Effects of Exchange Rate Shocks and Political Risk on the Turkish Manufacturing Industry: Some Evidence

In cases where debt dollarization of firms is more than asset dollarization, sudden and high depreciation of the national currency causes firms to lose net wealth and may adversely affect their investments and profitability. Real exchange rate depreciation, on one hand, increases the incomes of manufacturing industry firms by providing international competitive advantage and it can prevent the competitive advantage by creating negative balance sheet effect due to high debt dollarization on the other. In this context, the aim of this study is to discuss the determinants of the debt-dollarization and the balance sheet situation of the manufacturing industry, which is facing political instability and exchange rate volatility. Dynamic panel data method was used for manufacturing industry sub-sector data for the 2008-2015 period. Overall, our empirical results reveal that the exchange rate shocks have positive impact on both debt dollarization and profitability. That means there is an exchange rate dependency in manufacturing industry. In addition, results show that there is no significant effect of political uncertainty on debt dollarization and the profitability of firm.