Destabilizing effects of stabilization programs: the case of Turkish Corporate sector

Abstract

This study aims to investigate the effects of stabilization programs on the financial performance of corporate sector. To figure out how the corporate sector is affected through the stabilization programs, a model, which looks into the disparities between exchange rate, interest rate and inflation created by these programs, is developed by combining the interest rate parity and purchasing power parity. It is illustrated that stabilization programs, which implement nominal anchors to tackle inflation and stabilize the economy, intentionally create a disparity among these factors and disturb the balance defined by the model. In other words, the stabilization programs try to stabilize an economy through a destabilizing mechanism. This thesis describes these disparities, illuminates how they are created by stabilization programs, and examines the role of them in the mechanism that generally leads to failures through these programs. Next, it is shown that Turkish Stabilization Programs implemented in the last two decades are also based on the disparities and try to use disparities to stabilize the economy. It is demonstrated that the weak TL to reinforce the exports in 1980s, the strong TL and high real interest rates to tackle the inflation in 1990s, and strong TL and negative real interest rates through the 2000 ERBS program, and high real interest rates and accordingly strong TL in the 2001 Strengthening Turkish Economy Program, are the basis or the outcomes of these programs. The research question of this study is how these disparities affect the corporate sector. Using a panel data set over the 1994-2003 period and covering 198 industrial companies issued in the ISE, it is shown that these disparities have deteriorating effects on the corporate sector. Specifically, an immediate negative effect of appreciation of domestic currency on the operational profitability and asset turnover of the corporate sector is observed. On the other hand, appreciation of domestic currency has a positive impact on the short-term solvency of the corporate sector. Real interest rates also have a negative impact on the profitability of the corporate sector. In addition, primary budget balance, which is crucial for a stable economy, has a negative impact on the profitability and asset turnover, and can be very destructive for the corporate sector when high primary budget surpluses are targeted. To summarize, this thesis proposes that a stabilization program should not involve mechanisms that lead to disparities. Ertuna (1999) demonstrates that a nominal anchor, violating the interest rate and purchasing power parities, leads to unsustainable mechanisms and vicious circles, and generally ends with economic crisis. This thesis reemphasizes this issue and also finds that the disparities among interest rates, inflation and exchange rate, have deteriorating effects on the financial figures of the corporate sector, even if they don't end with an economic crisis. It is also recommended that the corporate sector should be aware of the risks and impacts generated by disparities, take precautions, and hedge their risks, if they can, when they observe a disparity among these factors.