It was only when optimistic Turks started snapping up imports that investors began

to doubt that foreign capital inflows would be sufficient to both spendthift consumers

and perennially penurious government.

-"On the Brink Again, " The Economist,

February 24, 2001

In February 2001 Turkey's rapidly escalating economic kriz, or crisis, forced the

devaluation of the Turkish Lira. The Turkish government has successfully waged war

on the inflationary forces embedded in the country's economy in 1999 and early 2000.

But just as the economy began to boom in the second half of 2000, pressures on the

country's balance of payment and curency rose. The question asked by many analyst in

the month following the crisis was whether the crisis had been predictable, and what

early signs of deterioration should have been noted by the outside world.

The Accounts

Exhibit 1 present the Turkish balance on current account and financial account between

1993 and 2000 (ending less than 2 months prior to devaluation). Several issues are

immediately evident:

First, Turkey seemingly suffered significant volatility in the balance on key

international accounts. The financial account swung between (1993) and deficit

(1994), and back to surplus again (1995-1997). After plummeting in 1998, the

financial surplus returned in 1999 and 2000.

Second, as is typically the case, the current account behaved in a relatively

inverse manner to the financial account., running deficits in most of the years

shown. But significantly, the deficit on current account grew dramatically in

2000, to over $9.8 billion, from a deficit in 1999 of only $1.4 billion.

-15000

-10000

-5000

0

5000

10000

15000

1993 1994 1995 1996 1997 1998 1999 2000

Financial/Capital Account

Current Account

Many analysts are quick to point out that the sizeable increase in the current account

deficit should have been seen as a danger signal of imminent collapse. Others, however,

point out quite correctly that most national economist experience rapid increases in trade

and current account deficits during rapid periodsweight to the argument, the net surplus on the financial account seemed to indicate a

growing confidence in the Turkish economy's outlook by foreign investors.

An examination of the subcomponents of these major account balances is helpful. As

illustrated in Exhibit 2, the rapid deterioration of the current account in 2000 was largely

the result of a rapid jump in imported goods and merchandise. The goods import bill

rose from $39.8 billion in 1999 to over $54.0 billion in 2000, an increase of 36% in one

year. At the same time, services trade and current income accounts, both credits and

debits subcomponents, showed little change. Unfortunately, the statistics reported to the

IMF provide little in additional detail as to the composition of these rapid imports, their

industry or nature, and their financing.

Exhibit 2 - Subaccounts of the Turkish Current Account, 1998-2000

(millions of U.S dollars)

1998 1999 2000

Goods: exports 31,220 29,325 31,664

Goods: imports -45,440 -39,768 -54,041

Balance on goods -14,220 -10,443 -22,377

Services: credit 23,321 16,398 19,484

Services: debit -9,859 -8,953 -8,149

Balance on services 13,462 7,445 11,335

Income: credit 2,481 2,350 2,836

Income: debit -5,466 -5,887 -6,838

Balance on income -2,985 -3,537 -4,002

Current transfer: credit 5,860 5,294 5,137

Current transfer: debit -133 -119 -92

Balance on transfer 5,727 5,175 5,225

Balance on current account 1,984 -1,360 -9,819

A similar decomposition of the surplus on the financial account also allow us to identify

where the various inflows and outflows of capital in Turkey there was a significant

change. Exhibit 3 provides this financial account decompisition. According to Exhibit

3, the doubling of the Turkish financial account surplus in 2000 was largely the result of

a massive increase - over $7 billion - in "net other investment'.

Exhibit 3- Subaccounts of the Turkish Financial Account, 1998-2000

(millions of U.S. dollars

1998 1999 2000

Net direct investment 573 138 112

Net portfolio investment -6,711 3,429 1,022

Net other investment 6,586 1,103 8,311

Balance of inancial account 448 4,670 9,445

One very important determinant of these account balances was the telecommunications

sector. Throughout 2000, TelSim, the national telecommunications provider in Turkey, of economic growth. And to

imported billions of dollars worth of equipment from Nokia (Finland) and Motorola

(United States). The equipment was purchased on trade credit, meaning that TelSim

would repay Nokia and Motorola at a future date for the equipment, primarily from the

proceeds of activating the equipment for telecommunications services. TelSim,

however, defsulted on its payment, and Nokia and Motorola were left with billions of

dollars in losses.

i. Determine where in the current account would the imported telecommunications

equipment be listed? Elaborate. Would this location correspond to the increase

in magnitude and timing of the financial account?

(5 marks)

ii. Why do you think that the net direct investment declined from $573 million in

1998 to $112 million in 2000?

(5 marks)

iii. TelSim defaulted on its payments for equipment imports from Nokia and

Motorola? Discuss this matter in detail.