## Please do not read if you do not want to be upset

Now, it is time for the contraction figures for 2009. First, I would like to explain the method I followed. First, I formed a small and simple model that uses quarterly data for the 1998-2008 period. This simplicity enables disregarding all details and focusing solely on growth.

The model constitutes of four equations defining imports of goods and services, private investment, private consumption and national income. Using the data the period between the first quarter of 1998 and the third quarter of 2008, I determine the direction and the magnitude of the relationship between the aforesaid variables and exogenous variables. After this step, to test the strength of the model, I found the consumption, investment, import and export values estimated by the model using actual values of solely the exogenous variables for the period between the first quarter of 2002 and the third quarter of 2008. The result is that the model estimates growth with an error of 2 percent in average.

Finally, I formed alternative scenarios for exogenous variables from the last quarter of 2008 to the last quarter of 2009 (five quarters). Table 1 gives the values of the exogenous variables under the basis scenario. Table 2 gives the growth rate under alternative scenarios. The only exogenous variable not included in the table is the real value of Turkish lira. I fixed the real exchange rate at the February end level under each scenario.

The basis scenario shows the case where the current 'unfavorable situation' continues. Second scenario (S2) is not 'viable': It shows what would have happened if the real value of exports of goods and services did not fall but rise by 1.2 percent as compared to 2008. This is the only difference of S2 from the basis scenario. In the third scenario, some tiny steps are taken (for example external funding need of the public sector is fulfilled) and confidence is gradually improving.

Under the fourth scenario, things recover slightly: Credit tightening is gradually eased as of the third quarter and achieves the 2008-end real value. Confidence of the real sector is improved significantly. Risk appetite of foreign investors recovers even slightly. Under the final scenario (S5), in addition to S4, exports increase to a certain extent in the second half of the year.

Figures given in the last raw of Table 2 in parenthesis show the alternative growth rates the model provides for 2009. Considering the margin of error of the model, I gave the values in intervals. Results are really unpleasant:

If the current conditions remain valid (both global conditions and inertia in Turkey), 6.5 to 8.5 percent contraction can be seen in 2009. I would like to point out the role of export performance in the contraction. If export volume achieves the 2008 level (S2), the contraction might be limited by at least 3 percent. However, this is not endogenous. On the other hand, there are certain things we can do: By means of an economic policy that will stimulate confidence and real credit volume (S4) rate of contraction can be limited by 2 points.

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*This commentary was published in Radikal daily on 09.03.2009*