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    Economic contraction in 2009: too unpleasant to write about

    Fatih Özatay, PhD08 March 2009 - Okunma Sayısı: 1328


    On Monday, I said that the question 'how much will the economy contract in 2009?' must be answered by the help of a technical model. In fact, I have the initial results on my computer for a while. But, I did not want to announce them here as they are extremely unpleasant. Therefore, I wanted to make more trials and minimize the margin of error. Today, I will not give any figures but go on comparing the situation in 2009 with that in 2001.

    Developments in two elements are worse as compared to 2001. Exports that continuously went up in 2001 have been steeply falling down now. Furthermore, growth estimations for significant trading partners of Turkey have been continuously cut down. Second, today, need for external funding is higher than back in 2001. Nonetheless, the markets that are to provide the funding are in turbulence. This implies that the corporate sector is trying to repay its foreign debt using their own sources; i.e. the corporate sector is going to shrink.

    Third determinant of the growth rate is the amount of domestic credits. In 2001, the banking sector faced a great turbulence. As a result, the amount of credits extended by banks to the corporate sector and consumers decreased significantly. Figures on total credit volume show that the real value of the credit volume as of the end of 2001 was 27.6 percent lower than that as of the end of 2000 (there is a further 2 percent fall as compared to the end of November 2000): There was a significant credit tightening in 2001.

    For now, the situation is not as bad as in 2001. The main reason behind this is the healthy structure of the banking sector. Here, however, I have to add that the health of the sector is a 'dynamic' rather than a 'static' concept: Credit volume has been tightening in real terms since October; the real volume of credits has decreased as compared month over month. Credit volume on February 20 is 6.9 percent lower than the volume at the end of September.

    So, will the credit tightening continue and reach the levels in 2001? Instead of answering these questions, it will be wise to return to the model formed to estimate the economic contraction in 2009. Because, different scenarios can be formed based on different credit volumes and the rate of contraction under each scenario can be calculated. I will touch upon this tomorrow.

    I would like to make a few comments on the fourth channel: confidence channel. Let me categorize it under two groups: domestic and foreign confidence channel. In 2001, global risk appetite and confidence were favorable. The 2001 average of the VIX index which is an indicator of the risk appetite is 25.7. Now, however, the index is varying between considerably higher levels; i.e. global risk appetite has worsened.

    In 2001, the only index set to measure the level of domestic confidence was the real sector confidence index announced by the Central Bank. This index gives valuable information in particular on the future value of the private sector investment expenditures. If we disregard the modifications in calculation methods, current level of the real sector confidence and level in 2001 are not so different.  A significant lack of confidence can be observed in both periods.

    However, there is an important difference: level of confidence in the economy has increased steeply as an economic program was announced in May 2001 and ensured foreign credit support. Though some fluctuations were observed due to the conflicts between the coalition partners, level of confidence recovered as the conflicts ended. Nonetheless, there is no economic program on the agenda yet and foreign markets are also in turbulence.

    Tomorrow, I will give the contraction estimations for 2009, which are extremely unpleasant. It is apparent that the economy will contract significantly. However, it is possible to ease the intensity of contraction. I have touched upon remedies to this end. Now, it is time to touch upon the cost of these remedies as well as their impact on growth performance.


    This commentary was published in Radikal daily on 08.03.2009