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    Can things get worse?

    Fatih Özatay, PhD23 April 2009 - Okunma Sayısı: 1216


    I know it is an unpleasant title to put at the National Sovereignty and Children's Day; however, current state of affairs validates this question. Here 'worse' refers to the possibility that the 2009 growth and unemployment realizations will be worse than the estimations I shared with you at this column.

    TEPAV report has foreseen that in case of 'inertia' and given that the exogenous conditions in February will be valid throughout 2009, Turkish economy will contract by 5.5 percent in 2009 and unemployment rate will rise to 16.6 percent. If the economic program the details of which were given in the report that involves a series of measures as I frequently addressed at this column was implemented completely in March including all of the components, rate of unemployment and economic contraction would decrease to 15 and 3.6 percent, respectively.

    Can unemployment rate get worse? Yes, it is a high possibility; because the forecasts I referred to are valid provided that workforce participation rate is constant. As December data suggests, workforce is composed of 24 million people.  Out of this number, 3.3 million are unemployed; so unemployment rate for December is 13.6 percent. If, other things held constant, number of people in workforce increases by 1 percent and none of these people find a job, unemployment rate increases to 14.5 percent.

    In my previous column, I provided some figures. In particular in crisis period workforce participation rate among females increased. However, under normal conditions, workforce also expands due to demographic factors. In this case, unemployment forecasts by TEPAV must be increased by 1-1.5 points under the most optimistic setting. To put it differently, in case of inertia in the field of economic policy, unemployment rate might go up to 18.1 percent at the end of 2009.

    TEPAV forecasts suggested that, if budget resources are not transferred to groups with high propensity to consume to stimulate domestic demand or a similar policy geared to the same end is not implemented, rate of contraction did not change to a high extent and even if an IMF agreement is signed and loan guarantee mechanism for TL loans is established. In this case, rate of contraction fell from 5.5 to 5 percent.

    On the other hand, even for this forecasts, there is a downward risk. For a couple of reasons: First, the estimation I made using a smaller model and shared with you at this column was more pessimistic. Under the assumption of inertia, rate of economic contraction stood at 6.4 percent at best. Under the limited policy response I mentioned, rate of contraction is expected to be 5.8 percent (in comparison with 5 percent estimation by TEPAV).

    Second, we are now at the end of April. One thirds of the year has passed. Due to this delay, certain impacts of the measures to be introduced from now on will be postponed to 2010. Third, we are underrating the external funding problem. That there is no high tension in the foreign exchange market has a significant role in this perception. However, that no sharp movement in exchange rates is observed does not imply at all that external funding problem is being solved.

    How else can we express? While net amount of foreign resources corporate sector and banking sector received was 31.5 million USD in 2007, the amount received in 2008 was 26.3 billion USD. And in the first two months of 2009, those sectors transferred 1.6 billion USD of resources abroad. This phenomenon is expected to continue throughout 2009.

    Of course the estimations above take this negative development into account. Nonetheless, the situation can get even worse. This, when considered along with the possibility that export volume might decrease beyond the estimations, implies lower production and higher unemployment rate. And besides, it is possible to ease the resource transfer problem of these sectors without necessarily causing the corporate sector to cut down production and the banking sector to lower the volume of loans extended. However, for now, no one is addressing the establishment of an FX loan guarantee fund, which is the means to accomplish this.

    In brief, the latest official announcement estimating 3.6 percent economic contraction in 2009, which was considered as a move in the right direction for the sake of convergence to the reality, might end up highly optimistic. Additional measures are necessary for the convergence of this estimation to the reality. If you say: "Then, why do we observe a recovery in confidence indexes in recent months?" I would answer 'the devil is in the details'.  I will touch upon those details later.


    This commentary was published in Radikal daily on 23.04.2009