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Monday, 06 August 2018 00:00

The Turkish economy - inflation, exchange rates, interest rates: what it means for Kalkan

Kalkan market Kalkan market

In many ways Kalkan exists in a kind of bubble.  When you’re here you can pretty much forget your day to day concerns and relax and enjoy your holiday.

But the economy affects all of us - visitors, expats and especially our Turkish friends and neighbours.  And the Turkish economy is not doing well at the moment.  In this article we look at what this means for those of us in Kalkan.  KTLN has spoken to local businesses, holiday companies and bank managers. 

Admittedly, perhaps this isn’t the place to tell you about the problems of debt laden Turkish corporates such as Turk Telekom, or big foreign investors pulling their money out of Turkish bonds and equities, and why these things matter, but rest assured these things are happening and they do matter.  

In this report we are going to park these issues and instead we are going to look at some of the economic factors that resonate with the ordinary person on the streets of Kalkan.  Inflation, exchange rates and interest rates.

Inflation - CPI
The rate of inflation is high and the trend is not good.  Inflation as measured by the Consumer Prices Index was 15.85% in July 2018, the highest rate since January 2004.  It’s been double digit, or very close to double digit inflation for the last 18 months.  Some experts predict it will stay at this level until at least the year end.

CPI July 2018

There have been significant increases in the cost of food and drink (e.g. bread, butter, milk, eggs and meat); housing costs; utilities - especially electricity; home furnishings and eating out.  Just last month the Turkish government added a 15.5% special consumption tax to alcoholic drinks.  (Between 2003 and 2018, according to TUIK the price of rakı has increased by more than 700% and beer by more than 600%, due mainly to taxes).

Transport costs are also increasing (up 24% year on year) as the price of imported fuel goes up.  A litre of unleaded petrol will now cost you around 6.33 TL.  Interestingly at the current exchange rate a litre of unleaded in the UK is more expensive than Turkey - the equivalent of 8.50 TL.

Below: CPI in Turkey over the last ten years.

Turkey CPI 10 years

Exchange rates
Again the direction in which the Turkish lira has been heading is not helpful.  The lira has been weak over recent times and has lost significant value against the major currencies, including the US$ and the British pound.  

Last week we exchanged sterling for Turkish lira and got a rate of 6.6.  Ten years ago the rate was 2.2.  Only 12 months ago the rate was 4.6 which means the Turkish lira has lost around one third of its value in a year.  


Data from

The weak lira is unhelpful because it creates uncertainty and feeds through into higher inflation as imported goods cost more.  For people visiting Turkey on holiday there is a short term gain - you get more lira to spend for your pound, but this benefit is offset by the generally higher costs of goods and services.

Interest rates
If you’re a saver in the UK you will no doubt be already planning how to spend all that extra interest you are going to get as a result of the Bank of England’s increase in Base Rate last week from 0.5% to 0.75%.  Whoopee do!

Meanwhile over here in Turkey savers do a little better.  The interest rates available are in the region of 18% gross.  We are almost getting back to those heady days at the start of this century when rates were above the 20% mark.

Turkish interest rates

Despite the President of Turkey famously saying in May 2018 that interest rates were "the mother and father of all evil" (presumably meaning high interest rates), it seems quite likely that the Central Bank of Turkey is going to have to increase rates still further to meet market expectations.

If you're an expat you are probably only interested in rates for savers, but spare a thought for Turkish people and businesses who are borrowing lira.  In general terms what you are earning on savings they are paying on loans (plus a fair amount more).  

The combined effect
Looking at inflation, exchange rates and bank interest rates is interesting but you have to combine all these factors together to get the whole picture.  We are going to look at this from the perspectives of Turkish individuals and businesses; expats and visitors to Kalkan.

1. Turkish individuals and businesses
The perfect storm of high inflation, high borrowing costs, adverse exchange rate movements and for the previous two years decreasing tourism revenues has had a major impact on the local economy.  The one positive this year is that at least visitor numbers are bouncing back, which means more money coming in to the local economy. 

Locally over the last few years incomes have not been keeping pace with rising costs.  A number of people have spoken to us about how their day to day shopping and routine bills have become much more expensive, and things like running a car or a scooter are hitting people hard in the pocket (petrol and insurance costs).  Managing a household budget is not easy.

It’s expensive to borrow Turkish lira but many individuals and businesses have had to borrow to help them through the dip in tourism over the last two years.  Many are still servicing those debts and with borrowing rates typically between 20% and 30% it is a significant challenge.  (And to think some people in the UK were complaining recently about the Bank of England raising Base Rate by a quarter of one percent to 0.75%).  As well as bank borrowing there is a high level of inter-business debt in Kalkan.

To make matters worse some local businesses borrowed in foreign currencies thinking they would benefit from much lower interest rate charges.  Sadly this has backfired spectacularly because adverse exchange rate movements mean they now owe much more than the original amount borrowed, when converted back into Turkish lira. 

For example, if a debt of 100,000 TL was converted to US$ in August 2017 the amount of that loan would have been US$28,300.  At current exchange rates they now owe the bank the equivalent of 144,000 TL - 44% more than the original amount borrowed.  It's not just local businesses that have been caught out, many big corporates in Turkey did exactly the same but on a massive scale and they now have massive problems.  Read more about it here.

So in summary many Turkish people and businesses really are feeling the negative impact of these challenging economic conditions.  Sadly, some businesses have already failed.  Others are pinning their hopes on this year’s tourism bounce-back which will undoubtedly help.  But will it be enough?  Let's hope so.  Time will tell.

Below: Tourism numbers in Turkey.  So far 2018 is better than 2016/17 but still below 2014/15 levels.

Turkey Tourism 2008 to 2018

2. Expats *
For expats it’s a case of swings and roundabouts.  If you live in Kalkan you will undoubtedly notice the rate of inflation when you go shopping, pay your monthly bills or go out for a meal.  But the degree to which you really feel any worse off depends on where your get your income from.

If your income is in sterling, perhaps a UK pension, then as things stand right now you are getting considerably more lira for your pound and so you are better off than a year ago.  In August 2017 £100 would have got you 460 TL.  Today £100 will get you 660 TL - that’s 200 TL extra or an increase of over 40%.  Even though inflation is almost 16% you’re still considerably better off.

MoneyIf you are living off your savings in Turkish lira it’s not such a rosy picture.  Interest rates are similar to the rate of inflation, so you are at best standing still.  You will have to dig deeper into your interest and/or capital to pay higher shopping bills and other living expenses.

Looking at the last ten years British citizens who converted their savings into lira have been doing pretty well.  Admittedly it’s been a balancing act.  On the one hand the rates for savers are very good; on the other hand the sterling value of your capital invested has been eroded by exchange rate movements.  

This latter point is really only an issue if you are contemplating repatriating your savings to the UK, otherwise it’s only a theoretical loss on paper.  Tracking this over the last ten years we have calculated that those who have been saving in this way (in Turkish lira) have been ahead of the game.  In other words, any reduction in the sterling value of your capital has more than been offset by interest earned.  This is even more the case if you have been reinvesting your interest rather than taking it out, as you get a compound effect (earning interest on your interest).  

But the massive exchange rate movement seen this year is a game changer and the balance has now swung the other way.  We are now in a net deficit scenario.  Ideally savers would like to see a lower exchange rate but still benefit from those relatively high interest rates.  What will happen next is impossible to say.  Ten years ago we could never have contemplated an exchange rate of 6.6 lira to the pound so who knows?  Anything could happen.  

We are not going to cover the subject of property ownership in this report.  That's a whole different subject.

3. Visitors *
For British citizens visiting Kalkan it’s a similar swings and roundabouts scenario.  As we have already pointed out you are getting considerably more lira for your pound - 40% more than a year ago.  However prices have gone up in Kalkan.  In theory it should be around the rate of inflation but the reality is it could be more.

Things that are costing more:

General shopping
If you do self-catering you will notice that food shopping is more expensive, as described above.

Eating outEating and drinking in restaurants and cafes
Many restaurants, cafes and bars increased their prices for the start of the season and many are continuing to adjust prices upwards as the season continues.  In part this is undoubtedly due to the ever increasing cost of supplies plus staff wages and social security costs - not forgetting increased taxes on alcohol. 

Given Kalkan's visitor profile some of the increases may be calculated to factor in a share of the tourist's 'windfall' benefit from exchange rate movements.  But remember there are over a hundred places to eat and drink in Kalkan so competition is keen and pricing reflects this.

Some restaurants are pricing in sterling (or euros) as well as lira.  If you are paying a bill that shows the price in different currencies, and you are thinking about paying in a currrency other than Turkish lira it's not a bad idea to check the exchange rate being used for the calculation.

Have prices gone up?  Definitely.  But when we reflect on the cost of eating out in the UK and in other European resort destinations, and also bearing in mind the quality of the food and the standard of service, we have no hesitation in saying that Kalkan restaurants, cafes and bars are still a cut above the rest and represent excellent value for money.  You can still eat out cheaply in Kalkan if you want to.  There is plenty of choice for all budgets.

The picture here varies a little depending who you ask but everyone agrees that demand has increased this year compared to last year.  We are still not back to 2014/15 visitor levels though.

The supply of property rentals to foreigners has shrunk as some owners have pulled out of the rental market due to recently introduced paperwork required by the Turkish authorities.  This is counterbalanced by an increased supply in accommodation geared primarily at the domestic market - notably in some of the villages close to Kalkan.  Many would say there was oversupply in the market anyway so the impact of any shrinkage will be slight.

Theoretically with increased demand and let’s assume a similar level of supply, prices should firm up.  And this is what appears to have happened in Kalkan this year.  Many owners have at least maintained their advertised prices at last year’s level and have not felt obliged to give the same levels of discount as last year.  We know that quite a few have made modest increases.  Many have said they plan to increase prices in 2019.

So for the holidaymaker in Kalkan this year you may see a small increase in accommodation costs, but not a massive one.

One final point to mention is that most accommodation in Kalkan tends to be priced in sterling (at least for the foreign market).  If you exclude charges made by online booking agents most operating/maintenance costs for the owners of Kalkan properties are payable in Turkish lira, so even if they keep rental prices the same as last year they are effectively getting lots more Turkish liras for their pounds.  Do bear in mind however that property owners are feeling the impact of high inflation and they also have to pay new administration charges so any 'windfall' from the exchange rate is probably already spent.

It’s good that the flight and tour operators are increasing capacity this year, but anecdotally flights are more expensive then last year.  It is possible to grab bargains if you are flexible on dates and times but the consensus seems to be that generally speaking flights to Turkey are not so cheap this year.

There are many independent travellers coming to Kalkan but do bear in mind that package deals can sometimes be excellent value too.

Petrol has gone up in price and so have taxi fares.  If you get an airport transfer or hire a car, or even go on a day trip somewhere there is a good chance it will be priced in sterling.  If you are paying the same sterling price as last year the business is now effectively getting 40% more Turkish lira.  Perhaps you could call that a win win situation - you pay the same, they get more.

Kalkan harbourExcellent VFM
It’s worth reiterating that Kalkan (and Turkey in general) remains an excellent 'value for money' holiday destination when compared to neighbouring eurozone countries.  On balance you will still get more for your money here compared to similar eurozone resorts where the exchange rate is now giving you less euros for your pounds.

A new plan for the economy
It's nice to be in the Kalkan bubble but the Turkish economy affects us all.  Persistent high inflation, the collapse of the currency and high borrowing rates are impacting more on Turkish individuals and businesses than any foreigners.

Many independent financial commentators have expressed less than complimentary views on how the Turkish economy has been run over recent times.  Credit ratings agencies such as Standard & Poor's, and Fitch have recently downgraded their credit ratings for Turkey, which is a reflection on how the economic prospects are looking right now.  Turkey desperately needs a plan to deliver it from its current economic woes.

As it happens the President of Turkey has recently announced a new 100 day plan which aims to do just that.  It appears to mostly focus on capital spending projects, but it is reported that there will also be support for Small and Medium Sized Enterprises (SMEs).  The President is predicting single digit inflation some time in 2019.  Let’s hope this plan works.  We all wish to see a better economic future for the people of Turkey.



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* We know that expats and visitors come from different countries but as ever KTLN tends to focus on British citizens.  That's our usual scope and area of knowledge.

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