Turkey’s Kriz :

Deteriorating Balance of Payments

Stephanie Goldin
Kyaw Min Htet
Mark Johnson
Matt Mikulka
Andre Lesean
“It was only when optimistic Turks started
snapping up imports that investors began
to doubt that foreign capital inflows
would be sufficient to fund both
spendthrift consumers and the
perennially penurious government”
-“On the Brink Again,” The Economist
Overview
 Current account and financial account fluctuations
between 1993 and 2000

 The scandal in telecommunication sector

 Huge deficit on current account in 2000 – The Turkish Kriz

 Political instability

 Depreciation of Turkish lira

Political Background
 Turkey’s Gov’t uses separation of powers
◦ Executive is the gov’t
◦ Legislative is controlled by the gov’t and the Grand
National Assembly
◦ Judicial is separate

 Bulent Ecevit was the Prime Minister of Turkey’s

Gov’t from Jan 1999- Nov 2002, the time of the
Turkey’s Kriz
Economic Background
 Benefitted greatly from Iran-Iraq War from 1980-
1988- supplied both nations and exported crude oil
for Iraq

 In 1992-1993 increase in salary for civil-servant

jobs which slowed Turkey’s economy

 Took public-sector borrowing up to 17% in 1993

Economic Background Continued
 1995-1997 Turkey’s economy showed promise
finally creating a surplus again

 1998 Turkey’s plummets and fixes itself in 1999

and the second half of 2000 then Turkey’s economy
crashed
Summary
 Between 1993 and 2000 the Turkish balance on the
financial account fluctuated between a surplus and
deficit

 Inflationary forces were causing this fluctuation

 In late 2000, just at the economy started to improve,

pressures on the country’s balance of payments and
currency rose
Summary
 The deficit on current account grew to over $9.8
billion in late 2000
◦ Deficit in 1999 - $1.4 billion

 In February 2001 the value of the Turkish lira

decreased significantly due to the rising economic
kriz, or crisis
Subaccounts of the Turkish Current Account
1998-2000 (millions of US dollars)
 Subaccounts of the Turkish Financial
Account1998-2000 (millions of US dollars)
Turkey’s Balance of Payments, 1993–2000
Question?
The Balance of Payments (BOP) current and
financial accounts recorded major swings in the
year prior to the crisis, the question is what the
underlying cause of the crisis is

Whether the crisis had been predictable, and what

early signs of deterioration should have been noted
by the outside world
Arguments
 The large increase in the current account deficit
should have been seen as a danger
BUT
 Most economies face an increase in trade and

current account deficits when experiencing

economic growth
 Would relate to this case because the net surplus on

the financial account throughout the upcoming

years indicates a growing confidence in the Turkish
economy’s outlook by foreign investors
TelSim
 Owned by Uzan family

 The second largest telecommunication provider in

Turkey

 Borrowed $2 B in total from Motorola

 Borrowed $700 M in total from Nokia

TelSim Vs. Motorola and Nokia
 In 1998, Motorola loaned TelSim $360 M for
cellular infrastructure and equipments

 Then, TelSim further borrowed $200 M to acquire a

25-year nationwide cellular license

 In subsequent years, the amount totaled to $2 B

 In 2000, current account grew to over $9.8 B

Telecommunication in Turkey
 Motorola and Nokia invested in TelSim due to good
prospects of cellphone market

 Motorola was pledged 51% of the shares as collateral

 As predicted, from 1998 to 2002, TelSim grew from

500,000 subscribers to 6.5 M

 However, TelSim defaulted on its payments

Political Instability
 In February 2001, there was a dispute between Prime
Minister Bulent Ecevit and President Ahmet Necdet Sezer

 The dispute led to turmoil in financial markets.

 Investors lost confidence in the stability of the

government and pulled out more than $7 billion from
central bank reserves.

 The interbank interest rates increased to 7,500 percent.

Consequences of Turkey’s Kriz
 Since both Motorola and Nokia are both foreign
companies, they had to follow a strategy that was
very subjective towards the Turkish Government.
The companies had to seek international authorities
to try to get a payback from TelSim.

 Nokia and Motorola should explore the potential

telecommunications market in foreign countries
before financing such large transactions so that they
do not end up with payments being defaulted.
Consequences of Turkey’s Kriz

The government let the lira float.

Consequently, the lira depreciated.
Case Question 1
Where in the current account would the imported
telecommunications equipment be listed?

Would this location correspond to the increase in

magnitude and timing of the financial account?
Solution
 The TelSim equipment would appear as an import of
goods in the “Current Account”. Financing TelSim
the equipment would be included in “Net Other
Investment.”

 Capital equipment most likely accounted for most of

the increase in “Net Other Investment” and the large
negative balance in the “Financial Account” in year
2000.
Case Question 2
Why do you think that net direct investment decline
from $573 million in 1998 to $112 million in 2000?

Solution:
 A number of factors like political instability and high

rates of inflation caused net direct investment to

loose confidence in the strength of the Turkish
economy.
Case Question 3
Why do you think that TelSim defaulted on its
payments for equipment imports from Nokia and
Motorola?

Solution:
 TelSim defaulted on its trade credit to Nokia and

Motorola because of the devaluation in the Turkish

Lira in 2001
Wrap Up
 Reasons for deterioration

◦ The case of TelSim

◦ Rapid jump in imported goods and merchandise in 2000

◦ Little change in services trade and income accounts

◦ Massive increase in “net other investment”

◦ Political instability