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What will happen in 2010? (1)
Now it is time to answer "What will happen in 2010?" question. Before estimating the pace of growth in 2010, it is necessary to form some scenarios. Determining the pace of growth under each scenario is more significant than sticking to a single figure. First, let me say that I worked with a quite simple model. It is easy to make it more complex. However, I picked the easier way in purpose: I used this model before and provided growth estimations for 2009 under different scenarios. As the global crisis affected Turkey through four different channels, each of these channels must be included in the model so that a significant result would be reached. To put it differently, exports (foreign demand), net foreign borrowing (global liquidity and risk appetite), domestic credit volume and the confidence in the economy must play an important role in the model.
First, let me give the basis scenario: In the period composed of the last quarter of 2009 and first half of 2010, banks and firms will be net foreign debt payers. However, the volume of funds they transfer abroad will drop moderately. And by the second half of 2010, they will achieve a neutral position in this regard: net foreign debt usage will be zero. Global risk appetite (measured by VIX index) will remain at the current level. In line with the framework I discussed in the previous commentary, foreign demand will rise moderately as of the last quarter of 2009 in comparison with the year before. This way, Turkey's goods and services exports in real terms will rise slightly below 1 percent in each quarter compared to the same period the year before. To give an idea: In the first half of 2009 this indicator dropped by 10 percent whereas rose by 3 percent in the second and third quarter of 2008. As you can note, I add exports of goods and services as an 'exogenous' variable to the model. Under normal conditions, exports should be determined by internal dynamics of the economy; i.e. should be considered as an indigenous variable. However, I chose the former since in the current milieu foreign demand is nearly the only determinant. This way the task becomes simpler. On the other hand, the model does not become any less realistic at all.
I believe that the variable that is hardest to decide is the domestic credit volume. I discussed the changes in the credit market in a couple of commentaries; there are two contrasting developments: on the one hand, volume of credits has ameliorated moderately since the end of April. Moreover, with the $1 billion Treasury will transfer to the Credit Guarantee Fund, $10 billion of credit movement can be created. These are the positive developments. But on the other hand, the current expansion in credit volume is driven more by public banks, raising questions about the sustainability of expansion. In addition, ratio of non-performing loans to total credit volume goes up. This problem can become more widespread and raise concerns across banks. On top of these, global liquidity tightening is expected to prevail in 2010 though decreasingly (I discussed this issue above).
Therefore, under the basis scenario, my assumption for credit expansion net of inflation is as follows: Consumer loans will grow more rapidly than other credits. During the last quarter of 2009 as well as over 2010, consumer loans will grow in real terms by slightly below 1.5 percent in each quarter compared to the previous quarter. For other types of credit, this stands at 1 percent. As a result, this group of credit will achieve, and slightly exceed the peak in the fourth quarter of 2008 by the second quarter of 2010.
Lack of confidence in the economy is effective in particular on private sector investments. Basis scenario assumes that the current level of confidence will not change. Real value of Turkish lira is also kept constant at the current level. Real value of public expenditures in the last quarter of 2009 is kept at the level for the same period the year before. This decreases by slightly more than 1 percent in the first half and by 0.5 percent in the second half of 2010. Therefore, the main assumption is that efforts to balance the budget will be driven by revenue side. I would like to remind here that real value of public expenditures in the second half of 2009 is quite high. The basis scenario assumes that the level of public expenditures will drop moderately.
As you might notice, my 'basis scenario' is a bit optimistic in particular considering the assumption for domestic credit expansion. Under this scenario, 2010 growth will be between 3.8 and 4.9 percent and in 2009; the economy will contract by 7 percent. Tomorrow I will try to find out how the pace of growth changes under different scenarios.
This commentary was published in Radikal daily on 22.11.2009