Current Account Balance Implications of Consumer Loans: The Case of Turkey

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1 55 Curret Accout Balace Implicatios of Cosumer Loas: The Case of Turkey Evrim Turgutlu * Dokuz Eylul Uiversity Abstract: This paper aalyzes the impact of cosumer loas o the curret accout balace of Turkey over the period 2000q1-2013q1. Cosumer loas are decomposed ito sub-categories as real estate loas, vehicle loas ad other loas to ivestigate their idividual effects o the curret accout balace. Depreciatio rate, real iterest rate ad GDP growth rate are also icluded i the model. Existece of the log-ru equilibrium relatioship amog the variables is aalyzed by bouds test developed by Pesara et al. (2001). The estimated log ru coefficiets idicate that real estate loas ad other loas which have icreased dramatically after the recet global fiacial crisis, have sigificat egative effect o the curret accout balace. Moreover, depreciatio of the Turkish Lira ad icrease i the iterest rates deepe the curret accout deficit i Turkey. The results may provide importat implicatios for the authorities i similar capital importig developig ecoomies. The polices to ecourage domestic ivestmet ad demad to avoid recessio may create fiacial fragilitiy problems ad lead to curret accout imbalaces. Keywords: Cosumer loas, Curret Accout Balace, Turkish Ecoomy, Bouds Test JEL Classificatio C22, E21, E58, F32, G21 1. Itroductio The dyamics of curret accout deficit have bee frequetly aalyzed i the ecoomics literature. The udesirable experieces of developig ecoomies with the balace of paymet crises over the 1990s made the subject more popular. Turkey, oe of these developig coutries, has a chroic curret accout deficit problem. Traditioally low savigs ratio resulted i depedece o speculative fiacial flows i the Turkish ecoomy to fiace the ivestmets ecessary for ecoomic growth. The savig-ivestmet gap, the structural depedece of Turkish idustrial productio o imported itermediate goods together with the boostig private cosumptio have bee the primary source of this deficit. Global fiacial crisis followig the ed of 2007 resulted i a sharp slow dow i developed ecoomies. The authorities i these coutries have iitiated loose moetary policies to restore ecoomic growth. The ewly created fuds flew ito the developig ad emergig ecoomies i search of quick ad high retur. Turkey, oe of these emergig ecoomies, witessed sigificat icrease i the fuds accumulated i the fiacial system. The loa growth rate i the Turkish bakig system has reached 26.5 percet by September 2010 which was far more tha the growth rate i the EURO area (2. percet) ad the USA (0.6 percet) 1. However, the outcome of the boostig demad was dramatic icrease i the curret accout deficit over the recovery period. By November 2010, Cetral Bak of the Republic of Turkey (CBRT) has take some macroprudetial policy measures with a special emphasis o loa growth. CBRT aimed to curb the cosumer loa growth rate, to icrease the savigs ratio ad to decrease the depedece o foreig resources to evetually miimize the effects of global fiacial crisis ad to solve the chroic curret accout deficit problem of Turkey. Hece, there is a sigificat egative relatioship betwee the curret accout balace ad loa stadards. Over the periods

2 56 where loa stadards were tighteed by the CBRT, Turkish ecoomy has witessed improvemet i the curret accout balace. Table 1 ad Figure 1 below idicate this egative movemet from the begiig of 2000s. I the literature there exists some research o the relatioship betwee cosumer loas ad the curret accout balace. Some of these studies such as Kasa (1998), Kuieda ad Shibata (2005), Telatar (2011), Toga ad Berumet (2011), Magir ad Erdoga (2012) ad Gocer et al. (2013) fid that cosumer loas lead to sigificat icrease i the curret accout deficit. However, these studies do ot aalyze the impact of loas at a decomposed level. Differet from these studies, Buyukkarabacak ad Krause (2009) focus o the effects of household ad firm credit o the trade balace of 18 emergig ecoomies ad fid that household credit is egatively but firm credit is positively correlated with the trade balace. Keepig i mid the experiece of Turkish ecoomy with the recet global fiacial crisis ad the policies adopted by the authorities to tighte the loa stadards, this paper aims to aalyze the relatioship betweee the cosumer loas ad the curret accout balace i Turkey over the period To provide a more detailed aalysis, cosumer loas are decomposed ito real estate loas, vehicle loas ad other loas 2. This paper aims to cotribute to the existig literature i two ways. First, Turkey is oe of the mostly affected periphery ecoomies from the fiacial crisis. Hece aalyzig the implicatios of the policies take by the authorities i such a emergig ecoomy by establishig the lik betwee the cosumer loas ad curret accout balace may provide a bechmark for similar ecoomies. Secod, to the author s best kowledge, this is the first study that ivestigates the lik betwee cosumer loas at a decomposed level ad curret accout balace i Turkey usig a ecoometric model. The rest of the paper is orgaized as follows: The methodological issues ad data are discussed i Sectio 2. Empirical results are preseted i Sectio 3 ad the last sectio is devoted to coclusio. 2. Method ad Data Theory of iteratioal ecoomics simply defies curret accout balace as et exports plus et icome from abroad. Hece the mai determiats of curret accout are real exchage rate ad domestic disposable icome (Krugma ad Obstfeld, 2003). Moreover, curret accout deficit ca be also expressed as the differece betwee atioal savigs ad ivestmet. Hece, curret accout deficit may be a measure of savigs-ivestmet gap i a ecoomy. I the literature it is metioed that cosumer loas, to the degree that they do ot grow at the expese of domestic savig may provide a potetial for ecoomic growth. However, if they grow at the expese of domestic savigs, the the ecoomy may become capital importig depedet o foreig ivestmets (Feldstei, 2006). Hece looseig or tighteig loa stadards may have potetial implicatios o the curret accout balace. Moreover, the impact of cosumer loas o the curret accout balace may differ accordig to their types. I this paper, takig ito accout this likage for the Turkish ecoomy the followig model is used: CAB t = α + βv t + γh t + δoth t + θexc t + μrint t + πgdpgr t + ε t (1) CAB, V, H ad OTH are curret accout balace, vehicle loas, real estate loas ad loas for idividual expeditures for durables, professioal eeds, educatio, vacatio at time t, as a percetage of gross domestic product (GDP), respectively. EXC idicates the depreciatio of the atioal currecy (Turkish Lira-TL) per US dollar RINT measures the real iterest rate as defied by Buyukkarabacak ad Krause (2009). The last variable is the atioal icome growth,

3 57 deoted by GDPGR, percetage chage i GDP 3. All variables are expressed quarterly ad cover the period 2000q1-2013q1. The descriptive statistics for the variables are preseted i Table 2. I order to aalyze the log term relatioship betwee time series variables, oe should first discover whether the relatioship is spurious or ot. To that ed first uit root ad coitegr atio tests should be performed. I the literature there are two types of uit root tests: Tests cotrollig structural breaks ad tests that do ot cotrol structural breaks. Uit root tests cotrollig structural breaks have a advatage of avoidig the false coclusio that a series is ostatioary due to structural break(s) embodied. Accordig to the level of itegratio of the series, the proper coitegratio methodology is chose. If all series are foud I(1), the Egle ad Grager (1987) coitegratio test or Johase ad Juselius (1990) maximum likelihood test of coitegratio ca be applied. However, if some series are statioary, I(0), while some are I(1), the these tests caot be applied. Pesara et al. (2001) suggest usig the bouds test of coitegratio i this case. Bouds test is based o the followig urestricted error correctio model (UECM) i Equatio 2: CAB t = α 0 + i=0 α 1i V t i + i=0 α 2i H t i + i=0 α 3i OTH t i + i=0 α i EXC t i + i=0 α 5i RINT t i + i=0 α 5i GDPGR t i + i=1 α 5i CAB t i + β 1 CAB t 1 + β 2 V t 1 + β 3 H t 1 + β OTH t 1 + β 5 EXC t 1 + β 6 RINT t 1 + β 7 GDPGR t 1 + ε t (2) Bouds test rests o the Wald F-statistic obtaied from ull hypotheses H 0 : β 1 = β 2 = β 3 = β = β 5 = β 6 = β 7 = 0 versus the alterative H a : β 1 β 2 β 3 β β 5 β 6 β 7 0. The critical values of the test is provided by Pesara et al. (2001). Rejectio of the ull hypothesis implies that there is a log-ru relatioship betwee the variables. Subsequet to the fidig that series are coitegrated, autoregressive distributive lag (ARDL) error correctio model ad short-ru coefficiets ca be estimated. 3. Empirical Results I order to aalyze the statioarity problems of the series, first Augmeted Dickey Fuller (ADF) (1979) uit root test is performed. The results are provided i Table 3. The traditioal ADF uit root test results idicate that ot all series have the same order of itegratio. Moreover, there results are icoclusive about some series. Hece, uder the suspicio of a edogeous break i the series, ZA test is performed ad results are reported i Table. The results obtaied from the ZA test idicate that V, OTH ad EXC are statioary at level with structural break while the other varaiables have a uit root. I order to ivestigate the log-ru relatioship betwee the variables, it will be appropriate to use bouds test of coitegratio sice the series have differet order of itegratio. To this ed, the UECM deoted i Equatio 1 is used. The optimal lag legth is determied as usig the Akaike Iformatio Criteria (AIC) followig Hedry (1995). The test results reported i Table 5 idicate that F-statistic is above the upper critical boud at each sigificace level, therefore CAB, cosumer loas ad the other cotrol variables have a log-ru equilibrium relatioship. After fidig out that the relatioship betwee the series is ot spurious, the estimatio of the log-ru parameters ad short-ru error correctio term will provide valuable iformatio to geerate policy implicatios. The log ru coefficiets are reported i Table 6.

4 58 The results reported i Table 6 idicate that real estate loas, other loas, depreciatio of the TL ad real iterest rate have statistically sigificat effect o the curret accout balace i Turkey over the sample period. Over the period that this study focuses o, Turkey experieced curret accout deficits except three quarters i the year Hece, the egative coefficiet of real estate loas idicate that, oe percet icrease i the real estate loas to GDP ratio has led to a 2.79 percet icrease i the curret accout deficit expressed as a percetage of GDP. However, the impact of other loas o the curret accout balace has bee egative but smaller relative to the impact of the real estate loas. This result is ot surprisig sice over the sample period, particularly followig the moetary expasio after the global fiacial crisis the real estate demad i Turkey icreased dramatically. The credit expasio was the mai source of this boom ad the major source of the credit expasio was the flow of foreig fuds to Turkey. The dowward pressure o the exchage rate was aother side effect of the iflow of foreig fuds. Overall, the outcome was the deterioratio i the savigs rate ad fially icrease i the depedece o foreig resources. This has led to worseig i the curret accout balace. By the ed of 2010, CBRT has adopted some precautioary measures through icreasig the required reserve ratio ad decreasig the short-term iterest rates. The objective of this policy has bee to deter the etry of foreig fuds ad curb the loa growth. Fially, the growth of real estate loas declied to 1 percet i 2012 from 35 percet i Table 6 idicates that depreciatio i TL ad declie i the real iterest rate have egative ad sigificat coefficiets. Itermediate goods are oe of the major items i the total imports i Turkey. Hece, depreciatio i TL leads to icrease i the total value of imports. This structural problem of the Turkish ecoomy is oe of the mai factors behid the trade deficit ad evetually the persistet curret accout deficit i Turkey. The egative coefficiet of the real iterest rate is also ot surprisig. Over the sample period, Turkey frequetly witessed iflow of foreig fuds seekig quick ad high profit. I comformity with the fidigs of Toga ad Berumet (2011), the major reaso behid the credit growth has bee the foreig capital flows to Turkey. Cosequetly, this mechaism eded up with icreased cosumptio, lack of savigs ad deepeig curret accout deficit i the Turkish ecoomy. I short ru there ca be some deviatios from the equilibrium relatioship established amog the series. To this ed, aalyzig the speed of recovery due to a deviatio from equilibrium is importat to esure the stability of the log ru relatioship. The equilibrium correctio form of the ARDL model is estimated usig the oe lagged error term obtaied from the estimatio of the log ru equatio. The results preseted i Table 7 idicate that the equilibrium correctio coefficiet is egative ad sigificat as expected. The value of the coefficiet, , implies that it takes about two quarters for the series to adjust to their log ru equilibrium after a deviatio i short ru. The results are i comformity with the fidigs from the previous studies. Eve these studies (see for example Telatar (2011), Toga ad Berumet (2011), Magir ad Erdoga (2012), Gocer et al. (2013)) use cosumer loas at a aggregate level istead of decomposig, the commo focus is the relatioship betwee the loa stadards, cosumer loas ad the impact o the curret accout balace. Similar to the results of this study, they also fid that the impact of the cosumer loas o the curret accout balace is large ad sigificat. Hece, policymakers should keep i mid this lik while establishig policies through adjustig loa stadards.

5 59. Coclusio Curret accout deficit has bee a chroic problem of the Turkish ecoomy. The depedece of maufacturig idustry o the imported iputs ad ivestmet goods has created trade deficits. Savigs-ivestmet gap, due to low savigs ratio, accompaied these deficits. Hece, ecoomic growth had to be fiaced by foreig resources which i tur led to curret accout imbalaces. This structural problem became sigificat particularly after the global fiacial crisis. Turkish fiacial system, similar to other emergig ecoomies, experieced dramatical icrease i the liquidity due to flow of foreig fuds ito the coutry. The reflectio of this excess liquidity was the sudde icrease i the cosumer loas. CBRT, with the fear of fiacial fragility ad worseig of the curret accout balace, started to imply a ew moetary policy aimig to restrict the loa growth by the ed of This process attracted the researches to aalyze the relatioship betwee the cosumer loas ad curret accout deficit. To this ed this paper also focuses o this relatioship ad differs from the previous studies sice it explais the relatioship by decomposig the cosumer loas for the first time comprisig Turkish ecoomy ad aims to provide policy implicatios for the authorities i coutries with similar ecoomies. I order to aalyze the statioarity properties of varaibles that are collected for the period 2000q1-2013q1, ADF uit root test ad the ZA uit root test with a edosgeeous structural break are applied. Fidig out that the series have differet order of itegratio, the bouds test for coitegratio developed by Pesara et al. (2001) is used. The log-ru coefficiets estimated after cocludig that there is a log ru equilibrium relatioship betweee the variables provide importat iformatio about the lik betwee the cosumer loas ad the curret accout deficit. The results idicate that real estate loas have created the largest impact o the worseig of the curret accout balace. Particularly after the expasio of liquidity after the global fiacial crisis, real estate loas icerased dramatically i Turkey. However, this created egative effect o the savigs ratio ad led to icreasig depedece o froeig resources to meet the fiace for the ew ivetsmet demads. Similarly, over the sample period, other loas have icreased at the expese of higher curret accout deficits. Depreciatio of the Turkish Lira ad the real iterest rate are the other two variables that have sigificat but egative effect o the curret accout balace. These fidigs provide importat iformatio for the policymakers i the similar capital importig developig coutries about the policies to be followed over the ecoomic recovery periods. With the fear of recessio, the expasioary moetary policies may lead to fiacial fragility ad also the dager of balace of paymets crisis. While the authorities are ecouragig domestic demad, the savigs propesity may be affected egatively. Makig a domio effect, the curret accout balace may worse. Hece, the most importat poit for such ecoomies should be ecouragig the savig through diversifyig savig opportuities ad efficietly supervisig the fiacial system to discourage credit booms. Edotes * Evrim Turgutlu, Faculty of Busiess, Departmet of Ecoomics, Dokuz Eylul Uiversity, Tiaztepe Campus, Buca Izmir Turkey. Tel: (90) (232) ; evrim.gursoy@deu.edu.tr

6 60 Refereces uyukkarabacak, B. ad Krause, S Studyig the Effects of Household ad Firm Credit o the Trade Balace: The Compositio of Fuds Matters, Ecoomic Iquiry, 7, Dickey, D.A. ad Fuller, W.A Distributio of the Estimators for Autoregressive Time Series with a Uit Root, Joural of the America Statistical Associatio: 7, Egle, R.F. ad Grager, C.W.J Coitegratio ad Error Correctio: Represetatio, Estimatio ad Testig, Ecoometrics, 55, Feldstei, M The Retur to Savigs, Foreig Affairs, 85, Gocer, I., Merca, M.ad Peker, O Kredi Hacmi Artışıı Cari Açığa Etkisi: Çoklu Yapısal Kırılmalı Eşbütüleşme Aalizi, İstabul Üiversitesi İktisat Fakültesi Ekoometri ve İstatistik Dergisi, 18, Hedry, D.F Dyamic Ecoometrics, Oxford Uiversity Press: Oxford. Johase, S. ad Juselius, K Maximum Likelihood Estimatio ad Iferece o Coitegratio with Applicatios to the Demad for Moey, Oxford Bulleti of Ecoomics ad Statistics, 52, Kasa, K Borrowig Costraits ad Asset Market Dyamics: Evidece from Pacific Basi, Federal Reserve Bak of Sa Fracisco Ecoomic Review, 3, Kuieda, T. ad Shibata, A Credit Costraits ad the Curret Accout: A Test for the Japaese Ecoomy, Joural of Iteratioal Moey ad Fiace, 2, Krugma, P.R. ad Obstfeld, M Iteratioal Ecoomics Theory ad Policy, Addiso Wesley Series: USA. MacKio, J.G Critical Values for Coitegratio Tests, i Log-ru Ecoomic Relatioships (Eds) Egle, R.F. ad Grager, C.W.J., Oxford Uiversity Press: Oxford, pp Magir, F. ad Erdoga, S Merkez Bakası Fiasal İstikrar Tedbirleri: Reel Kur ve Kredileri Cari Açığa Etkisi, SU IIBF Sosyal ve Ekoomik Arastirmalar Dergisi,, Pesara, H. Shi, Y. ad Smith, R Bouds Testig Approaches to the Aalysis of Level Relatioships Joural of Applied Ecoometrics, 16, Telatar, E Türkiye de Cari Açık Belirleyicileri ve Cari Açık-Krediler İlişkisi, Bakacılar Dergisi, 78, Toga, S. ad Berumet, H Cari İşlemler Degesi, Sermaye Hareketleri ve Krediler, Bakacılar Dergisi, 78, Zivot, E. ad Adrews, D.W.K Further Evidece of the Great Crush, Oil Price Shock ad the Uit Root Hypothesis, Joural of Busiess ad Ecoomic Statistics, 10,

7 Percetage Turgutlu, Iteratioal Joural of Applied Ecoomics, 11(2), September 201, Table 1. Curret Accout Balace, Trade Balace ad Cosumer Loas i Turkey CAB Real Estate Loas Vehicle Loas Other Loas Total Cosumer Loas * Note: CAB: Curret Accout Balace; all variables are measured as a percetage of GDP.*Figures for 2013 reflect the first quarter of the year. Source: CBRT (Cetral Bak of the Republic of Turkey) ad TBA (Turkish Bakig Associatio) Figure 1. Treds i Curret Accout Balace ad Cosumer Loas CAB V H OTH -12 Period Note: CAB: Curret Accout Balace, V: Vehicle Loas, H: Real Estate Loas, OTH: Other Loas; all variables are measured as a percetage of GDP.*Figures for 2013 reflect the first quarter of the year. Source: CBRT (Cetral Bak of the Republic of Turkey) ad TBA (Turkish Bakig Associatio)

8 62 Table 2. Descriptive Statistics CAB V H OTH EXC RINT GDPGR Mea Media Miimum Maximum Std. Dev # of obs Table 3. Uit root test results: ADF μ u μ t Coclusio CAB L () () I(1) FD -3.87** (3) -3.72** (3) V L -3.78* (1) -3.7** (1) I(0) FD -5.72* (2) -5.66* (2) H L (0) () I(1) FD -.5* () -.38* () OTH L -3.1**(2) (2) I(0)/I(1) FD -.11* (1) -.12* (1) EXC L -5.15* (0) -5.32* (0) I(0) FD -6.78* (3) -6.72* (3) RINT L -2.9() -3.0** () I(0)/I(1) FD -9.85* (0) -9.95* (0) GDPGR L -3.23() -3.22**() I(0)/I(1) FD (2) -23.5* (2) Note:μ u ad μ t deote model with oly itercept ad model with itercept ad tred, respectively. L ad FD idicate level ad first differece of the series. Lags are chose accordig to the AIC ad provided i paratheses.*ad ** represet sigificace uder 1 ad 5 % level. I(.) idicates the order of itegratio. Critical values are based o MacKio (1991). I(0)/I(1) implies icoclusive result. Table. Uit root test results: Zivot-Adrews Test 1 TB δ θ γ k Coclusio CAB 2008Q ** -0.0 I(1) (-3.9) (2.5) (-0.36) V 200Q -0.1** 0.33* -1.11* I(0) 1 (-5.50) (3.57) (-.30) H 2005Q * I(1) (-.8) (-.09) (-0.26) OTH 2005Q2-0.6* 1.08* -2.13* I(0) 2 (-6.17) (2.7) (-3.61) EXC 2002Q1-1.0* * I(0) 0 (-6.97) (-3.38) (-1.57) RINT 2003Q * 0.7 I(1) (-.18) (-2.52) (1.25) GDPGR 2006Q I(1) (-3.7) (-1.80) (-1.00) Note: Critical values are take from Zivot ad Adrews (1992).*ad ** represet sigificace uder 1 ad 5 % level. The umbers i paratheses are t-statistics ad k is the lag legth. The break dates are reported i the colum TB. I(.) idicates the order of itegratio. Table 5. Bouds Test Results Model F- statistic 10% 5% 1% I(0) I(1) I(0) I(1) I(0) I(1) F(CAB V, H, OTH, EXC, R, GDPGR).593* Note: * represets sigificace at 1 % cofidece level. The critical values are obtaied from Pesara et al. (2001, Table C1, Case III, p. 300). 1 Zivot-Adrews uit root test is based o the followig model C as specified by Zivot ad Adrews (1992): y t = α + βt + θdu t + γdt t + k δy t 1 + j=1 φ y t j + ε t.

9 63 Table 6. Log ru coefficiets Depedet variable: CAB Coefficiets t-statistics Variables V H -2.79* OTH -1.7*** EXC -0.07** RINT -0.06* GDPGR F statistic 2.61 (Prob.: 0.03) LM test (2) 0.59 (Prob.: 0.56) Ramsey RESET Test (1) 0.57 (Prob.: 0.5) Note:*, ** ad *** represet sigificace uder 1, 5 ad 10 % level. I(.) idicates the order of itegratio. Table 7. Equilibrium correctio form of the ARDL model (3,,,3,,3,3) Depedet Variable: CAB t Variable Coefficiets t-statistics Costat CAB t CAB t V t V t V t V t * H t ** H t H t H t OTH t OTH t ** OTH t ** EXC t EXC t EXC t EXC t RINT t *** RINT t *** 1.72 RINT t GDPGR t 0.129*** GDPGR t * 2.93 GDPGR t ECM t ** F statistic (Prob.: 0.000) LM test (2) Ramsey RESET Test (1) Note: *, ** ad *** represet sigificace uder 1, 5 ad 10 % level (Prob.: 0.115) (Prob.: 0.100) 1 CBRT Fiacial Stability Report, December Other loas iclude porfessioal aids, educatioal fuds, vacatioal fuds etc.

10 6 3 Data o cosumer loas are take from the Turkish Bakig Associatio curret accout balace (CAB) ad GDP data are take from the Cetral Bak of Republic of Turkey. Iterest rate series are obtaied from the IMF Iteratioal Fiacial Statistics Database. I order to assure that there are o specificatio errors i the estimated UECM, Ramsey RESET test is performed. With probability value 0.768, there is o evidece of model misspecificatio. The estimatio results are available form the author upo request. 5 Turkish Bakig Associatio Statistical Database