Turkeys Kriz (A)

CouldTurkeysfinancialcrisisandthe
collapseofitscurrencyhavebeenprevented?

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Turkeys Kriz (A)

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, February 24, 2001.

Copyright 2009 Pearson Prentice Hall.

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Turkeys Kriz (A)

In February 2001 Turkeys rapidly escalating economic kriz, or crisis, forced the
devaluation of the Turkish lira.

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

international accounts.

The Turkish government had successfully waged war on the inflationary forces embedded in the countrys
economy in 1999 and early 2000. But just as the economy began to boom in the second half of 2000,
pressures on the countrys balance of payments and currency rose.
The question asked by many analysts in the months 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 financial account swung between surplus (1993) to deficit (1994), and back to surplus again (19951997). After plummeting in 1998, the financial surplus returned in 1999 and 2000.

Secondly, 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 the deficit on current account grew dramatically in 2000, to over $9.8 billion, from a
deficit in 1999 of only $1.4 billion.

Copyright 2009 Pearson Prentice Hall.

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Exhibit 1 Turkeys Balance of

Payments, 19932000

Turkeys current account had been relatively volatile (generally in deficit), but had
taken a severe dive in 2000. The capital/financial account balance was in surplus
nearly throughout the period reflecting the massive international borrowing by Turkey.

Copyright 2009 Pearson Prentice Hall.

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Turkeys Kriz (A): Case Questions

1.
2.
3.

Where in the current account would the imported telecommunications

equipment be listed? Would this correspond to the increase in
magnitude and timing of the financial account?
Why do you think that net direct investment declined from $571
million in 1998 to $112 million in 2000?
Why do you think that TelSim defaulted on its payments for
equipment imports from Nokia and Motorola?

Copyright 2009 Pearson Prentice Hall.

4-5

Exhibit 4 Turkish Inflation Rate and Exchange Rate (quarterly)

Inflation Rate

Exchange Rate

Turkeys Kriz (A): Case Questions

1.

Where in the current account would the imported

telecommunications equipment be listed? Would this correspond to
the increase in magnitude and timing of the financial account?

2.

The telecom equipment would appear in the Current Account as an import of goods.
Net other investment would include financing by the vendors that sold TelSim the
equipment.
This and other imports of capital equipment probably accounted for most of the
increase in net other investment and thus the large negative balance in the Financial
Account in the year 2000.

Why do you think that net direct investment declined from $571
million in 1998 to $112 million in 2000?

The decline was probably caused by a lack of confidence in Turkeys political

stability and long-term growth prospects.
Turkeys war on its own inflation during the period 1999 to early 2000 must have
included high interest rates and other macroeconomic policies to slow down the rate
of growth.
A slower rate of growth, if maintained in the long run, would reduce expected
returns and direct investment inflows.

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Turkeys Kriz (A): Case Questions

3.

Why do you think that TelSim defaulted on its payments

for equipment imports from Nokia and Motorola?

TelSim needed to invest heavily in capital equipment in order to create a modern

high speed, high capacity network. Unfortunately, a considerable time gap typically
exists between the time a network is created and it s capacity is utilized by revenuepaying customers.
Thus long-term financing rather than short-term trade financing is needed. The
timing gap experienced by TelSim was also experienced by many other
telecommunications companies worldwide, including the highly-publicized case of
Global Crossing, which also went bankrupt.
Expectations for the telecom industry and its ability to monetize its customer
base, the ability to generate significant revenues from installed networks, proved
overly optimistic.
A worldwide overcapacity of telecommunications networks led to cutthroat price
competition, adding to the shortfall in revenues experience worldwide. The
overcapacity continued for several years, however, as firms attempted to survive by
covering variable costs but not fixed capital costs of providing services.

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Turkeys Kriz (A): Case Questions

3. Why do you think that TelSim defaulted on its
payments for equipment imports from Nokia and
Motorola? (continued)

Finally, there has been a continuing debate over the intentions and ethics
of the Uzan family itself the controlling interest group of TelSim.
The press has run a number of stories raising the question as to whether
the Uzan family had ever truly intended to repay the massive
infrastructure financing provided by Motorola and Nokia. At the time of
this writing, however, there is no proof that this was the case.

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Exhibit 2 Subaccounts of the Turkish

Current Account, 19982000 (millions of
U.S. dollars)

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Exhibit 3 Subaccounts of the

Turkish Financial Account, 19982000
(millions of U.S. dollars)

Copyright 2009 Pearson Prentice Hall.

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