Emerging economies’ short-term private external debt as evidence of economic crisis

Considering both economic stability and crises, the need to analyze the short-term private external debt (ST-PrED) of a country is notably obvious for proactive crisis management. In the economics literature, the convention is to monitor the ratio of debt to the country’s Central Bank’s international reserves. However, the debt itself could act as a main precursor. In this context, we examine Turkey’s ST-PrED data as representative of an emerging economy. Our methodology is to use a linear growth model to fit the ST-PrED data and a Bayesian method for model estimation and forecasting strategy. The empirical findings illustrate the performance of our predictions in capturing unstable terms of the economy. As a policy implication, we recommend that policy makers place special emphasis on ST-PrED as a potent indicator of the country’s financial vulnerability. Taking into account the ST-PrED level, to prevent the contagion effect of a crisis, it is essential to implement policies that are more effective in coordinating international financial flows and improving liquidity positions. Furthermore, fostering structural reform and an innovative approach to strengthen the real sector and improve education could create economic stability and sustainability in terms of debt structure among emerging economies.