International finance external debt management and Turkey

VI ABSTRACT INTERNATIONAL FINANCE, EXTERNAL DEBT MANAGEMENT AND TURKEY Harun BAL Ph. D. Thesis, Department of Economics Supervisor : Prof. Dr. Muammer TEKEO?LU August 1999, 340 pages This dissertation intend to investigate and analyze the international financial relations and the external debt management problems that is experienced in Turkey and other developing countries. The main focus of our objective is to explore, risk management and institutional dimensions of the external debt problem and its management in Turkey. In this framework, in which dimensions breakthrough needed is determined. In the context of these objectives, the study is formed by five parts. The first section centred around international finance and its concern about developing economies. In doing so, the reasons behind the needs for international finance are set forth and foreign debt mechanisms, inflow of resources to developing economies and evolution of the debts of these countries described and explored with all their details. The main inference of this section about international finance is that, developing countries are very far from realizing the desired results in practice. The next section, investigates the passive dimensions of foreign debt management in the context of the developing economies. An extensive study; about organization, scope, functions and importance of debt management is carried out for developing countries. Moreover, institutional extensions, management units and coordination failures between those units, monitoring and measuring debt services are explored in depth. The study introduced debt management applications of eight developing countries in order to explore the problems and get comparable information between countries. The conclusion of this section is as follows: the debt management structure of developing economies is far from even the fundamental principals of debt management. Another development whichVII should be underlined, is the improvement of debt management with aid of international institutions in recent years. The third section of this study assigned to "risk management" which is somewhat new dimension of debt management for developing world. In this framework, interest rate, exchange rate, metallurgic and agricultural products prices, risks and their interrelations with debt management are described. Moreover, the difficulties and necessities of new solutions are presented. Additionally, the application of "Independent Foreign Debt Management Offices" of the five leading OECD countries is taken as a role model for developing economies and the applicability of this model is discussed in detail. In conclusion, developing countries, even in the passive dimensions of their debt management, have much more problems and the need for an active foreign debt management is very urgent. Even if the Independant Foreign Debt Management Office model is not appropriate for developing economies; the need for new overtures in debt management like risk management techniques and step by step action planning is immediate. Section four aims to explore the dynamics of international finance and foreign debt in the Turkish economy. Net resource transfers dimensions (extent) of various periods are analyzed and some sort of interrelationship is found between quantity of the external debt stocks and macroeconomic management. Especially, during the 1980' s and 1990's, to keep a positive net resource transfers on one hand and to maintain targeted foreign debt services on the other, the foreign debt stocks of Turkey has expanded. While the public sector was influential during the 1980's, with the integration of capital market with the world markets during 1990's the private sector became the leading sector in the development of this process. After the debt crisis of Southeast Asian countries and because of the slumps in the world economy, this process has begun to show discontinuities after 1998. Consequently, the positive net resource transfer process which is maintained for a long period of time, has begun to leave its place to negative net resource transfer process. The last section deals with the institutional and financial risk dimensions of foreign debt management, sustainability of foreign debt service capacity and developing foreign debt management in the Turkish economy. In this framework the study also try to convey and discuss new solutions and their extensions about foreign debt management. In thisvııı section the applications of debt management policies are settled down from the perspective of asset and liabilities structure of debt management. Organizational and institutional structures are explored in detail and in order to prevent coordination failure, the importance and the needs for constituting a foreign financial comity is emphasized. Moreover, by measuring the current state of debt service capacities, some of the relevant problems like liquidity are set aside. On the other hand, various sources of the rises in external debt stock are investigated and the magnitude of various financial risks are determined. In order to shield from this risk an optimal portfolio composition ( benchmark portfolio) is examined, and the role of the Euro, which should be regarded as an important evolution in this process, is emphasized. The fifth part of the study ended with a detailed action plan in the context of the evolution of external debt management and the need for new overtures in the Turkish economy. At the end of the study there appear; a general conclusion in which the fundamental problems of the external debt management and the strategies for coping with these problems are explored. Keywords: International Finance, External Debt, External Debt Management, Risk Management Techniques, Turkish Economy.