The Turkish lira plunged further against the US dollar today, with Turkish energy firms among the most vulnerable because of higher debt in foreign currencies and a firmer outlook for energy prices.
The lira depreciated by as much as 12pc from yesterday to TL6.3/$1 today, lifting its total losses to above 50pc this year.
Turkish energy firms have higher exposure to foreign exchange risks as most of their revenue is in liras. Total long-term debt of Turkey's gas and power firms stood at $12.9bn at the end of April, central bank data show. Mining firms' long-term dollar debt was at $3.7bn in April, while the metals sector debt stood at $2.5bn.
The sell-off in the lira was fuelled by yearly inflation rising to 16pc in July and the lack of intervention by the central bank with higher interest rates. This was amid the appreciation by the dollar in recent years and a rising borrowing cost outlook in US. Turkish president Recep Tayyip Erdogan took on new powers to appoint the central bank governor and the deputies as the country switched to a presidential system with the general elections in June. President Erdogan opposes higher interest rates to support higher gross domestic product.
Turkish industrial energy users also face more risks because of the lira, as the energy price outlook rises significantly on the back of the weaker currency. Turkey imports nearly all of its gas from abroad, and imported fuels have accounted more than 50pc of its power generation mix so far this year. Regulated gas and power prices have already risen this year, with further hikes expected in the coming months.
Power sector risks
Companies that received financing in dollars to build thermal power plants are exposed to higher currency risks.
Some utilities with thermal units in their portfolio are holding talks with local banks to refinance their debt as the tumbling domestic currency drives down their revenue in dollar terms.
Gas-fired generators also face risks, with their fuel costs linked to dollars by the state-owned gas supplier Botas at the beginning of this month. The volatility may render margins for gas-fired units unprofitable, as the lira has already fallen by more than 20pc this month.
Power firms with balanced portfolios that include domestic coal-fired units and renewable generators are less likely to be affected by the weaker lira. Renewable plants receiving dollar feed-in-tariffs will benefit from stronger lira revenues. Most lignite-fired units sell their output to state-owned generator Euas at fixed tariffs above day-ahead prices for the majority of this year.
For imported coal-fired utilities, fuel costs rise because of the currency depreciation. The rise in day-ahead prices may compensate part of higher fuels. But Euas adopts different pricing and generation methods to limit price spikes in the spot market, putting more pressure on profitability.
Gas sector
The lira's all-time low drives Turkey's gas import costs, as Botas buys gas at crude-indexed formulas in dollars. Botas regulates gas tariffs, and changes in its import costs are reflected with a lag.
The firm kept gas prices unchanged from October 2016-November 2017 despite higher crude prices and a weaker lira. It has raised regulated prices for power plants by 50pc this month.
The sharp hike and the move to fix the tariff at $270/'000m³ was seen as a signal for a tariff regime closer to cost-based pricing by power and gas market participants. Forward power prices gained on expectations for higher tariffs in line with higher import costs.
