (the broker holds this)
- In 3 months (15th August) you buy the remaining £45,000 of Turkish lira at the rate you agreed on 15th May. Total you actually receive=YTL1,300,000
With this scenario, you know how much you will have in Turkish currency on a fixed date in the future and if this security appeals and you have signed a contract with a vendor/developer for a fixed price, it is a sensible method to employ. The forward contract can be extended significantly if you purchase is an off-plan development with staged payments and you could take out more than one contract at different rates. One thing to remember is that while the brokers might claim that their contracts are commission free, in reality they will accrue interest on your deposit. They will also gain from making large trades using your and other people's contracts combined on the same day and while this is not to say that their service is a bad one, it should be taken into account.
Above all, remember that you are at the biggest risk if you agree a sale price for a property in Turkey, in advance and then wait to exchange the money until the day it is required. You may be fortunate and find that, as in recent days, you gain, but equally you may lose significantly. However, if using a bank on the day still appeals to you, check in advance how much their commission will be as this varies considerably.
Tags: Turkish Lira foreign exchange, Turkish property
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