Central Bank of Republic of Turkey (CBRT) goes on to cut interest rates.  But, does the Bank do this because things are on track? No, it does not. On the contrary, CBRT goes on to cut interest rates because things are not on track considering the real sector. What else would it do? It has only one instrument; so it uses that instruments whether or not it works. We believe that, for the going period, Eximbank (Export Credit Bank of Turkey) is more important than the CBRT in terms of the recent period growth of the real sector. Or, to put it differently, we believe that the CBRT is not as important as Eximbank. Let us show why.

First things first: In the coming period, there will be a mathematical recovery; but in the meanwhile domestic demand does not seem to be strong. What does CBRT say in the last Monetary Policy Committee Statement? It says: "Recent data releases indicate that the ongoing recovery in economic activity will be gradual and protracted. External demand remains weak, domestic investment demand continues to contract, and labor market conditions do not display a significant improvement. Moreover, recent developments have increased the uncertainty regarding the strength of the consumption recovery." What type of a conclusion must be drawn from this statement? We do not know what CBRT can be talking about; but we are still curiously monitoring the changes in consumer confidence indices not only in Turkey but also throughout the world.

Do you monitor the Consumer Confidence Indices recently? Remember; a while ago we said "You had better not trust in those indices in the current period." And the reason was quite obvious. It was not yet definite what the economic recessionary period we are in meant. The intuitive "This does not last for months, does it?" approach automatically became prominent in the formation of the expectations. Confidence indices started to jump up as of the beginning of 2009. Survey respondents, for instance expected a rise in new orders within three months. In the meanwhile, everyone was talking about how difficult it is for the European Union countries, which constitute the main export market for Turkey, to start recovering. The conclusion drawn here was this: one should have been more cautious when evaluating the "what happens in the following three months" questions of surveys. In fact, in the recent period, prospective expectations and consumer confidence indices started to follow a horizontal path. So, this might be the second point. Why did consumer confidence indices started to follow a horizontal path? What is the point we arrived? Prospective expectations now started to be more cautious. We all started to acknowledge better the meaning of economic recession. We have understood that this process will not end easily and rapidly as we are familiar with. The main factor that will slow down the recovery in consumer demand will most probably be this perception.

And the third point of the day: So, from this lens, what parameter should we assess in relation with the growth performance in 2010? We believe that export performance will be an important parameter. And with respect to export performance, we believe that there exists a serious danger. The danger is: Turkish firms are faced with the risk of losing their market shares given the shrinking export market and intensifying price competition. A study recently concluded by TEPAV economists show that such risk exists. This risk stems from three sources: First, profit margin of firms decrease due to the intensifying price competition. The decrease in profit margins is a challenge for firms who engage in export undertaking all the risk. Second, firms trying to open up to new markets to compensate for the contraction in traditional markets have to undertake higher risks, which is impossible. Third, valuable Turkish lira is worse than worse in the face of increasing competition. The risk of losing market share, as started to be demonstrated in figures, will limit the recovery in 2010. And this is the third point of the day.

The issue that makes Eximbank important lies right under this point. Have you checked the share of Eximbank credits in total exports in such a climate? Export credit/total exports ratio has decreased from 13 percent in 1995 to 3 percent in 2008. This low figure for 2008 is not necessarily important. In a period where the world was enjoying ample liquidity, it was easier for firms to access funds from private markets. However, this has changed today. Period of economic recession has intensified the competition in the shrinking export markets. Rival countries have been supporting their firms implicitly or explicitly through various methods. In such an environment, Turkey must also return to export supports of 1980 and support the exporter firms. It is necessary to review comprehensively Eximbank, and export finance and insurance mechanism constructed around Eximbank. What did we say? Eximbank is more important than the CBRT considering real sector and employment. Yes, it is so, indeed.

At the beginning of the interest rate cut process, we have criticized in these columns not what CBRT did but the "style of speech" of the bank which did not emphasize there existed a new problem. Economic recession climate had to be put at the core of the discussion jargon more frequently, as we believed that how central banks speak was as important as what they do. We still believe so. We believe that statements of CBRT still fail to put emphasis.

Let us emphasize it one more time: For the going period, CBRT is not as important as Eximbank considering real sector.

This commentary was published in Referans daily on 20.08.2009