Investment Opportunities for Foreign Capital and Economic Fragility in Turkey

Abstract

More than 6 years has passed since the 2001 Financial Crisis & Banking Crisis in Turkey. During the analysis of this paper many people were asking when the next crisis will be hitting Turkey. 2008-9 Mortgage Crisis (Banking Crisis) in the West has some similarities to the Turkish Banking crisis. The similarity is the effect of capital inflow and reversal of capital. The Financial crisis of 90’s had the direction of capital towards partly to the US and partly to China via Hong Kong. In the Mortgage Crisis of 2008-9 the direction of flow seems to be out of the US, towards China as well. Though Turkey has been effected negatively via their trade, Banks in Turkey had their highest profitability, as the major Banks in the West suffered. This indicates that it is important to investigate the post 2001 Financial and Banking Crisis in Turkey. The strengths of the Banking sector in Turkey indicate the other side of the coin in the Global Banking Sector. In this paper, we compare pre- and post Financial and Banking Crisis in Turkey, using a theoretical macro-model in reduced form to estimate the empirical data. We explore the effects of capital inflows and outflows to real exchange rates and the real stock market prices, before and after the financial crisis. We investigate the relationship between real exchange rate, real stock prices and capital flows. We decompose the foreign flows into real assets and liabilities, in order to investigate the possible long-term effect of inflows and outflows. Since the capital reversal has not carried on during the post 2001 period, in this paper, the result has not substantially changed. However, capital inflow carried on during the post 2001 Crisis. High percentages of inflows did not go to the stock market investment, but rather found its way into the Banking sector Hence, the inflow model (Model 1) gave opposite results in the post Financial & Banking crisis period.