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How much will Turkey’s economy contract in 2009 (1)?
What will be the rate of economic contraction for Turkey in 2009? This question can certainly be answered by naming any figure. However, then, it is necessary to answer why will the rate be exactly 'that' figure, not lower or higher. It is necessary to enumerate the rationale for the contraction prospects so that it can be discussed whether they are realistic or not. A way of answering this question is employing a technical model. The most basic model will include the sup components of the national income (such as consumption, investment, exports and imports). Then, a series of technical calculations will be made based on the determinants of the components and their impacts on the components. In the current environment, the candidates for major determinants of components like consumption, investment and export are: Real value of the total credits extended to consumers and corporate sector, access to external funds, growth of the export market, risk appetite of international financial investors, and indicators of confidence.
As seen, the items I listed as main determinants completely match up with the channels through which the global crisis affects Turkey. Now, let us modify the initial question: What will be the rate of economic contraction in 2009 as compared to the situation in 2001 crisis? Will it be far below or higher than that in 2001? Let us remember that in 2001, Turkish economy contracted by 5.7 percent.
Let us proceed this way: Let us address the main determinants of the national income for 2009 one by one and compare the values realized in 2001 with those prospected for 2009.
Let us begin with exports. In 2001, there was no significant decrease in the income level of the countries in our export market. Now, however, the right opposite is valid and this negatively affects the export performance of Turkey. Exports of Turkey increased by 12.8 percent from 2000 to 2001. As the situation in 2008 is evaluated as a whole there is no striking problem; exports have increased by 23 percent. However, we know there is a problem. Export performance has considerably been deteriorating since October. Exports in October decreased by 1.8 percent as compared to the same month last year. The rate of contraction increased steeply and rose to 25.7 percent in January.
As regards the contribution of exports to the rate of growth, one point shall be underlined: The contribution of exports (including exports of services) to the growth rate of 2001 was positive, around 3.6 points. However level of exports will fall down in 2009 and thus the contribution to growth will be negative. For instance, let us assume that the rate of fall in exports for the last three months (20 percent) is valid for the whole year. In this case (under a highly rough computation), the effect of solely this fall will be - 3.5 percent. Of course this is not a growth rate prospect for 2009 as export is not the only determinant of growth. Growth rate might be lower or higher depending on other determinants.
Now, it is time for other determinants. Let us begin with external funds. External fund is not a direct component of national income. However, it is a significant determinant for private investments and cash flows of the corporate sector. In 2001, the amount of foreign debt due was around 16.7 billion USD, 65 percent of which belonged to the private sector. The amount of foreign debt due in 2009 is around 106 billion USD. Out of this amount, 92.5 billion USD, i.e. 87 percent, belongs to the private sector. So, what happens if new external funds meeting the amount of debt due do not inflow?
Quantity effect: Banking and corporate sector adds the foreign exchange to the new external funds received. This implies a contraction in balance sheets and deterioration of cash flows for both sectors. This implies lower production level, employment, investment and indirectly lower level of domestic credits.
Price effect: The efforts to access foreign exchange increase the exchange rate in favor against Turkish lira.
It appears that external funding problem will be a bigger problem and will have worse outcomes on the growth performance in 2009 than 2001.
This commentary was published in Radikal daily on 02.03.2009