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How can export expectations get better while our share in the European Union market shrinks?
As you might remember, last Tuesday, we started asking "What is the problem in expectations surveys?" There observed something strange. Rate of those whose expectation for "export orders over the next three months" was recovering increased steeply. Expectations got better; however, over the same period annual growth forecasts for our basic export markets were revised downwards. As the question on export orders was a part of real sector confidence index, we changed the question as follows: "Is it possible that market actors while passing through lands, whose roadmap is not known, fail to decide how to formulate their expectations? Do expectations surveys reflect confusion?"Today, let us continue with the same topic.
First, let us clarify one point. What you read at this column last Tuesday and today has nothing to do with "they are modifying and manipulating survey results" banality. Our concern is this: though the surveys are collected as securely as before, it is possible that survey respondents, in the present economic environment might be experiencing a horizon problem in their prospective perspective. Under Keynesian ambiguity conditions it is quite normal that projection ability disappears if future is covered with smoke clouds and the economy starts to function in a way that you are not familiar with. In this context, our concern is related to the deterioration in the capacity to predict the future. Is it possible that expectation formulation mechanism is affected and damaged by the current environment? With this regard, we believe that it is wise to be more cautious than the past about what expectation surveys tell.
The problem arises from this point stated on Tuesday: "Recently, 2009 growth expectations are revised downward for each of our export markets. However, business tendency survey announced by the Central Bank of the Republic of Turkey (CBRT) reveals that "expectations for export orders over the next three months" ensures rapid recovery after sinking to the lowest level in November 2008. Among total participants of the April survey, the number of those expecting an increase in export orders over the next three months is 14 percent higher than that of those expecting a fall. As a result, real sector confidence index goes up."
What do you take into consideration when forming your expectations for prospective export orders? First, I guess, you consider the growth capacity of your export market. The more the related country grows, the more demand for its citizens to goods you export grow. This was what we underlined last Tuesday. Graph 1 included the answers given to the related question in the CBRT survey. The question was: "If Germany will contract by 5.3 percent, how can Germany's export demand and contribution to Turkish exports grow?" Apparently, there existed a problem.
Graph 1: Expectations for export orders over next three months (orders will increase (%) - will decrease (%))
Given that German economy is contracting how else can the number of export orders of Turkey increase? It might be that your share in the market is increasing though the size of the market contracts. Then, let this be the topic of today. So; secondly, market the share of Turkish goods might be increasing. Then, does the share of Turkish goods in the EU market that contracts as a whole increase? No, it does not. As calculations of TEPAV economists reveal, import demand of EU market for Turkish goods has deteriorated back to 1990 levels. There is a broad market contraction rather than market gain. This is what Graph 2 says. Then, how does export order expectation recover? We honestly do not know.
Graph 2: Share of Turkey in imports of EU-27 countries excluding imports within EU -27 countries (%, monthly)
Source: EUROSTAT, TEPAV calculations
Why do we focus on the EU market? We do so as half of total exports of Turkey are done in the European Union market. Given its size, it is not a market that can easily be substituted. Therefore, a rise in export order expectations due to a recovery in an unfamiliar market does not seem possible. Second, engaging in trade in unfamiliar markets incur high costs. There is a trust relationship between us and buyers in the EU market. This way, we usually do not need insuring export receivables. Even if we insure them, we have to accept low commissions rates. If we trade in unfamiliar markets, on the other hand, we either have to take higher risks or pay higher rate of insurance premiums. In additions to this, banks refrain from confirming letter of credits opened by buyers in related countries or request high commission rates. As a result, cost of the trade done with those unfamiliar countries fold. Though it might be easy to enter, it is hard to leave a market where you do not know how to collect your receivables. If there is no state subsidy, leaving European Union market to enter African market is like "going on a trip with head-in-lions-mouth tours". Besides, the share of the market is not big enough.
So, what is the conclusion to be derived here? It is wise not to wait for a recovery in our export markets in the short run. Second, it is necessary to wait for the recovery in our export markets to expect a recovery in the Turkish economy. Then, it is possible that positive growth expectation for 2010 might be optimistic. Third, in the light of these figures, it does not seem possible to easily explain the rise in export orders expectations in the survey. Fourth, then, it is necessary to question as well the real sector confidence index. Fifth, it is wise to take a closer and more comprehensive look at expectations surveys over the current period.
Kindly submitted to the information of relevant actors
This commentary was published in Referans daily on 30.04.2009