4 Dec 18

Crisis in Turkey: local currency, please

A couple of months after the outbreak of the crisis in the operational leasing sector in Turkey, we take another look at this challenging but at the same time promising market.

After the sudden currency crisis that erupted in Turkey, the government took various measures and enacted a new law for the operational fleet leasing sector. Now, operational fleet leasing companies can no longer quote leasing contracts in foreign currency. Instead, operational car rental contracts must be written in the local currency (TL).

The recent crisis brought to light that the euro contracts were very risky for leasing companies that took loans in euro to finance their fleet.

This law has consequences for both customers and leasing companies.

From the customer side, leasing in euro was not a very big risk. The leasing prices were so low that even if the euro doubled, the customer did not suffer much. For example, a customer leasing 10 C-segment cars would have paid TL9,000 per month while the exchange rate was TL3. When the euro hit TL6, this customer will still happily pay TL18,000. While the borrowing rate for the euro is 10%, it is 25% for TL, which is why customers prefer this strategy. From the customer point of view, this law did not seem very advantageous.

From the point of view of operational leasing companies, it was advantageous in terms of monitoring their finances properly and in terms of euro risk. When they borrowed in euro, they suffered heavily at times of crisis. Euro increase affects operational fleet leasing company strongly, particularly the amount of credit that remained to be paid at the end. Often, it was very difficult or even impossible (Fleetcorp) to make the last balloon payments, making it impossible for them to sell their second-hand cars. In turn, this led to a big cash flow shortage. Once the new law is in place, this risk no longer exists.

Henceforth, all leasing contracts will be in the local currency. This is very attractive for the companies who are thinking about entering the sector as they will get a view on much higher profits.

Author: Nevzat Girgin