Turkey’s Kriz : Deteriorating Balance of Payments

Group member: Jingxian Zhou

Adel Abaza Jesse Van Gestel Muye Li Zhongyi Ren

Background of the case:

Turkey’ sEconomic crisis

Current account decrease

Financial account increase

TelSim could not pay its default

-0. 01-0. 008

-0. 006-0. 004

-0. 0020

0. 002

0. 0040. 006

0. 0080. 01

Mi l l i ons of US $

1993 1994 1995 1996 1997 1998 1999 2000

Current AccountFi nanci al Account

Turkey’s balance of payments

Turkish current account, 1998-2000(millions of us $)

Goods export 31220 29325 31664Goods import -45440 -39768 -54041Balance on goods -14220 -10443 -22377Service credit 23321 16398 19484Service debit -9859 -8953 -8149Balance on service 13462 7445 11335Income credit 2481 2350 2836Income debit -5466 -5887 -6838Balance on income -2985 -3537 -4002Current transfer credit 5860 5294 5317Current transfer debit -133 -119 -92Balance on transfer 5727 5175 5225Balance on current account 1984 -1360 -9819

Turkish financial account 1998-2000 (millions of us $)

Net direct investment 573 138 112

Net portfolio investment

-6711 3429 1022

Net other investment

6586 1103 8311

Balance of financial account

448 4670 9445

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 imported equipment could not be listed in the current account because there was no cash transferred, due to TelSim defaulting on their payment

As the imported equipment was not listed in the current account, it can not correspond to the increase in magnitude and timing of the financial account.

This increase in the financial account would however correspond to the decrease in the current account that would have been partially caused by similar imports that were paid for.

Case question:

2:

Why do you think that net direct investment declined from $573 million in 1998 to $112 million in 2000?

Solution: Net direct investment declined for 1998 to 2000 due to

investors losing confidence in the strength and stability of the Turkish economy. This lose in confidence was caused by a number of factors:

1. Political instability

2. High rates of inflation

3. An unstable exchange rate and the decreasing value of the lire

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 due to the Turkish lira being devalued in 2001

TelSim may have had enough lira to cover their purchases at the previous year’s exchange rate, however due to the fall in the price of the lira this amount would no longer equate to the billions of US dollars they owed