Liability Dollarization and Growth Performance of Non-Financial Firms in Turkey

Within the framework of the floating exchange rate regime which was introduced after the 2001 economic crisis, particularly non-financial firms with limited foreign currency (fx) denominated income have reduced the fraction of fx denominated loans in their total liabilities (i.e. liability dollarization rate) in order to avoid the foreign exchange risk. Nevertheless, the liability dollarization rates of Turkish non-financial firms are still very high compared to those of international peers. In the aftermath of the crisis, in general, liability dollarization rates of firms declined significantly along with the improvement in the maturity structure of fx denominated loans. As a result, balance sheet vulnerabilities of the non-financial firms have diminished to a certain extent. Accordingly, despite the sharp contraction in both domestic and foreign demand, the impact of the 2008-2009 global economic crisis on the firms� activity has been limited with respect to the 2001 economic crisis when the foreign demand was buoyant. The estimations, which were performed by using a large firm level data set compiled by Central Bank of Turkey for the period of 1996-2010 and employing dynamic panel regressions (GMM), show that liability dollarization rates have in general favorably affected the sales and employment growth performance of non-financial firms. This finding suggests that non-financial firms in Turkey have limited access to loans in domestic currency and they circumvent this constraint by borrowing in fx denominated loans. On the other hand, it is estimated that liability dollarization tends to deteriorate the growth performance of the firms with low export shares and high liability dollarization. In sum, the analysis shows that firms would be able to ease their borrowing constraints by enhancing their export shares and hence could have a better growth performance. However, it is also observed that net profit margins of highly liability dollarized firms contract sharply especially during crisis periods due to large depreciations, which would in turn negatively influence the firms� activities through �balance-sheet channel�.