Monday, April 13, 2009

Weekly Hurriyet Column: Crisis, what crisis?

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive.

Households are faring well, and so are the banks. As for the non-financial sector, there isn’t much to be afraid of.

Before devout followers of my columns accuse me of a triple jump worthy of a world class figure skater, I have to say that the words above are not mine- rather they are my liberal translation of part of a speech made by Economics Minister Simsek last week. Honestly, if all the main parts of the economic engine are well-oiled, as the minister claims, then I believe I have been wasting my time (and yours) writing about a crisis that doesn’t exist. A closer look is in order.

To start with the non-financial sector, I find it almost Woody Allenesque that the Minister’s comments appeared on the same day industrial production reached new lows. While March capacity utilization has hinted that industrial production could have hit bottom in the first quarter, other leading indicators such as real sector confidence indices and both manufacture & imports of capital goods suggest that the recovery is likely to be slow and painful, as firms have been cutting back on investment plans. The fact that non-financials owe more than 150 billion dollars of foreign currency debt, about two thirds of which is to Turkish banks, is further confounding the picture.

In fact, the real sector’s woes are, in turn, increasingly showing up in the assets side of the banks’ balance sheets as rising non-performing loans (NPLs) and tightening credit. It is true that there is a demand and supply side to every good, and credit is no exception. But it would be a bit far-fetched to dismiss all of the decrease in loans as a demand pullback- as would be explaining the large margin between deposit and loan rates with the appealing “greedy bankers” explanation. Moreover, in the current uncertain environment, banks are likely to ration credit as well, as economists Stiglitz & Weiss explained almost three decades ago- one of the works that brought the former the Nobel Prize in 2001. The idea is not that novel for today’s Turkish banks, as the upward trend in the concentration of loans as well as anecdotal evidence certainly point to rationing in the credit market.

Unfortunately, credit is not the only thorn in the so-called rosy banking picture. For one thing, banks have literally been banking on rate cuts in the last two quarters. While, contrary to conventional wisdom, they did not profit extensively from the bond market bottom-fishing in the last quarter of 2008, banks have nevertheless both taking part in and benefiting from the rally in bonds on the back of the Central Bank’s aggressive monetary easing. Even under an optimistic scenario, most of the gains have already been realized. In addition, even though it depends on important exogenous factors such as the IMF agreement and CBT actions, liquidity is likely to be tighter going forward.

Turning to households, it is true that Turkish consumers are not nearly as indebted as their Eastern European counterparts. However, “mean” figures that ignore the distribution of debt can understate the true nature of household strains. A cursory look at the Bank Association’s latest consumer & housing loans report, using data from the third quarter of 2008, reveals that low-income households are disproportionately more indebted relative to their income. Simple back-of-the-envelope calculations taking into account disposable income point to rising defaults among low-income borrowers. Given the relatively more blue-collar nature of the job losses, the rising unemployment rate will definitely be a catalyst. Needless to say, this would deal yet another blow to banks.

Given all this, I am really glad that households, firms and banks are all bracing the crisis well. What if they weren’t?

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