A Sudden Stops in International Capital Flows: The Case of Turkey
Emine Ebru Er, Cihan TanrıövenThe aim of this study is to determine the sudden stops (SS) periods in equity and debt flows for Turkey and to investigate the effects of global and local variables on the occurrence of SS periods. The study addresses monthly data for the January 2010-December 2021 period. The study explains the SS periods that occur in equity and debt flows using the probit model and data based on global and local variables. The analysis is the first study in Turkey to examine this subject with quantitative techniques. According to the study results, SS periods were determined in three different periods with regard to equity flows and in two different periods with regard to debt flows. In addition, global variables generally affect equity and debt flows; however, the success of the models regarding the formation of SS periods increases once local variables are included in the analysis. As a result, the performed analyses have determined local variables to have a greater effect in the Turkish sample.
Uluslararası Sermaye Akışlarında Ani Duruş: Türkiye Örneği
Emine Ebru Er, Cihan TanrıövenBu çalışmanın amacı Türkiye için öz kaynak ve borç akışlarındaki ani duruş (sudden stops; SS) dönemlerini tespit etmek ve SS dönemlerinin meydana gelmesinde küresel ve yerel değişkenlerinin etkisini araştırmaktır. Çalışmada 2010:01 – 2021:12 dönemini içerecek şekilde aylık veriler ele alınmaktadır. Öz kaynak ve borç akışlarında meydana gelen SS dönemleri, küresel ve yerel değişkenlere ait veriler kullanılarak probit model ile açıklanmaktadır. Analiz, Türkiye için konunun kantitatif teknikler ile incelendiği ilk çalışmadır. Çalışmanın sonuçlarına göre; öz kaynak akışlarında üç borç akışlarında ise iki farklı periyotta SS dönemi tespit edilmiştir. Buna ek olarak, küresel değişkenler genel olarak öz kaynak akışları ve borç akışlarını etkilemekte ancak yerel değişkenler analize dâhil edildiğinde SS dönemlerinin oluşmasında modellerin başarısı artmaktadır. Sonuç olarak yapılan analizde Türkiye örnekleminde yerel değişkenlerin etkisinin daha fazla olduğu tespit edilmiştir.
Financial and money markets developed in the 15th century, and financial crises are not a new concept as they have occurred unexpectedly since then. Financial crises have been dominant for centuries and still continue to manifest and spread in countries today. Crises happen much more often than people realize and are not specific to certain historical periods or emerging market economies (Gorton, 2017, p. 45).
In general, when globalization gained momentum in the 1980s, many crises have served as the basis for both macroeconomic imbalances and deterioration of financial indicators. A financial crisis represents a sharp deterioration of a group of financial and economic indicators, an imbalance between money supply and demand, a fall in asset prices, and failure of financial institutions such as banks (Raluca & Witowschi, 2010, p. 33). Financial crises manifest standard features such as the overvaluation of exchange rates, withdrawal of foreign capital, inability to close short-term debts, domestic credit crunch, and savers withdrawing deposit funds from banks and buying securities from capital markets (Furman et al., 1998, p. 1).
International capital movements are one of the factors that negatively affect a country’s financial equilibrium. Capital goes to the country where it will appreciate the most as a result of its free movement within the economic system, and this provides an opportunity to support that country’s economic growth. However, when international capital movements are unstable, the economy of the country the capital has entered can be seriously affected. In particular, portfolio investments both increase consumption by facilitating access to credit and may cause a divergence between domestic and foreign demand as a result of the overvaluation of the local currency. This state of the country’s economy may cause the macroeconomic balance to deteriorate and result in the economy’s vulnerability to sudden changes regarding the global risk appetite to increase. As a result, negative aspects may occur in terms of both macroeconomic and financial equilibrium. Sudden capital outflows occur based on these types of developments within the country’s economy.
The academic literature shows the reversal of capital inflows to be called a sudden stop (SS). Dornbusch et al.’s (1995) study expressed the concept of SS for the first time during their evaluation of capital outflows from Mexico with regard to the Latin American and Mexican crises, thus revealing the first occurrence of SS in the literature. Rodrik and Velasco (1999) also referred to SS as capital account reversal. The SS phenomenon has also been used as a method for determining financial crises (Radelet & Sachs, 1998, p. 43).
The aim of this study is to determine the SS periods in equity and debt flows for Turkey using monthly data over the January 2010-December 2021 period and to investigate the effect of global and local variables on the occurrence of these periods with respect to both equity and debt flows. In this context, the second section of the research involves a literature review, and the third section describes the data and methods. The fourth section presents the empirical findings, and the fifth section discusses the results of the study and makes recommendations for policy makers. This study is the first in the literature to examine SSs in equity and debt flows regarding the case of Turkey using monthly data.
The results of the study determined three SS periods to have occurred regarding equity flows (June-July 2013, January 2020, and December 2021) and two SS periods to have occurred regarding debt flows (June-July 2015 and March-May 2018). When examining the effect from the variables on SSs, sudden stops in equity and debt flows are only meaningful to a certain extent with regard to global variables; however, more meaningful results are obtained when local variables are included in the model.
As a result of the study, although global variables are seen to be effective in the formation of SSs, the main effect emerges when local variables are put into play. When looking at these results, a developing country like Turkey should have its own solid economic foundations, from which the country should have financial and price stability, low risk levels, and a balance of all factors that are able to affect local variables. In short, an environment of trust should be provided for both international investors and local investors in order for them to invest. Future studies can compare this one with Turkey and/or other developing and developed countries, can increase the number of independent variables, or diversify the data by taking daily data as the frequency range instead of monthly data.
