The Early Warning Indicators of the Turkish Financial Crises

The global economic and financial instability context of the 1990s also affected the Turkish economy. Actually, the 1980s in Turkey are characterized by a radical transformation of its economy through significant efforts of liberalization. With an out-looking economy and a liberalized financial system in the early 1990s, Turkey was presented by international organizations such as the IMF and the World Bank as an example of successful liberalization process to other developing countries. However, this "remarkable " liberalization process, which was performed without ex ante correction of persistent macroeconomic imbalances, worsened economic and financial instabilities and caused two severe financial crises that occurred first in April 1994 and then in February 2001. This paper aims to illustrate the essential causes of these crises by developing a binominal and multivariate logit model which estimates the predictive ability of eighteen economic and financial indicators in a sample that covers the period January 1990-December 2002. In addition, the paper evaluates the out-of-sample forecast performance of the model in a period of January 2003-December 2008 in which two small-scale currency crises occurred in May 2006 and then in October 2008. The paper finds that the Turkish financial crises are mainly due to excessive budget deficits ( /BUDGET GDP), high money supply growths ( 2 /M RES), sharp rises in short-term external debt ( /SHORTDEBT RES), growing riskiness of the banking system (in particular currency and liquidity mismatches, BSHORTPOS and /BLOAN BDEPO), and external adverse shocks (TOT)