The Relationship between Dollarization, Portfolio Flows and Exchange Rate Volatility for the Turkish Economy during the 2003-2018 PeriodSüleyman Hilmi Kal
Foreign currency usage (as deposits and loans) of the Turkish banking system (dollarization) has gradually decreased from 50 percent in 2003 to 30 percent in 2010. Yet, in the second half of 2011 dollarization in the Turkish banking system began increasing and reached to 50 percent. During the same period, volatility of the Turkish lira US dollar exchange rate has also elevated in a parallel fashion. Adverse effects of volatility on the economy such as discouraging investments, causing higher exchange rate passthrough to inflation are known. Analytic information regarding the determinants of conditional exchange rate volatility is important for monetary policy. In this paper, we investigate determinants of the Turkish lira US dollar exchange rate volatility EGARCH-M. Our results indicate that dollarization of the banking system, particularly credit dollarization has increasing effects on conditional exchange rate volatility. On the other hand, portfolio capital flows both to debt and stocks have reducing effect on conditional exchange rate volatility. At the same time, country risk measure, rise in Turkish government debt default insurance premium (CDS) has increasing effect on conditional exchange rate volatility. Elevation of conditional volatility and increase in interest spreads on Turkish lira US dollar loans lead to depreciation of the Turkish lira, while increase in interest rate spreads on Turkish lira US dollar deposits lead to appreciation of Turkish lira. As policy recommendation of this paper, dollarization in the banking system must be reduced by using appropriate tools while capital flows to the country must be encouraged.
2003-2018 Dönemi Türk Ekonomisinde Dolarizasyon, Kısa Vadeli Sermaye Hareketleri ve Kur Oynaklığı İlişkisiSüleyman Hilmi Kal
Türk bankacılık sisteminde 2003-2010 yılları arasında yüzde 50’lerden yüzde 30’lara gerileyen yabancı para cinsi mevduat ve kredi kullanım oranı (dolarizasyon), 2011 senesi ortalarından itibaren bir yükseliş sürecine girmiştir. Aynı dönemde, Türk lirası (TL) ABD doları (Dolar) kur oynaklığının da paralel bir seyir izlediği görülmektedir. Bu çalışmada TL Dolar kur oynaklığını etkileyen dolarizasyon dâhil diğer faktörler, genelleştirilmiş ardışık koşullu dağınık oynaklık (GARCH) sınıfı modellerden uygun bir model olan EGARCH-M modeli kullanılmak suretiyle araştırılmıştır. Yapılan ekonometrik analizden elde edilen bulgular, bankacılık sitemindeki yabancı para kullanımının, özellikle kredi dolarizasyonun, koşullu kur oynaklığına yukarı yönlü etkisine; hisse senedi ve borç senedi piyasalarına olan kısa vadeli sermaye akımlarının da koşullu kur oynaklığına aşağı yönlü etkisine işaret etmektedir. Türk kamu borçlanma senedi temerrüt primlerindeki (CDS) yükseliş de kur oynaklığına yukarı yönlü etki ettiği de bulgular arasındadır. Koşullu kur oynaklığının kurda değer kaybına yol açtığı, mevduatlardaki TL Dolar faiz farkın artışın TL’nin değerlenmesine, kredilerdeki TL Dolar faiz farkındaki artışın TL’nin değer kaybına yol açtığı görülmektedir. Ekonomide negatif etkileri bilinen kur oynaklığının düşmesi için bankacılık sistemindeki yabancı para kullanım oranının azaltılması ve sermaye akımlarının teşviki gerekmektedir.
Liberalization process of the capital markets in Turkey began by July 1984 dated number 30 executive order of the government and the process has continued with executive order number 32 on August 1989. New regulations allow domestic and foreign individuals and institutions to open bank accounts, invest in Turkish debt and stock markets in Turkish Lira and foreign currency with some restrictions on borrowing with foreign currency. Short and long term capital flows increased with the liberalization of capital markets in Turkey.
Deposit and credit dollarization of banking system is defined as ratio of foreign exchange deposits and credit to the total deposits and credits. In between 2003- 2019 (the sample period of this study), the dollarization (both deposit and credit) of Turkish economy followed a volatile path (Figure I). Dollarization which was around 45% at the beginning of 2000’s declined below 30% until year 2010. After the modifications in the framework of the monetary policy implementation, both deposit and credit dollarization began to rise. The simultaneity of the modification in the monetary policy framework and the rise in dollarization may be related to the fact that required reserve ratios of Turkish lira deposits increased while those of foreign currency decreased were decreased by the monetary authority. During the same period, a simultaneous elevation of volatility of the Turkish lira US dollar exchange rate was observed. In the literature the relationship between deposit dollarization and exchange rate volatility has been showed in multiple studies (Akçay 1997, Honohan, 2006, Corrado, 2008, Yinusa 2008 Mengesha and Holmes, 2013), yet the impact of credit dollarization on exchange rate has not been investigated in our best knowledge. In this paper, we investigate the effects of credit and deposit dollarization and portfolio capital flows on volatility the Turkish Lira (TL) US Dollar (USD) exchange rate. For this purpose we employed the EGARCH-M model. This paper, contributes to literature by its comprehensive approach of examining exchange rate volatility relationship with dollarization of both kinds, portfolio flows and country risk factor (CDS).
Empirical results provide insights to the dynamics of Turkish lira US dollar exchange rate volatility since 2003. According to this, increase in deposit and especially credit dollarization elevate conditional volatility of the TL-USD exchange rate. On the other hand, portfolio flows reduce it. In addition to conditional volatility findings indicate that higher deposit interest rate spread between TL and USD deposits, appreciate the TL-USD exchange rate, while higher spreads in loan interest rate TL-USD depreciate TL. These results are in line with theory and literature.
Findings of this study indicate that dollarization of the financial system through deposit and credit dollarization elevate volatility of the exchange rate risk in Turkey. So, reducing dollarization of the financial markets gradually decrease exchange rate volatility and risk, eventually attracting foreign portfolio flows by increasing return per unit of risk (Sharpe ratio) which in turn reduce volatility further more. This virtuous cycle eventually reduce volatility more and stabilize exchange rate, increase investments and lead to economic growth and prosperity