Effects of Exchange Rate Shocks and Political Risk on the Turkish Manufacturing Industry: Some Evidence

Üzeyir Aydin,Ramazan Ekinci,Osman Tüzün

doi:10.13189/aeb.2020.080403

Abstract

In cases where debt dollarization of firms is more than asset dollarization, sudden and high depreciation of the national currency causes firms to lose net wealth and may adversely affect their investments and profitability. Real exchange rate depreciation, on one hand, increases the incomes of manufacturing industry firms by providing international competitive advantage and it can prevent the competitive advantage by creating negative balance sheet effect due to high debt dollarization on the other. In this context, the aim of this study is to discuss the determinants of the debt-dollarization and the balance sheet situation of the manufacturing industry, which is facing political instability and exchange rate volatility. Dynamic panel data method was used for manufacturing industry sub-sector data for the 2008-2015 period. Overall, our empirical results reveal that the exchange rate shocks have positive impact on both debt dollarization and profitability. That means there is an exchange rate dependency in manufacturing industry. In addition, results show that there is no significant effect of political uncertainty on debt dollarization and the profitability of firm.

Highlights

Financial resources are required to make the investments that underpin economic growth and development
The purpose of this study is to address the determinants of debt dollarization of manufacturing industry and its impact on the balance sheet, the profitability of firms in the face of political instability and exchange rate volatility
As expected, we find that there is high first-order autocorrelation, but no evidence for significant second-order autocorrelation

Summary

Introduction

Financial resources are required to make the investments that underpin economic growth and development. When financial resources are insufficient, economic development slows down and the desired level of economic progress cannot be reached. Creating resources for the real sector and directing to investments is one of the main priorities of the economy, both in terms of growth and development. Low savings and low profitability due to the poor internal resource creation potential, restricts investments and growth, causing the need for outsourcing. The insufficiency of domestic savings; the dependence of industrial production on imports of intermediate goods, raw materials and investment goods, and the fact that the maturity of foreign debts must be converted by external borrowing can be listed as the main determinants of the external financing needs of developing countries (Mutlu, 2011)

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Conclusion