When will the Turkish economy step on the recovery path? When will liquidity start to circulate in the market? Can recovery start alone? This is the issue we must focus on as the Turkish government officially acknowledged the crisis and announced that measures will be implemented. The statement made by State Minister Mr. Mehmet Şimşek that "households and the banking sector are doing well and the condition of the corporate sector is not bad at all" must be paid regard to and assessed. We used to emphasize that because of the crisis, the corporate sector was in bad shape. (Remember the story titled "I am currently feeling what the figures will tell you two months from now.) Last week, we said "if the corporate sector of a country is not doing well, banking sector of that country cannot be doing well". Then, as news in Referans daily suggests, Mr. Ekrem Keskin, Secretary General for Union of Banks of Turkey spoke so. (Remember the story titled "Masallah, you are doing very very well.) The story ended with saying "then let us touch upon the issue for the households and see whether Mr. Mehmet Şimşek is or is not completely wrong?" Now, we are touching upon the mentioned issue and saying that Mehmet Şimşek is not completely wrong. If you wonder "How the state of households is, please keep reading.
The first point where Mehmet Şimşek is right is; the 2008 crisis did not lead to loss of wealth in household portfolios. In fact, due to fall in interest rates and the rise in exchange rates, the value of the portfolios of households went up and generated a potential for positive wealth effect in private spending. What does this mean? The arrival of the global crisis in Turkey did not lead to the evaporation of houses, cars, bank accounts, government debt security (GBS) portfolios as accumulated during the period of strong growth or the amounts accumulated in foreign exchange deposit accounts (FXDA). When compared with the 2001 crisis, the impact of 2008 crisis on accumulated savings is smaller. And obviously, this is a good thing.
Second, some groups, for who nominal income flow did not change, for instance public servants and retired people, enjoyed a rise in consumption power in some sectors due to the relative decrease in prices. What does this mean? Companies introducing rapid price reductions in brand name products in particular in fast moving consumer goods sector enable an enhancement in consumption power for those shopping from supermarkets. This supports households in feeling better. And this is a good thing.
The third positive actor is that the total credit debt of households in Turkey is lower when compared with that in other countries. While the ratio of household sector total indebtedness rate is 17 percent; that for the USA varies between 130 and 140 percent. Therefore, Turkey does not have a middle class whose debt burden relatively increased due to interest rate reductions. And this is also good.
So, in this regard, as Mehmet Şimşek is not completely wrong in what he said, can the Turkish economy recover from the free fall alone?
The answer is: The free fall the Turkish economy in does not disappear without intervention. That the household sector did not face significant wealth losses does not mean that they will immediately start to consume and that the rise in consumption will lead to a sustainable recovery process. Why? First of all, households are confused. They are not sure when the disaster will end. If you do not believe in us, please take a look at the crazy outlook presented by recent expectations surveys. In a period where no exit strategy is presented, in a bad period which will last for an indefinite time, no one will be willing to make spending. What the households and the corporate sector needs is the confidence that the course of events is under control. For this, you need coordination. This is what the public sector failed to do. It is an opportunity for a fresh start that the "denial period" in economic administration has ended. However, though is the essential condition to ensure economic recovery, this is not sufficient alone. This is the first point to make.
Second, the first difference of 2008 crisis from 2001 crisis is that in 2001 the main issue was the requirement to restructure the public sector domestic borrowing market. Back then, it was enough to change the composition of the household savings. Now, in such "rainy" days, the same households will be requested to direct their savings to consumption. Households will not do so unless they see the way out. They need sweeteners. If you provide them with sweet opportunities, they make spending. So, the current problem is not as easy as that in 2001.
Third point is that in 2008 crisis unemployment is more prevalent and intense than in 2001 crisis. The impacts of the crisis are not yet completely clear; nonetheless, the number of unemployed people reached 3.6 million as announced two days ago. In such an environment, households will not consume rapidly even if they have savings. It is worse if the households do not have any savings. However, we can make a general assessment: The wealth effect that will have a positive impact on household portfolios will not step in as fast as usual and will not be able to compensate for the income loss stemming from the rise in unemployment rate. Thus, it will be wise to provide more widespread and intense compensation for the income losses.
Fourth point is related to the size of household portfolio. Portfolio size of the households in Turkey is small as is the household indebtedness. As of the end of 2008, the share of GBS, FXDA, deposits in TL bank accounts of the households in national income is around 30 percent. Similarly, the wealth effect generated over this portfolio will not be big. This point increases the importance of income compensation.
Fifth, as it is considered that the corporate sector cannot survive in the medium term by constantly cutting down prices, income effect on consumption will also be limited. So, the problem is the same; the problem is that the corporate sector must immediately be provided with an exit strategy.
Mr. Şimşek is not completely wrong, but the picture is not as optimistic as he has drawn. Let us draw three conclusions. First, the economy will not recover alone. Second, to stimulate domestic demand, those faced with income loss must be provided with compensation in a more widespread setting. Third, stimulus is needed to direct wealth to consumption.
Our old problem, the "story of this period" problem is still apparent.
This commentary was published in Referans daily on 16.04.2009
