Dollarization and External Sustainability of Turkey

In this paper, we attempt to explain that expanding current account deficit of Turkey can be a highlighting signal of its dependency on foreign capital inflows. When private non-financial firms borrow in foreign currency, they face currency mismatch in their balance sheets. Statistical analyses of aggregated balance sheet data of non-financial sector revealed that the negative gap between firms’ dollarized assets and liabilities has been increasing considerably in Turkey. This creates financial exposure by private non-financial sector. Given a high level of liability dollarization by firms in Turkish economy, it is exposed dramatically to the changes in external and domestic conditions