Building Up a Real Sector Confidence Index for Turkey

1
Building Up a Real Sector Confidence Index for
Turkey

• Ece Oral
• Dilara Ece
• Türknur Hamsici
• CBRT

2
Outline

• Business Tendency Survey (BTS)
• The Development of the Real Sector Confidence
  Index

3
BTS Characteristics

• Sample Size 829 (September 2005)
• Response Rate 53 percent (September 2005)
• Sampling Unit Senior Managers
• Sampling Method Non-probabilistic Purposive
• Data Collection Mail, e-mail
• Answers 3-point Likert Scale, multiple choice,
  ranking some factors
• Sectors covered mining, food, textiles,
  forestry, paper products, chemicals, stone,
  metals, machinery, energy

4
What is Business Confidence?

• The degree of sentiment towards risk taking by
  business for whatever reason (Pellissier, 2002).

5
Aim of the Confidence Index

• The confidence index is constructed to provide an
  indicator of short-term business conditions for
  economic policy makers and business managers due
  to the need of early warning indicators in order
  to foresee financial and economic crises.

6
The Development of the Real Sector Confidence
Index

• Reference Series
• Methodology
• Emprical Results
• Interpretation
• Performance
• Conclusion

7
Reference Series

• Since the aim of the index is to forecast the
  expansion and contraction periods of the economic
  activity, an important indicator is to be chosen
  as the reference series for comparison.

8
Methodology

• Diffusion Indices
• Selection of the Potential Series

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Diffusion Indices

• The method that Sutanto (1999) used for Indonesia
  case is followed.
• The scales which are in the form of more
  optimistic - the same - more pessimistic or up
• the same down are coded
• Answers indicating improvement (better off) are
  scored 2.
• Answers showing no change are scored 1.
• Answers showing a worsening condition are scored
  0.

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Diffusion Indices

• Iv Ts/N 100
• Iv Diffusion Index of a Variable
• Ts Total Score
• N Number of Establishments

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The Selection of the Potential Series

• Standardization and Smoothing
• Seasonality
• Cross Correlation Analysis
• Peak-Trough Analysis
• Low Volatility
• Economic Significance
• Weighting

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Standardization and Smoothing

• Months for Cyclical Dominance (MCD) moving
  average procedure can be used.

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Seasonality

• The business survey series may exhibit
  significant seasonality.
• Seasonality should be treated as statistical
  noise, be always tested, and, if necessary,
  corrected for.

14
Cross Correlation Analysis

• The correlation between variables is assumed to
  be strong when a correlation coefficient is
  greater than 0.45 in absolute value.

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Peak-Trough Analysis

• Peak-trough analysis includes examination of the
  behavior of the diffusion indices per question in
  relation to the cyclical turning points of the
  reference series.

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Low Volatility

• The standard deviation from median of the lead
  for each series being low is important because
  the leading time of the series at turning points
  should be consistent.

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Economic Significance

• Before the series are accepted as an indicator
  according to the statistical criteria, there has
  to be an economic reason.

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Weighting

• Weighting aims to improve reliability by giving
  higher weight to better components.
• The weights of the components can be given
  according to their economic significance or
  statistical adequacy.

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Emprical Results

• Reference Series
• Standardization and Smoothing
• Seasonality
• Selection of the Series
• Economic Significance
• Weighting

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Reference Series

• The industrial production index, which is
  available on a monthly basis and an important
  indicator for the economic activity is chosen as
  the reference series for comparison.

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Standardization and Smoothing

• Most of the diffusion indices show MCD values in
  the range 2-4.

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Seasonality

• The seasonality of the diffusion indices of each
  question in BTS is searched. Seasonal influence
  have little impact on cyclical patterns.

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The Selected Series to form Confidence Index

• General Economic Situation
• Export Oppurtunities
• Investment Expenditures
• Total Orders
• Monthly Stocks of Finished Goods
• Employment (trend of next 3 months)
• Production (trend of next 3 months)
• Goods sold in Domestic Market (trend of last 3
  months)
• Raw Material Stocks (trend of last 3 months)

24
Cross Correlation Analysis

• The correlation coefficients of the selected
  series and cycles of industrial production index
  are between 0.45 and 0.666.

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Peak-Trough Analysis

• The mean lead time of the selected indicators are
  between 0 and 9 the median lead time of the
  indicators are between 1 and 8 at all turning
  points.

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Economic Significance

• An algorithm which shows all the process that
  assumed to be thought by the managers before
  making production decision and describes the
  production process for Turkey has been derived.

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Weighting

• The use of the principal component analysis to
  choose optimal weights illustrate that scores
  have approximately equal weights.

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The Formula used to find the Confidence Index

• I ?Iv / n
• I Confidence Index
• n number of variables

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The Interpretation of the Real Sector Confidence
Index

• I 200 (maximum) all respondents showing an
  improvement
• I 100 number of establishments showing an
  improvement and worsening conditions are
  balanced, or such that the general condition of
  respondents are unchanged

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The Interpretation of the Real Sector Confidence
Index

• I gt 100 number of establishments showing an
  improvement is higher than that showing a
  worsening condition, or such that the general
  condition of respondent is better
• I lt 100 number of establishments showing an
  improvement is lower than that showing a
  worsening condition, or such that the general
  condition of respondent is worse

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The Performance of the Real Sector Confidence
Index
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The Performance of the Real Sector Confidence
Index
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Conclusion

• The real sector confidence index has the leading
  indicator capability for the economic activity
  and it is an indicator for the business
  confidence based on the Business Tendency Survey.

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References

• Nilsson, R. (1999). Business Tendency Surveys
  and Cyclical Analysis. Business Tendency
  Surveys, Proceedings of the First Joint OECD-ADB
  Workshop, Manila, November.
• Pellissier, G.M. (2002), Measuring Business
  Confidence in South Africa, Presented at the
  26th CIRET Conference, Taipei, October.
• Sutanto, A. (1999). Business Confidence Index,
  Consumer Confidence Index and Index of Leading
  Indicators An Experiment for Indonesia.
  Business Tendency Surveys, Proceedings of the
  First Joint OECD-ADB Workshop, Manila, November.