New IMF Turkey index

Dunya 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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