Corporate Sector Debt Composition and Exchange Rate Balance Sheet Effect in Turkey

This paper investigates the causes and balance sheet effect consequences of the liability dollarisation of non-financial sectors in Turkey using the Company Accounts database compiled by the Central Bank of Turkey. The results from the panel EGLS and GMM procedures suggest that both sector-specific (tangibility, leverage ratio, export share) and macroeconomic condition variables (inflation, real exchange rate change, budget deficits and confidence) are significant in explaining the corporate sector liability dollarisation. Firms are found to match only partially the currency composition of their debt with their income streams making them potentially vulnerable to negative balance sheet affects of real exchange rate depreciation shocks. Consistent with this argument, real exchange rate depreciations are found to be contractionary, in terms of investments and profits, for sectors with higher liability dollarisation. Macroeconomic instability, as proxied by budget deficits and inflation, appears to have a significant negative affect on the performance of the firms in the non-financial sectors, in terms of their investments, sales and profits. Our results also stress the importance of strong macroeconomic policy stance and price stability for an endogenous dedollarisation process along with regulatory measures to limit vulnerabilities caused by dollarisation.Balance sheet effects, Capital structure, Corporate sector, Debt composition, Liability dollarisation, Turkey

Emerging Market Sovereign Spreads, Global Financial Conditions and U.S. Macroeconomic News

This paper investigates the impact of global financial conditions, US macroeconomic news and domestic macroeconomic fundamentals on the evolution of EMBI spreads for a panel of 18 emerging market (EM) countries using daily data. To this end, we employ not only the conventional panel data estimation procedures but also the recently developed common correlated effects panel mean group method which incorporates heterogeneity by allowing country-specific coefficients whilst accounting for the effects of common global shocks such as contagion. The results strongly suggest that the long-run evolution of EMBI spreads depends on external factors such as changes in global liquidity conditions, risk appetite and crises contagion. Domestic macroeconomic fundamentals proxied by sovereign country ratings are also found to be important in explaining the spreads. The results from panel equilibrium correction models suggest that EMBI spreads respond substantially also to US macroeconomic news and changes in the Federal Reserve’s target interest rates. The magnitude and the sign of the effect of US macroeconomic news, however, crucially depend on the state of the US economy, such as the presence of an inflation dominance.Bond spreads, Emerging markets, Macroeconomic news

The Determinants and Implications of Financial Asset Holdings of Non-Financial Firms in Turkey : An Emprical Investigation

This paper investigates the determinants and financial crowding out consequences of nonfinancial firms’ holdings of financial assets (FA) including government bonds and securities (GS) in Turkey using the firm level data compiled by the Central Bank of the Republic of Turkey over the 1990-2004 period. The salient features of the Turkish financial system with financial dollarisation and short maturity of financial contracts allowed the corporate sector to remain relatively liquid in spite of high inflation persisting until very recently. Consistent with the presence of capital market imperfections and financial adaptation, the Turkish corporate sector’s transactions-cum-precautionary motive-led holdings of the FA as a financial buffer are found to be relatively high and persistent. Contrasting with the transactions-cum-precautionary motive based “economies of scale” argument of the trade-off theory, but reflecting a plausible argument that financial constraints decrease and the ability to allocate resources into financial and real investments increases with firm size, the holdings of FA and GS tend to increase with the firm size both for manufacturing industry and other non-financial firms. The empirical results based on the one-step robust GMM estimations of DPD models suggest that the FA and GS holdings of the corporate sector can be explained by firm-specific characteristics including profitability, leverage ratios, asset tangibility and size along with macroeconomic condition variables represented by uncertainty and real interest rates on GS. The results further suggest that the impacts of these variables significantly vary not only across manufacturing industry and other non-financial firms but also between the large, medium and small sized firms. Under macroeconomic instability leading to excessively high real rate of returns for financial assets, non-financial firms tend to hold FA and GS also for their speculative motive. Consequently, financial assets and real investments may become substitutes rather than complements leading the former to crowd out the latter. The empirical results from a conventional accelerator model of investment augmented with variables representing firms financing conditions and PSBR strongly support such a financial crowding out impact of FA holdings for large sized manufacturing industry firms. For the small and medium sized firms, the positive complementary impact of precautionary and the negative substitution impact of speculative FA holdings are found to offset each other. Consistent with the credit view of the balance sheet literature, real investments of bank-dependent firms decline with an increase in the PSBR potentially due to the fact that government domestic debt is heavily financed via banks, which in turn deteriorates the credit availability for the corporate sector. This provides a further support to the “expansionary fiscal contractions” literature. The sensitivity of investment to cash flow is found to reflect the firms’ profitability and investment opportunities which are not fully conveyed by the fundamental Q rather than the degree of financial constraints. This paper also argues that the conventional pecking-order and trade-off theories of the capital structure literature may not be solely adequate in explaining the non-financial firms’ behaviour as financial intermediaries in Turkey. This might be the case also the acceleration of the FA holdings of firms in many industrial countries during the last decade in spite of declining financial constraints due to deepening international financial integration. An alternative but not mutually exclusive approach may be treating firms as facing a choice between allocating their resources into financial and real investments. The results of this paper provide a strong support to such an approach and suggest that financial investments may be a substitute or complementary to real investment depending respectively on whether the speculative or transactions-cum-precautionary motive dominates.Balance sheets, Cash flow, Corporate sector, Financial constraints, Financial crowding-out, Investment, Liquidity demand, Panel data, Turkey

Corporate Sector Debt Composition and Exchange Rate Balance Sheet Effect in Turkey

This paper investigates the causes and balance sheet effect consequences of the liability dollarisation of non-financial sectors in Turkey using the Company Accounts database compiled by the Central Bank of Turkey. The results from the panel EGLS and GMM procedures suggest that both sector-specific (tangibility, leverage ratio, export share) and macroeconomic condition variables (inflation, real exchange rate change, budget deficits and confidence) are significant in explaining the corporate sector liability dollarisation. Firms are found to match only partially the currency composition of their debt with their income streams making them potentially vulnerable to negative balance sheet affects of real exchange rate depreciation shocks. Consistent with this argument, real exchange rate depreciations are found to be contractionary, in terms of investments and profits, for sectors with higher liability dollarisation. Macroeconomic instability, as proxied by budget deficits and inflation, appears to have a significant negative affect on the performance of the firms in the non-financial sectors, in terms of their investments, sales and profits. Our results also stress the importance of strong macroeconomic policy stance and price stability for an endogenous dedollarisation process along with regulatory measures to limit vulnerabilities caused by dollarisation.Balance sheet effects, Capital structure, Corporate sector, Debt composition, Liability dollarisation, Turkey

Corporate Sector Financial Structure in Turkey : A Descriptive Analysis

This paper presents and discusses some stylised facts of the corporate sector financial structure in Turkey using the Company Sector Accounts compiled by the Central Bank of the Republic of Turkey (CBRT). The findings of the paper suggest that non-financial firms in Turkey have been heavily exposed almost all of the basic balance sheet risks. The corporate sector appears to be excessively leveraged with relatively lower asset tangibility creating also a credit risk for the lenders. The firms rely heavily on foreign currency denominated and short-term debt instruments making them vulnerable to both exchange rate and interest rate shocks through currency and maturity mismatches. The corporate sector can be characterised as financially constrained as the deepening of the Turkish bank-based financial system is rather low and the bank credits to the private sector tend to be crowded out by the mode of domestic debt finance. The corporate sector vulnerabilities to maturity, interest rate and currency risks are found to be improving with the firm size. With the relatively stable macroeconomic environment and stricter prudential regulation on the financial system, the corporate sector balance sheet risks, albeit still are at high levels, tend to be improving after the financial crisis of 2001.Balance sheets, Capital structure, Corporate sector, Debt composition, Financial crowding-out, Liability dollarisation, Turkey

Is currency seigniorage exogenous for inflation tax in Turkey?

This paper discusses the implications of the validity of the conditioning hypothesis for the maintained money demand equation for an inflation tax analysis. We also test the validity of the quantity-theoretical inflation tax model for the post-1980 quarterly Turkish data by using Johansen cointegration techniques. The results suggest that the tax rate (inflation) is weakly exogenous for the parameters of the long-run money demand (tax base) equation. This result, consistent with a Keynesian endogenous seigniorage-exogenous inflation tax rate theory prior, does not support the hypothesis that the Turkish inflation can be explained by the conventional inflation tax revenue-maximizing motive alone.

Exchange rate regimes and the Feldstein-Horioka puzzle: the French evidence

This paper investigates whether the Feldstein and Horioka (Economic Journal, 90, 314-329, 1980) argument on domestic saving-investment relationship is supported by the French data when an endogenous structural break corresponding to a major policy regime change is taken into account. The evidence suggests that the saving-investment cointegration disappears after the estimated endogenous structural break point in 1973 coinciding with the end of the Bretton Woods system of fixed exchange rates. Consistent with a current account targeting policy, an investment-driven saving process appears to be the case for the fixed exchange rate regime period.