In Turkey (And Elsewhere) Devaluation Spurs Value Hunt Among Luxury Goods

The vagaries of currency take on all sorts of meaning to consumers, borrowers and lenders large and small, individual and corporate.

Over the last few weeks, some headlines have focused on the impact of the trade war being waged between the United States and a number of countries, China perhaps most visibly. In this space, too, we have noted the ways that devaluation of currency (i.e., China’s) can have an impact on retailers’ fortunes. In that instance, the eroding power of the Chinese consumer – specifically, tourists – might be setting off alarm bells for some of the biggest names in commerce, including Tiffany and others. If Chinese yuan are worth less abroad, shopping abroad should be dampened, and so, the reasoning goes, should these high-end firms’ top lines.

Now, looking at Turkey, it may be a case of a flip side to the China scenario. Maybe the same story, different currency. The currency has slipped significantly. In one example, as reported by The New York Times on Monday (Aug. 13), one dollar was worth 3.8 lira as 2018 dawned; that tally is now 7.2 lira. The shifts are seismic and volatile, and it’s anyone’s guess where things will stabilize against news that the country’s government is becoming a bit more authoritarian, stock markets are sliding and the central bank has stated it will do what it must to pursue firmer economic footing.

But as a currency slides, the currencies from other countries have comparatively stronger buying power – if, in this case, spending takes place within Turkey’s borders. Thus, the scenario seen as recounted by Bloomberg: Foreigners “lining up to splurge” on some of the biggest names in retail. Think Chanel and Louis Vuitton, among others. In fact, some of these names are the very brands that some observers state might get hit by a slowdown from the Chinese consumer.

We are not suggesting that a pickup in spend in Turkey would mollify the effects of a wholesale slowdown from China. After all, millions of consumers upping their spend in Turkey would have to be dropping a lot of lira to offset tens and even hundreds of millions of consumers pulling back in China.

Want an anecdote?  The financial publication noted that for some people shopping in person at stores in Turkey, a Chanel camera bag was a lot cheaper than might be seen on, say, a European retail site – about 25 percent cheaper. One Chinese shopper stated that he works in Turkey, earns wages in dollars and buys items in lira.

“Turkish buyers were nowhere in sight,” said Bloomberg.

Here, then, in a nutshell, is the global economy as rendered through shopping sprees. The individual consumer gets a boost, if he or she is in the right place, is holding the right currency or, like the Chinese tourist mentioned above, conducts commerce across different bank notes with aplomb. Ah, but writ on a larger stage lies some danger.

The Turkish central bank, after all, has been injecting liquidity into the system, which is intended at least in part to keep price swings in check. Yet interest rates are rising elsewhere, which in turn means capital may chase returns and march right outside the country, defeating the liquidity strategy.

The contagion that sparks fears? Not evident at the retail point of sale at the moment. But European banks have holdings in Turkey, which means those holdings are getting lighter just through devaluation. In addition, the debt that is held in Turkey is held in foreign currencies – and without the money to service that debt, a round of selling may spark with repercussions that stretch well beyond a designer handbag price.