The Structure of a Financial Crisis

The Structure of a Financial Crisis

Lessons from Turkey

BY AYBEK GOREY (*)

INTRODUCTION

The year 2001 had been unlucky for Turkey. Apart from the crisis in 1994 and November 2000, the country had to face another financial crisis, causing problems in the management of its economy. Why does a country delve deep into financial crisis? What are the possible immediate triggers for both the current and potential new crises? What precautions should be taken for the key issues like the fragility of the financial and banking system, belated reforms and privatisation, rampant corruption, exchange rate policy? And how can the governments satisfy the markets and people to undertake these reforms?

The current crisis has not hit the country overnight. This article figures out the weakness of the system, years of neglect and mismanagement, possible solutions for other developing countries.

One has to bear in my mind that even evaluating the aftermath of the 1994 crisis, Turkey was a rising star, with aspirations towards full membership to the European Union. Among the potential applicants of EU membership, - mostly the Transition Economies of Eastern Europe- Turkey was the mere applicant with a functioning Customs Union with the EU back in 1995. With a relatively large and dynamic market, having high hopes for rapid economic and social progress, Turkey seemed a valuable candidate for the European Integration. Now after the 2000 November and 2001 February crises, the shrinking of the economy suggests that Turkey can only catch up with the figures of year 2000, as far as the year 2004, let alone the EU membership and further growth. To indicate why such a failure has been suffered, we have to go back to the roots of mismanagement. And that begins with the problems of Privatisation practices.

THE INITIATION OF PRIVATISATION

Privatisation has proved to be a successful method for improving institutions and maintaining corporate efficiency all around the world. But under certain conditions either privatised firms can get into serious difficulties or delaying the privatisation programs could trigger economic crises, together with the impact caused by years of mismanagement, not undertaking the progressive reforms and corruption - as experienced in some of the transition economies of Eastern Europe, Central Asia, Far East, and as is the case in this article, in Turkey

THE FIRST DECADE OF SUCCESS

The past decade forced the public sector to its knees, all around the world. Though Turkey was not a transition economy, the winds of change has affected the public sector like in all other developed and developing economies. However, unlike the Transition Economies, Turkey embarked on a prospective plan to privatise a major part of the public sector in the mid 80's and laws enacting and enabling the privatisation of the State Owned Enterprises (SOE) in late 1985, was an important breakthrough. In the 1990's privatisation went ahead but caused disappointment in many sectors. Most privatised firms could not improve their performance and some that succeeded, had been profitable already as SOEs. But that was not the only problem the country had to face. Turkey had already begun to face significant problems regarding the Privatisation Policy in the 1990's. These mentioned problems not only aroused from the aggregate demand concerning the SOE, and the negative effect of investment but the ongoing debate carried by the opposing political parties in the Parliament.

The governments have overcome several difficulties and successfully resumed privatisation in the beginning of the second decade. Though the outcome was promising, the program proceeded more slowly than the original plan. In 1993 for example, a net revenue of US$ 543 millions was raised through several privatised firms including two electric companies, two communications equipment manufacturers, a supermarket chain and four cement factories. In 1994 a total of approximately US$ 412 million was raised through the sale of an automobile manufacturer, remaining cement factories by international offering resulted in US$ 330 Million. In 1995, a total of US$ 573 million was raised. Sales during this year included entities in the sugar, cement and magnesium industries, as well as a state bank. In 1996, a total of approximately US$ 300 million resulting from disposal of entities in the cement, zinc, forestry and textile industries had been realised.

TABLE

TABLE

PRIVATISATION GROSS REVENUES

. Years 1986 -1995 1996 1997 TOTAL

. ($) ($) ($) ($)

-Block Sale 1,274,950,286 217,990,000 239,150,000 1,732,090,286

-Asset Sale 203,539,351 71,765,349 114,920,934 390,225,634

-Public Offering 433,197,263 0 0 433,197,263

-International Offering 330,000,000 0 0 330,000,000

-I.S.E Sale 522,453,459 1,988,800 0 524,442,259

-Incomplete Asset Sale 2,139,819 0 0 2,139,819

TOTAL 2,766,280,178 291,744,149 354,070,934 3,412,095,261

Source: Turkish Treasury, Privatisation High Council Results

THE SECOND DECADE OF FRUSTRATION AND FAILURE

New problems have been faced in 1994, and the privatisation program was subject to certain legal problems, as result of the new Privatisation Law introduced. The new legislation established the Privatisation High Council (PHC) for presenting proposals and determining plans. A critical turning point was reached when the privatisation plan for Turk Telecom was proposed. Under the new Privatisation Law in May, 1995, Turk Telecom shares were decided to be privatised. And in June 1995, Turk Telecom was reserved into the privatisation portfolio and studies for further assessment have begun.

On February 28, 1996, the Constitutional Court annulled and banned the execution of some articles of Law No:4107. As a result of this decision, PHC had no longer reserves the authority for transferring and selling the shares. The tender process of advisory services of Turk Telecom was cancelled.

After