Did the markets start to revive? Do not you also notice dynamism at the markets? Recently we have been frequently hearing narratives that business activities are rallying. If you wonder what is going on, please keep reading.

As far as we are concerned, there is no recovery in any market. Rather, business owners that are bored as they do not make any sales become willing to take higher risks. So, what happens? The post-dated checks that were declined a few months ago to be cautious start to step in again. Commodity sales on credit start to take place. Those that do not know what to do with the commodities in inventories start saying "Will I keep these for good? I would rather dispose of the inventory first and hope that I will get paid in time." They do not exactly act rationally. In such an environment, they take higher risks. Day by day Turkish economy becomes a more interesting research laboratory for those studying on behavioral economics. Maybe this is also what goes on in the world; but we can observe the course of events more closely in Turkey.

Okay, but why the business owners act like this? Why do they become ready to take more risks? To answer this, the situation the corporate sector is faced with must me well acknowledged. We propose a three-step answer. First, a number of companies in manufacturing sector was caught in the crisis with raw material and finished goods inventories. Raw material prices have decreased unprecedentedly from the emergence of the crisis to present. For instance, iron-steel and cotton prices move around very low levels. What does this mean? Cost of production with high-price raw materials is higher than the current sale price of the finished good. Each sale of good produced with high-priced raw materials implies a loss for the company. As a result of this, companies in various sectors have lost their working capital. This is the first point.

The second point is:  Due to the lack of confidence rising among the corporate sector, companies stopped making transactions based on post-dated checks. No one is sure what his counterpart will face in the future and whether or not he will abide by his debt. That as a principle, banks stopped extending loans in exchange for post-dated checks shut down the channel for transactions on credit. Commercial activities based on post-dated checks are highly important for the Turkish economy. Due to the blockage of this channel, domestic demand instantly came to a halt. The actor to open the channel is the banking sector. Their perturbation can be understood, however the banking sector knows better than any of us that in an economy where the corporate sector is in bad condition, banks extending loans to the corporate sector can never be in good condition (here, some banks that are not interested in extending loans to the corporate sector; that have forgotten of such a phenomenon years ago and who are frequently discussed recently are out of subject. They are in another league. And that league is not related with the corporate sector.). This is the second point to be stated concerning the corporate sector.

The third point is:  A number of companies that have suspended production still have finished goods inventories because of the tightening of domestic and foreign demand. What does a business owner that cannot see the end of the tunnel and that is not proposed a way-out strategy and a horizon by the government do? What does that business owner do if it is also given that more than six months has passed and no measures to tackle the crisis has been introduced, that though the elections has passed a simple IMF agreement has not yet been signed?

In our determination, there are two options he can follow: He either will keep the finished goods inventory until a period where prices will start to go up again, or dispose of the inventory even it incurs a loss in exchange. The former means maintaining the finished goods inventory as an investment tool. The latter means shifting the investment portfolio even in incurs a loss in exchange. Now, which option would you follow if you were owner of a business? If you believe that the market will not recover in the short term, do not you convert the finished goods inventory into cash as soon as possible and shift to another investment tool? For instance, do not you shift your to government debt securities which ensure higher gains day by day thanks to the interest rate cuts by the Central Bank or to foreign exchange the value of which does not change much? In our determination, this is what is beginning to happen. Some business owners are trying to convert the finished goods inventories into cash as soon as possible. When doing this, they are taking risks and start accepting post-dated checks again. And obviously, this situation will lead to a slight recovery. Short-term tax cuts introduced by the government in certain sectors might also have led to a temporary recovery.

Is this recovery sustainable? In our determination, it is not under its current features for three reasons: First, the source of the recovery is not hope but hopelessness about the future. It is an instant portfolio changing operation. Business owners try to shift from a portfolio composed of finished goods, which is hard to be converted into cash, to a portfolio composed of financial assets. Second, working capital losses of the corporate sector is not compensated for. When compared to the time the crisis emerged, Turkish economy has a lower level of working capital stock. Production level does not increase to the older levels unless the working capital stock is exchanged. In that case employment losses cannot be compensated for as well. Third, there is no way-out strategy; even a medium term one. This recovery is a flash in the pan; it will end as it started.

Then, is Turkey hopeless? No. However, there are steps to take and measures to implement. It is possible to control the rising hopelessness.

What was the equation? Either we would control the crisis or the crisis would control us. Currently, the crisis goes on controlling us. It is kindly submitted to the information of those who want to learn about the present state of affairs.

This commentary was published in Referans daily on 23.04.2009