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“Man, is the crisis ending?”
No, it is not. What makes you think so? It is not even close. That the Turkish government has finally started to move in the right direction is not enough. There are still a lot of steps to take and a series of measures to be implemented. It is impossible to conclude "man, is the crisis ending?" solely relying on the rise in demand for automobiles after tax cuts. This is a flash in the pen. Nonetheless, it also involves a good message.
This week, private consumption tax rate for automobiles and white appliances have been cut down temporarily for three months. Since the beginning of the week, everybody is keeping an eye on automobile sales. Dealers are happy, their phones have started to ring again and they started to make sales again after a certain period. Last night, news on a television channel said: "600 automobiles were sold in the first day after the rate cuts." I guess this was the number for a particular brand. It is certain that these are quite favorable developments. However, we should not miss the reality: When not supported with other measures, the effect of this measure will end like a flash on the pan.
Let us state three points: First, the rise in sales in the automotive sector does not mean that automobile factories will start to operate with full capacity. What is more, this measure alone cannot guarantee that the automobile sector in Turkey will survive. Third, the rise in sales does not imply that the policy makers now have the right to say "Man, you see that we have fulfilled our part perfectly" and take a back seat.
Let us elaborate on the first point. That automobile says per day reached a couple of hundreds will not make automobile factories increase the number of people they employ. The number of automobiles waiting in inventory since last year is around 150 thousand. So, if you sell 1000 automobiles starting from today, you will not need to make production for a year as the inventories will not be depleted yet. Therefore, this measure does not increase the activities in factories. It at best enables them to survive for an additional couple of months. And a period of a couple of months is not enough to stimulate the domestic market. This is the first point.
It is not possible to come with a solution for the current problem unless the problem of the corporate sector is completely acknowledged. Due to the tightening of domestic and foreign demand, the corporate sector ended up with product and raw material inventories. Accumulation in inventories poses two problems. First, also due to the steep fall in raw material prices, the price of the products in inventories is already below the market price. Thus, selling products in inventories in fact poses a loss and wastes the working capital of the company. Second, to accumulate products in inventories means to put money on those products. Products kept as assets shall be financed by liabilities. Rise in the quantity of products in inventories implies a rise in working capital requirement. Now, while each sale enabled via the new measure takes away a part of the working capital, the need for additional working capital will not be eased. Furthermore, transactions with the dealers also create a need for additional working capital. Therefore, stimulating domestic market alone will not solve the problems of the corporate sector. It is crucial to reestablish the cash balance of the corporate sector. Corporate sector needs working capital support. And this is the second point.
If assessed in this perspective, the impact of the tax cut decision will be a flash in the pan; it will be transient. Do, what is the good news in the new measure? It is that, creating an impact is possible; even it will be a flash in the pan. Policy activism, deficient or alone, will be beneficial at least to a small extent. It is better to lose the saddle than the horse. A room to maneuver within the domestic economy can be created even though the crisis tyrannizes the rest of the world. The thing to be done is to bring forward a multidimensional measure package as soon as possible.
It is time to implement active economic policies and make endless trials. The more you try, the earlier you find the solution.
The first thing to do is to forget about the constraining assumptions of the past immediately. It is important to deal with the issue with an open mind.
This commentary was published in Referans daily on 19.03.2009