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    Is recovery without credit possible?

    Fatih Özatay, PhD25 May 2009 - Okunma Sayısı: 1072


    Latest changes on the volume of loans extended by the banking sector were as follows: First, volume of total credits neither had a downward nor an upward trend over the last weeks. In other words, downward tendency observe since October came to an end. Second, volume of consumer loans was increasing since March 20. Third, this phenomenon observed both in total credits and consumer loans did not apply for all bank groups. While the volume of credits extended by private banks fell down, that extended by public banks went up.

    Put the trend over the last weeks aside; when investment banks are also involved in the picture, level of total credits are currently 7.5 percent lower than the peak point in October when freed from inflation effect. The question is: Does the economy recover in the absence of a permanent upward movement in total loan volume?

    Let us return to the 2001 crisis and examine total loan volume freed from inflation effect. When figures are taken from the beginning of 2000, it is seen that the real value of credits reach the peak point in February 2001.  With the emergence of the crisis, volume of real credits decreases steeply and hits the trough in December 2002. After that point, volume of real credits goes up. But the volume achieves back the level in February 2001 in June 2004.

    However, the economy starts to recover earlier: We hit the trough in the last quarter of 2001 and then enter a rapid growth path. In other words, economy starts to recover a year before real credit volume hits the trough.

    This phenomenon is not specific for Turkey, it is in general observed in emerging market economies in post-crisis periods. The title of a research emphasizing this is attractive enough: "Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crisis" (Calvo, Izquierdo, Talvi; NBER, Working Paper 12201, 2006). Authors are of opinion that this phenomenon can be explained with corporate sector accessing liquidity from sources out of the credit market.

    Another observation about Turkey: While corporate sector made in average over 2 billion USD net foreign borrowing per month in 2007, made in average 530 million USD net foreign debt payment per month between 2001 December and 2009 March. Under normal conditions, you expect that this creates a significant pressure on foreign exchange market due to the fall in foreign exchange supply and rise in foreign exchange demand. But it did not turn out so. There is no doubt that foreign exchange liquidity injection of the Central Bank has a role in this. Another possible reason preventing the pressure on exchange rate is that given the current milieu companies preferred to pay foreign debt using their own sources rather than by borrowing. However, that there is little pressure on exchange rates also mean that, as also stated in the abovementioned study, companies have found new financing resources.

    Last week three researchers from the IMF published a study showing that a similar observation applies also for developed countries. The study is titled "A recovery without credit: Possible, but..." (Claessens, Köse and Terrones, VOX web site, 22 May 2009, However, it is wise to not lose ourselves in bright dreams. Authors underline that even such a recovery is observed among developed countries under the current circumstances, it will take a longer time and the pace of recovery will be slow.

    For us, the positive side of the issue is that our banking system is not as damaged as in 2001 today; the sector is in a very good shape thanks to the program implemented after the crisis. If we can implement an economic program that will reduce the risk perceived by banks, recovery in credit market can take place earlier in comparison with the 2001 crisis.

    And the negative side is, we still hear negative export signals. Steep fall in export volume continues in May: According to data released by the Undersecretariat of Foreign Trade, export volume for the first 21 days of May is 42 percent lower than the same period in 2008. In 2001, however, we did not have such problem. In case this deterioration continues, we must not be to hopeful about going through a recovery and achieving pre-crisis production level.


    This commentary was published in Radikal daily on 25.05.2009