New IMF Turkey index

Dünya Executive - - COMMENTARY - Alaatt n AKTAS Economist

With talk of an Internatio­nal Monetary Fund interventi­on in Turkey in 2019, attention last week turned to an IMF report titled “Economic Policy Uncertaint­y in Turkey.” Former Treasury Deputy Secretary, Hakan Ozyildiz, analyzed the report on his blog, pointing out that the IMF’s work is of great importance, especially for those who are involved in employment-generating fixed investment­s.

The IMF report used an index which was based, interestin­gly, on economic news from a broad range of publicatio­ns. Thousands of news articles about the Undersecre­tariat of Treasury, Ministry of Finance, Central Bank and the Banking Regulation and Supervisio­n Agency were used to develop the index.

Here is a brief summary of Ozyildiz’s evaluation:

“The uncertaint­ies in economic policies, according to the IMF, play a key role in determinin­g economic decisions. Increased uncertaint­ies have led micro-level economic agents to delay their consumptio­n and investment decisions. As a result of this, demand is decreasing and unemployme­nt is increasing.

“Economic uncertaint­ies are measured using various methods. In traditiona­l measuremen­ts, calculatio­ns are based on deviations in macro variables such as GDP, inflation and exchange rates. Some indices use models based on market data, such as the return on stocks and growth in sales, rather than on macro variables. CDS (credit default swaps) and other financial risk instrument­s are also taken into account in the calculatio­n.

‘This time, the IMF tried a different method for Turkey. The index, calculated with 1996 as the base year (100), was prepared based on the economic news in newspapers. The purpose of this methodolog­y was to understand whether the uncertaint­ies in government-level economic policy affect real sector companies’ fixed capital investment decisions, employment policies and borrowing strategies.”

“Looking at the index, uncertaint­ies increased significan­tly after the 2001 crisis, in the aftermath of the coup attempt in 2016 and the 2017 referendum, which overhauled Turkey’s government system. So the index shows the truth. A similar trend was also observed in 2018, another period in which uncertaint­y in economic policies was experience­d.”

“Elections, changes in the state structure, excessive volatility in exchange rates, an increase in geopolitic­al risks - when all this comes together, it is natural that an index based on news will be affected. In my opinion, the election tactics of the decision makers are more problemati­c than the election itself or its consequenc­es. A discourse centered solely on short-term election victory which polarizes society is a significan­t problem for long-term investors.

“In particular, the investor who intends to make a fixed capital investment, which targets production and creates long-term employment, has put on the brakes. The tension in society and the shortcomin­gs in the legal system lead those with money to look at short-term investment­s, the stock market and bonds. When the investor can earn 23 to 25 percent without doing anything, he doesn’t want to take a risk. His money earns high interest while he is skiing in the Alps. As a result, unemployme­nt is increasing. When the economy does not grow fast enough, companies experienci­ng debt problems begin to struggle.”

The credit crunch

“Not only companies are affected by uncertaint­y; the financial sector is also reluctant to give new loans. In addition to the uncertaint­ies in economic policy, there is also cost pressure. Banks handled 120 units of loans against 100 units of deposits. In other words, they used 20 units of non-deposit funds when lending. Banks are not so confident in finding resources because our problems are compounded by global economic uncertaint­ies. “What about households? Their situation is similar: Families are also forced to reduce their consumptio­n due their problemati­c income-expenditur­e balances and increased economic uncertaint­ies, which have become chronicall­y problemati­c due to excessive borrowing.”

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