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    ‘If you are in debt, you are in trouble’ period begins for the corporate sector

    Güven Sak, PhD30 December 2008 - Okunma Sayısı: 1557


    Honorable businessman Mr. Tuncay Özilhan said "Ankara residents do not feel what goes on in Anatolia". He was right. The subject was on the headlines of this daily yesterday. Today let me examine the problems the corporate sector encounters in daily life. The topic is 'if you are in debt, you are in trouble'.

    The world has changed. Things we considered favorable yesterday are not so anymore. The developments led by the global crisis shall first change the way we evaluate the issues. If we evaluate the indicators in the way we used to, we will only increase the risk of making mistakes. It will be wise to identify successfully the fundamentals of the interim period the Turkish economy is in. Last week, we highlighted three issues: First was that economic transactions have ever increasingly began to be carried out by cash. Second, Treasury bill interest rates have been gradually falling down. Third, banks were requesting collateral guarantee for existing credits. The source of all three was the same: the gradually rising lack of confidence between economic actors. As no one trusted each other, banks were not extending working capital credits - contract term in the real economy is shortening - and transferring the funds not extended to the corporate sector to the Treasury. Therefore, it will be wise not to assess the fall in the interest rate like "How good it is. The Central Bank is cutting down interest rates. Monetary transfer mechanism is working. Corporate sector has access to cheap credit."Especially in the current environment. The corporate sector is entering a period where they will not only be unable to find credit but also have hard time in repaying existing loans.


    Last Friday, a reader called this new period "Shall I suffer by selling commodities or by not selling commodities" period. And he was completely right. Can you imagine the condition of the people who believed the "the crisis will be tangent to Turkey" arguments and encountered recent days with full inventories? Nowadays, a part of the corporate sector has high cost inputs and inventories created via production based on these inputs. What does this mean? This means facing default losses. We are right at the middle of the phenomenon that decreasing raw material prices are creating losses for companies. There is nothing to do. That loss will be recorded anyway. And it will not stop there: We are also at the beginning of a period where cost of keeping inventory increases. Since the Central Bank began to cut down the interest rates, credit interests for the corporate sectors seem like they increased by around 50 percent. We are in a period where not depleting inventories will be dangerous. But, what if you sell the commodities in inventory? Then, you will need a buyer to pay in cash, which is absent. Making post-dated sales means completely undertaking the risk of defaults for a company. So, what is the issue? You will not be fine if you make sales either. So, tell me, is our reader making the aforesaid comment wrong? Is not this new period sort of a "Shall I suffer by selling commodities or by not selling commodities" period? It is.


    Yesterday, being able to receive a credit was an indicator of healthiness for the corporate sector. Today, the circumstances are as the following: All credit contracts reflect the conditions valid for yesterday. Or rather, all credit contracts reflect the cash flow conditions for yesterday. Terms of domestic and external market have completely changed. The fall in raw material prices have decreased the competitiveness of the already produced goods. When considered as a whole, cash flow towards the corporate sector will not rise but fall.


    In such an environment, there is no sense in saying "God forbid! We shall not mention the name of the crisis". If you do not diagnose the disease, you cannot find the cure. Everyone needs a doctor who says: "Unfortunately you have cancer. But do not worry, I know the cure. You can trust me" directly in the face. Accepting the truth does not make it difficult but easier to find the opportunity door.


    Now, please think about the situation a company that has the eligibility for credit in yesterday's terms and that aggressively paves the way for itself in the arena global competitiveness encounters. While the cash flow towards the corporate sector decreases, cash outflow resulting from credit repayments remains the same. That cash outflow reflects the reality of another world. Will the company suffer in the upcoming period not because of its own fault but because of the global crisis surrounding the world as a hurricane? Yes, it will.


    Then, what shall be done? Debt of the corporate sector shall be restructured for an interim period of one year. This is exactly what is meant by keeping the credit channel open. If this is not done, the crisis will only become deeper. Feeling the effect of the crisis more deeply does not make any good for anyone. What is expected from the government today is the designing of the mechanism that will transfer the production capacity of the country to tomorrow with lowest losses possible.  Otherwise, what is meant to happen will happen. And then the government will design a huge recovery package whether desired or not. The trick is to minimize the loss to be faced in the future and improve the resistance of the economy towards the future shocks as soon as possible.

    This is what is absent though necessary.


    This commentary was published in Referans daily on 30.12.2009