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How much will the economy contract in 2009? (2)
The title question can also be asked as "What will be the contraction in 2009 in comparison with 5.7 percent of contraction in 2001?" To give a satisfactory answer for this unpleasant question, I evaluated the export performance on Monday. Exports of Turkey fall down by gradually increasing rates since October. Pace of slowdown in January was around 25.7 percent. According to data provided by Assembly of Turkish Exporters, volume of exports fell down by 35 percent in February as compared to the same month last year. On Monday, I stated that a 20 percent fall in 2009 exports as compared to 2008 would roughly result in a 3.5 point fall in growth rate. On the other hand, in 2001, Turkish exports did not fall down, but increased by 12.8 percent.
Under the current circumstances, even a 20 percent fall in exports seems an optimistic forecast. But I will touch upon technical and sensitive calculations at the end of the "How much will the Turkish economy contract in 2009" series.
The second element determining the rate of contraction in 2009 will be inflow of external funds. In 2001, value of foreign debt due was around 16.7 billion USD. In other words, the amount of funds private sector and public sector had to generate to repay their foreign debt corresponded to 8.5 percent of GNP. On the other hand, the said fund requirement for 2009 stands at much higher levels (106 billion USD, around 17 percent of GNP).
nother difference of 2009 from 2001 is that almost 90 percent of the foreign debt constitutes of private sector's debt. However, in 2001, the share of the private sector in total foreign debt stock was lower. In 2001, corporate sector managed to repay due debts by receiving additional foreign funds. Besides, the value of new funds received was even slightly higher than the amount of the debts due.
Here is another interesting point to note: Back in 2001, corporate sector had hard time in repaying due debts and failed to find foreign funds sufficient to cover due debts during the March - July period; i.e. during the period where economic program against the crisis was not yet implemented and the conflicts between the coalition partners with respect to implementation issues were on the agenda. Will similar developments resulting from lack of a reliable economic program happen in 2009? Net long term borrowing of the corporate sector throughout 2008 is in average 1.9 billion USD per month. In other words, they paid due debts and used 1.9 billion USD additional funding. However, this average amount falls down to 144 million USD for the last quarter of 2008. In December 2008, there is a net increase of 394 million USD.
If this upwards trend continues, the corporate sector which will have around 92.5 billion USD of foreign debt due in 20009, will have very hard time in fulfilling this obligation. But, does this inability to roll over foreign debt continue in 2009? As it is considered that the financial sector throughout the world is tightening, this trend might be expected to continue; and most probably might intensify.
I would like to remind you that there was no global crisis in 2001. Therefore, global financial investors had risk appetite. The 2001 average of the VIX index which is an indicator of the risk appetite is 25.7. The index is varying between considerably higher levels; i.e. global risk appetite has worsened. The index which has reached around 70 at the end of 2008 now varies around 50. Thus, external funding problem will be more challenging in 2009 than in 2001. This unfavorable situation along with the worsened export performance will increase the rate of contraction in 2009.
Note: Striking fall in February inflation is another indicator that domestic demand has almost come to a halt: It indicates that growth rate for February is quite low.
This commentary was published in Radikal daily on 05.03.2009