A couple of wods on October Industrial Production

IP came in at 6.5% yoy in October, significantly above expectations of -3.0% yoy. Part of the figure reflects base-year effects, as last October had fewer working days due to Ramadan holiday. While TURKSTAT will not release seasonally-adjusted figures until the end of the moth, my own calculations bring the raw 6.0% monthly increase to 1.5-2.0% after adjusting for seasonality and working days, which is still quite an accomplishment.

Without looking at the data, one would speculate that the strong figure is due to the special consumption tax breaks working their magic, but a casual look at data reveals that the rise in IP is too broad-based across sectors. It is normal for IP to rise after the destocking going on for the past few months, but such a strong rebound is rather surprising.

Moreover, IP is totally out of whack with other real sector indicators released earlier such as PMIs, real sector confidence and most importantly capacity utilization, which usually do a decent job of forecasting IP. That's why economists were so off the target this time around.

In sum, today's release is too good to be true, and a revision might bring it back to earth in a couple of months. In this sense, Thursday's November capacity utilization will provide a reality check- a strong reading there would make me feel more comfortable towards today's figure.

Back again:)

After a long absence, I am back at blogging again.

I have a word on two on the latest Industrial Production figures, which I will be posting soon. Then, the next step will be archiving my Hurriyet Daily News articles. The blog should be tidied up by Thursday or so....

Weekly Hurriyet Column: My Minority Report’s collateral damage

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. And not one but two cheesy movie references squeezed into the title this time around. And I managed to make a reference to the word collateral, which I use in the second part of the column. As for the column itself, here are a few extra notes:

First, a small game: Replace the word capital with IMF in the article (hint: there are two) and you'll see why I favor an IMF deal. As for the CBT's need for collateral, as I was doing my weekend reading of favorite Econ. columnists Sunday afternoon, I found a really good article by Ugur Gurses explaining in painful detail why the CBT did not need bonds as collateral or any collateral at all. Most of the points he is making were already relayed to me by my friends from the CBT, but since I am no CBT expert, I definitely could not have written them that clear myself. Finally, I am now realizing I have once again been too harsh. Governor Yilmaz noted that the full details of the bond-buying deal will be given out at the press briefing for the 2010 monetary policy strategy on December. I will therefore be waiting for this annual strategy document on monetary policy and be on the lookout for any developments before then. Maybe, I will be pleasantly surprised at that time, but the fact remains that the Bank has taken a really awkward first step in a very delicate matter. Anyway, on to the column:


The Central Bank, or CBT, released its latest Inflation Report on Tuesday. With analyst reports having gone into all the nitty-gritty details, I will only briefly summarize the Report’s salient features before jumping to my own minority report.

First, the Central Bank’s inflation outlook is, if anything, slightly more optimistic than before: Despite higher commodity prices, the Bank has only marginally revised its end-2010 forecast. The CBT also notes that inflation will creep up during the remainder of the year and the first half of next year due to base-year effects, unwinding of tax cuts and administrative price hikes, but sees inflation continuing with its downward move afterwards.

This trajectory is fully in line with your humble neighborhood economist’s own projections as well, although I see inflation edging up higher than the Bank envisages and being more resistant on the way down. While this is partly due to my higher oil price expectations, I guess I am also penciling in a higher exchange rate pass-through. In any case, even if my well-above-consensus October forecast of 2.3 percent is realized, yearly inflation will still be below 5 percent, a level we are unlikely to see again at least for a year.

While its inflation outlook may be more dovish, the Bank’s assessment of risks to this outlook is actually less so, as the Bank has taken a more balanced approach than before, highlighting upward risks to global inflation such as growing developed country budget deficits and exit strategies. However, domestic risks barely get any mention in the Report. It seems that the CBT has opted to take as given the government’s fiscal outlook as outlined in the budget and the Medium-term Program, which are, lo and behold, consistent with each other, but totally inconsistent with reality.

Without a weaker-than-expected global recovery and appreciation pressures on the lira driven by capital flows, the CBT is set to pause after limited cuts in the near-term, and the seemingly contradictory views of the report are simply efforts by the Bank to position itself against tail risks in both directions. All in all, I would have said the Bank did a pretty god job with communication this time around, only if this bond-buying business had not come up.

At first sight, it looks innocent enough: Governor Yilmaz highlighted that all the Bank will be doing is to replace the maturing Treasury debt in its balance sheets from the 2001 crisis bank bailout, as the CBT needs collateral for its operations in the Istanbul Stock Exchange and the reverse repo market.

Now, this raises question marks. After all, as I confirmed with conversations with ex-Central Bankers, not only the Bank has many other means to obtain collateral, it could also conduct its operations without collateral as well. Moreover, someone has yet to explain to me why the CBT would need to coordinate this with the Treasury, unless of course it would like markets to perceive this as fiscal accommodation or debt monetization.

A better explanation would be the need to respond to the financial market liquidity squeeze, which the Treasury’s high borrowing requirements have finally managed to make permanent. Unless the CBT increases FX purchases, which it is unlikely to do without significant capital inflows, all the onus of funding the markets would be on open markets operations, which is only a temporary fix. In this environment, the 9 billion the Treasury would have to pay to the CBT would be a major drain from the market if it were to borrow this amount from the markets.

I wonder why the CBT has not put it this way rather than resort to the collateral argument, risking serious collateral damage.

EconNews Roundup

Not much today:

It is disheartening to see that now the CBT has taken up the tangent argument...

...And the disheartened bondholders

On Debt......

One of the most common BS I have been reading about lately is that Turkey's debt to GDP ratio, now at 47%, is low compared to developed countries.

Simple cross country comparisons, which ignore the vastly different absorption capacity of countries, can be highly misleading. Fellow economist and friend Murat Ucer of Turkey Data Monitor summed up very well in a recent report:

So to those who keep telling us that the debt-to-GDP ratio is very low in Turkey, and hence further fiscal expansion and/or a very gradual adjustment are affordable, our response is unchanged: it’s not the level, but the speed (with which debt is rising), the maturity (still short at about 3 years on newly issued debt), and absorptive capacity (of financial markets) that are concerning us.

Murat does raise three important points, two of which can be summarized with a simple chart prepared from Murat own's proprietary software:

You can see below that debt has been rising quite fast recently, after having turned an inflection point during the summer of last year. As for the maturity, while the maturity of new debt is promising, average maturity is still way too low.

As for the absorptive capacity of markets, I think it is about to be tested soon; there are several ways of showing that, but I am leaving that to another post.

In sum, unless a big positive exogenous positive shock such as improvement in global risk appetite or an IMF agreement (the latter could also be considered endogenous in the sense that the challenging scenario can induce the PM change his mind on an agreement with the Fund), a tough year awauts the Treasury in 2010.

EconNews Roundup

Turkey scores poorly in the World Economic Forum Global Gender gap index, but mainly because there are no women in politics. I agree with the article, but having skimmed the report, I see that the country has fared poorly in other components of the index as well; it is just that politics is the one we are at rock bottom.

I always thought that journalists could make interesting stories out of flow data; the FT just loves EPFT, which publishes global fund flows, but their Turkish colleagues rarely pay attention to bond and equity flows data. So even though I would be careful before making the Brazil link, as correlation is not causation, I still like the piece on the return of the foreign investor.

No disaster without the IMF, says Finansbank Deputy Director Saruhan Dogan: I agree, as I stated clearly a couple of weeks ago. But it is not given that next year, interest rates will stay low while liquidity will be in abundance and Turkish Lira maturity terms will extend. If anything there will be tremendous upward pressure on rates, as the CBT starts hiking. I am not sure on liquidity, but some of the saturated demand for bonds will be channeled to credit, and the CBT is ready to intervene if liquidity gets too tight (look for OMOs in excess of TRY 20bn or so for that). As for lira maturity, it is already extending, but I doubt it will reach the levels to comfort markets.

Fitch follows Moody's with an outlook upgrade; a rating upgrade is on the way as well. Contrary to conventional wisdom, I do not think that Turkey deserves 2-3 notches of an upgrade; a one notch adjustment should brng to Turkey where it should be. Part of my objection is related to my view of debt, which I will refer to in a later post.

CBT lowers its inflation forecasts, albeit only marginally for 2010- 2011 stays the same.

The markets must be crazy...

The fact that Treasury's 2010 borrowing will be challenging, as rates are set up and banks become saturated with bonds, has been repeatedly stated by not only your friendly neighborhood economist but many other economists with a sense as well. It seems that markets woke up after a supposedly tense primary dealers meeting, which the Treasury denied- incidentally I find the Treasury and my beloved Besiktas similar in the sense that they both like to use their web sites to deny media rumors with Soviet-era one pagers that end with "we present this to the attention of the public"- "kamuoyunun dikkatine sunulur" id you speak Turkish.

Anyway, the bond traders I spoke to told me that locals do not want to take maturity risk at such low carry. Besides, there has been some foreigner sale as well. In any case, the latest Inflation Report also suggests that we have come more or less to the end of the easing cycle barring unexpected events.

On the positive side, the traders I talked to do not believe IMF is priced at all, pointing out that the recent decrease in reserve requirements supports this view. This means that, if there is a deal, bonds are sure to react strongly, not only because such a deal would affect the debt calculus profoundly, but also because it'd come as an unexpected shock...

Weekly Hurriyet Column: Wheels in the sand

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. No cheesy title this time around, just a little play on words that caused confusion at the editorial, resulting in a the title "Brazil puts wheels in the sand" in the hardcopy version- the web version is OK, as the editors had to change the title after they submitted the article to the web.

As for the article, a really good commentary appeared on the Financial Times the same day as my column- definitely recommended reading, especially if you liked my pieces on the changing role of the IMF. I had never thought of this way, but as the authors suggest, rather than stating the obvious, that such measures will not work, the Fund should channel its energy into coming up with ways that they will. This fits in IMF's new role as well. It seems the Fund springs underneath every stone these days:)...


Brazil stole all attention last week with its 2 percent tax on portfolio inflows, igniting a discussion on not only whether it will work, but also on whether other countries will follow, with Turkey’s name coming up among the candidates.

On the first question, it is important to note this is not the first time Brazil is trying to put sand in the wheels. It had introduced a 1.5 percent tax in March 2008, only to drop it shortly after the Lehman collapse. Just as the previous attempt had not stemmed the real from rising, it is safe to assume that the measure will not have much effect, as the size of the tax is small compared to the underlying forces of appreciation.

Brazil’s problem is that the real could be strengthening not only because of capital flows, but also because of a permanent shift in the country’s terms of trade. While there is room for policy action for the former, at least theoretically, there is no easy fix to the latter other than a rise in productivity, which is definitely more easily said than done.

Terms of trade improvement or not, capital flows emanating from developed country central banks and looking for a new home with high returns had been with us since March, but have gained considerable pace in the last couple of months. According to Emerging Portfolio Fund Research, which collects data on dedicated emerging market (EM) fund flows, flows to EM bonds and equities have already surpassed 2006 and 2007 highs.

These loose cannons wandering around have, in turn, led to asset price booms in EMs across the globe and reawakened the familiar EM drama “fear of appreciations”, as central banks try to prevent their currencies from appreciating through intervention. With the resulting increase in foreign exchange reserves only partly sterilized, the domestic money supply expands, resulting in credit growth and unsustainable rises in asset prices. Looking at the forest rather than the individual trees, this process is also impeding the global rebalancing act needed to put the world economy back in track.

The Turkish case has been different from this textbook scenario in some small but important aspects. To begin with, the lira has performed worse than peers, having lost around 15-20 percent to comparison currencies such as the real, the South African rand and the Hungarian forint. Moreover, flows into equities and bonds have slowed down considerably in the last few months, with anecdotal evidence and banks’ off-balance sheet activity suggesting that much of the action is now in derivatives such as swaps. As for the Central Bank liquidity injections, they have almost exclusively channeled into bonds, and the resulting rally has been a boon not only for the banks holding the Treasuries but also for the Treasury issuing them.

Highlighting these differences is enough to make the case that Turkey is unlikely to enact a similar tax, but a simple comparison with Brazil yields more insights. For one thing, Brazil’s current and fiscal accounts are in better position than Turkey’s, making the former less in need in of capital inflows. Perhaps more importantly, interest rate differentials are also working in Brazil’s favor. While Brazilian officials have hinted that they are in no hurry to hike rates, with the country set to weather the recession with a slight contraction and inflation worries likely to emerge in 2010, the next direction for rates is up rather than down. The Central Bank of Turkey, on the other hand, has at least 50-75 basis points of cuts in its sleeve.

Brazil put sand in the wheels when it felt those wheels were turning too fast. Turkey cannot put any sand in the wheels because its wheels are stuck in the sand.

Tourism finally puts a smile on my face, or does it?

September incoming and outgoing tourist figures were released today. As before, to see the the time trend, I compared the yoy figures of the last four Septembers:

Unlike in earlier months, the yoy figures are not that different from last year, but last September was right the middle of the crisis, so I would not make too much out of this. But one thing is for sure: Although in an absolute sense, the crisis seems to have passes tangent to Turkish tourism, to use the PM's Econospeak, high growth rates in tourism came to a sudden halt with the crisis. In fact, as I argued in a Hurriyet column back in August, once you take this braking effect into account, Turkish tourism has not fared much better than other Mediterrenean countries such as Spain, Greece or Croatia.

EconNews Roundup

Dogan fine worries US investors and Turkish economist(s):)

A neat piece on the changing composition of Turkey's exports.

Mehmet Simsek prepares markets for the inconvenient truth: No IMF deal. But wait until the next large Treasury auction (early next year) and more IMF rumors will drive a rally:)

Last but not the least, I should I am glad David chose one of my more civilized quotes from my summary of the Meetings.

The forecasters must be crazy

At yesterday's CBT bimonthly expectations survey, October inflation expectations came out at 1.20% mom. I just did a couple of quick calculations myself, and I am getting a forecast of slightly over 2% mom. Funnily, the effect of the end of the price cuts (some of which will spill over to November) and the electricity price hikes by themselves contribute almost 1% to inflation, so expectations are way off the target. You can see CBT President Yilmaz's warning yesterday at Eskisehir that October inflation could be high as a shot at steering expectations in the right direction, and I suspect that the CNBC-E survey, which is asked solely to bank economists, will be much more rational.

Yearly inflation will most likely shoot below 5%, as October inflation has come in at a sultry 2.6% mom last year. Then, we'll probably see inflation shoot up rapidly in the final months of the year, as there are no more base effects, ending the year at just below 6% (and shattering my otherwise immaculate number of the beast forecasts- but don't worry, I'll have my revenge next year).

Construction finally completed, blog open for busines...

I finally managed to find a couple of hours to archive the remaining couple of dailies I did at the IMF-World Bank meetings as well as last two week's regular weekly (Monday columns). If you follow me from the paper, you already saw these, but in any case, I should remind once again that comments are always required, never appreciated (or was it the other way around):)

Speaking of comments, one of my readers told me, on condition of anonymity, that he was at a meeting with bank CEOs recently and the financial center project was mocked upon. It is nice to know that I am not that crazy or pessimist after all....

As for my articles on the Fund's new face and clothes, I should say that after conversations with friends in the Fund and a bit more reading, I am even more convinced that we'll be seeing huge changes before the next Annual Meetings. But I should add that I bring up the issue with economists I trust, only to find that they are extremely pessimistic, and some of these guys are ex-Funders. The good thing is that if the Fund fails to deliver, there won't be much of a disappointment.

Weekly Hurriyet Column: Saving private savings

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. I thought I had lost my ability to come up with cheesy titles, so it is comforting to see that I am slowly getting back into shape- although it is definitely a good WWII movie, I think it is a bit overrated.

Although I love my editors at the paper, one thing we can not agree upon is referencing. I like to give full academic-style references to any papers I am referring to, while they do not like footnotes too much. Of course, I could reference the papers in the article, but then given that I only have 600 words or so space, I am reluctant to do that. So to make it easier for those who want to go ahead and read the papers, I have included hyperlinks to the papers.

In addition, I should tell that a conference call I had with analysts from Dr. Doom's aptly named Roubini Global Economics Monitor really helped me organize my ideas, so a "thanks" is due to them as well.

Just to give you a bit of a background, this savings discussion is not new: It started during the summer when internationally-known Turkish economist such as Dani Rodrik and Kemal Dervis highlighted that Turkey needed to increase its savings rate; Cevdet Akcay's response came at that time as a response to those arguments.

Finally, there is quite a bit of support for the reform argument in the latest Doing Business Report of the World Bank. In fact, one of the undersubscribed seminars at the Meetings was precisely on reforms. Although the official name of the Meetings is IMF-World Bank Annual Meetings, the World Bank part usually gets overlooked, and with the crisis and all that, this year would naturally be no exception. But I would have hoped that longer term issues in the Bank's sphere would not get as ignored. Anyway, a couple of newspapers/columnists did highlight recently Turkey's lackluster performance in these rankings in the past few years. I would not make too much out of the numbers per se, but anyone following the Turkish economy would agree that the government has been suffering from reform fatigue in the last two years.

'nough said; now to the column:


One of the big themes of the IMF-World Bank meetings was that global imbalances, widely seen as one of the underlying causes of the crisis, need to be corrected.

In fact, when you think about the great emerging market reserve buildup of the last decade, IMF’s efforts to broaden the flexible credit line and turn itself into a lender of last resort suddenly appear as a crucial part of this rebalancing act. A natural consequence of this process is that international capital flows will not reach the highs of the few years.

Such a transition and the new normal that is associated with it, which was outlined in an excellent article by bond investor Pimco’s Mohamed El-Erian at the end of last month, has important implications for the Turkish capital flows-induced growth model. Having opened its capital markets, secured customs union with the EU in 1996 and cleaned up its banks after the 2001 crisis, Turkey was in an excellent position to take advantage of the 2002-2007 liquidity glut.

Therefore, it was only natural that import dependency of exports rose considerably in the last decade, with 1996 and 2001 being inflection points. More surprising was the decline in the private savings rate, which Turkey’s demographics should have favored. Several notable economists I chatted with during the IMF-WB Meetings in Istanbul did indeed admit they were puzzled by the low savings.

Notwithstanding the fact that the theoretical relationship between demographics and savings is rather tricky, the impact of Turkey’s booming economy on its middle class has largely been ignored. YapiKredi economists Cevdet Akcay and Murat Can Aslak do show in a recent research note that the middle classes have been increasing their share of consumption in the past few years. A short drive around booming districts of Istanbul such as Umraniye and Gungoren, which have developed into buzzing consumption centers, confirm their findings.

Further evidence comes from a paper on the evolution and determinants of the savings rate by Murat Ucer and Caroline Van Rijckeghem. They relate the decline in savings to the post-crisis credit growth and housing price increases. While this means that the savings rate is expected to increase naturally in the next couple years, their detailed run-through of different policy options comes to the conclusion that there is no quick fix to the Turkish savings drought, especially in the short to medium-run.

Argentine economist Guillermo Calvo famously noted once that we do not know much more about Macroeconomics than accounting identities. In this case, the identity is the equality between the current account and the sum of the government and private sector savings-investment balances. If the global economy is indeed sailing to a new normal and increasing the savings rate will be a bit harder in practice than in academic papers, the onus of adjustment will have to be on the current account. This would mean less import dependency of exports, definitely much more easily said than done.

In the meantime, maybe we should also be questioning if the current Turkish growth model is really so undesirable or impossible to attain in the new normal. As Martin Wolf has been emphasizing, capital should be flowing to where it will have the most use. This is a point Cevdet Akcay has been making, as he questions export-led growth models.

But with a smaller pie, countries will scramble for scarcer capital by pushing ahead with reforms; at least, this was the impression I got from the IMF-WB meetings. In other words, it will be a world of survival of the fittest rather than party until dawn.

And those falling back on reforms may not find markets as forgiving as in the last decade.

The CBT doesn't surprise again....

Nope, I am not talking about interest rates, although the 50bp cut does not surprise anyone. More interestingly, the CBT cut lira reserve requirements (from 6% to 5%) right after saying it might do so in the one pager accompanying the rate decision. If I am not miscounting, this is the third time a "may" in the one-pager has turned into a reality the next morning.

BTW, the construction is still in progress, as I still have to archive my last three Hurriyet columns. Hopefully, I will be done with that over the weekend...

Weekly Hurriyet Column: A hitchhiker’s guide to the IMF-Turkey saga

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. As usual, there is the cheesy movie reference, although I did not think much of this one.


With the IMF-Turkey saga looking more like a Brazilian soap opera everyday and market expectations changing by the hour, I will not like speculate on the deal, opting for a rough guide instead.

I should state my position upfront: I favor an IMF deal. But I do not think Turkey will sink without one; it certainly will not. It is just that a sans-program scenario will surely be more costly than one with program. This is a point Economics tsar Babacan has emphasized quite a few times as well. But when I say more costly, I am not only thinking about interest rates, which will definitely be lower than what Turkey could borrow from markets, but also about financing and credibility.

The recent normalization in Turkey’s Balance of Payments has led to a wide misconception that external financing is no longer an issue. It has been forgotten that the current and capital accounts summed up to a deficit of nearly 20 billion dollars from the Lehman collapse to the markets’ trough in March, which was mainly financed by the Central Bank, or CBT, running down reserves and UFOs, or unidentified financing objects. With an external financing requirement expected to approach 100 billion dollars next year, continuing with the same set-up is simply asking for trouble.

Even if all goes well on the external financing front, there is the risk that the banking system will not be able to accommodate the private sector’s needs. For one thing, with the high redemptions schedule, especially in the early months of 2010, Treasury borrowing could start to bite on lending. Moreover, the Central Bank’s liquidity injection into the system through open market operations has been running very high recently, ringing alarm bells that the liquidity shortage could be permanent this time around.

Rough banking sector balance sheet calculations and statistical analysis suggest that the annual nominal loan growth consistent with a 3.5-4 percent recovery next year would be 10-15 percent. If lack of liquidity in the system and allocation what is available into bonds clog the lending pipes, the CBT could have to resort to the dangerous road of buying bonds on the secondary market.

As for credibility, maybe it’s just me, but I just do not understand the argument that Turkey could do without an IMF program if fiscal discipline were sustained. Sure, it can if the markets buy it from a government who has a really bad recent fiscal track record, is facing elections in a year or two and therefore is completely time inconsistent in terms of fiscal policy. In fact, I doubt whether the markets would even buy a constitutional fiscal rule after the PM's candid remarks on his appetite for Central Bank independency. Anyway, the fiscal side of the Medium-Term Economic Program, or MTEP, has gone tangent to sustaining fiscal discipline, to use the PM's own Economics phrasebook, so this discussion is solely theoretical.

But things are not as bleak as they look. It is likely that the Fund is ready to accommodate Turkey more than ever. Evidence to this bold statement comes from the Fund’s aptly-named paper, Review of Recent Crisis Programs, which was presented at the IMF-WB Annual Meetings. While I summarized the presentation in my October 3 column, the key result regarding Turkey is that the fiscal easing allowed in the most recent 15 Stand-By Arrangements is only slightly tighter than that envisaged in the MTEP. Skipping such a good deal looks like a missed opportunity.

In the meantime, I am becoming extremely paranoiac when rumors of large IMF deals emerge just before large Treasury auctions. Maybe, I should reread the famous Lucas paper showing that governments cannot fool people as a tranquilizer.

Warning: Construction in Progress...

I fell behind blogging once again due to the IMF-WB meetings and a flu that followed- luckily, I did not get caught by the heat traps set by the Ministry of Health, and it wasn't of the swine variety...

Anyway, as I mentioned before, I wrote daily for Hurriyet Daily News during the meetings, so in case you prefer to read my columns here or in Facebook rather than in the Daily News web site, I'll be archiving them, according to the dates they were published in the paper, today...

Daily Hurriyet Column: Impressions a la Turca

The unedited version of my last column covering The Meetings is below; you can read the final version at the Daily News web site. Incidentally, the day the article appeared in Hurriyet, I ran into a couple of buddy from Boston who, I learned, happens to follow my columns. His one big critique was that the article was written from the viewpoint of an expat, not like a Turk. All I can say is that is that is indeed the case, I am really happy:) One of the best things I like about Hurriyet Daily News is that it is extremely objective. In fact, despite being part of a big media conglomerate currently at odds with the government over a tax issue of a few billion quid, it has been extremely objective towards the government as well. This might bring a "so what", but remember that this is Turkey; we are talking about a country where people become polarized because of football. Anyway, that's all I have to say about that:)


I am concluding my week-long coverage of the IMF-WB meetings with my impressions regarding Turkey.

Before I go on, I should say I was very disappointed by the Turkish delegation’s presentations, with the possible exception of the Central Bank of Turkey President Durmus Yilmaz. With the world coming out of a major crisis, I would have expected the delegation to highlight Turkey’s experience with past crises, particularly the 2001 vintage that handed the country a sounder banking system. Also, despite the growing importance of the G-20, especially given the responsibilities it bestowed on the IMF at Pittsburgh, I would have thought the delegation would play to Turkey’s membership in the club.

Instead, the emphasis was on making a financial center out of Istanbul and the Medium-Term Economic Program, or MTEP. The attendees did not take the former seriously and did not care about the latter. Especially entertaining were Econ tsar Babacan’s efforts to present the MTEP as an exit strategy, boldly claiming that Turkey was the first country that had enacted one. That seemed to bring a smile to quite a few faces.

As for the MTEP, opinion was divided, with the Turkish delegation and foreigners, with the possible exception of the still-cautious Fund, hopeful and locals equally cynical. Policymakers relayed their disappointment with the harsh local critics, noting that it has been tough to get the PM agree to even this much. Perhaps so, but this is no reason not to highlight the fiscal deficiencies of the program.

As for the Turkish economy, the attendees were divided on the underlying cause of the Great Turkish Contraction: The IMF laid the blame on the greater weight of manufacturing on GDP; Turkey’s durables have indeed been hit hard by the crisis. Others saw it as a typical case of capital account/ financing issue.

The World Bank noted that the poor had been hit very hard by the crisis in Turkey, highlighting the results of a recent survey conducted by the Bank, UNICEF and Economic Policy Research Institute, or EPRI, a think-tank in Ankara. Although the fact that unemployment doubled in a year is worrying by itself, the more scary part is the Bank’s finding that the incomes have been falling among the poor and self-employed.

Speaking of EPRI, the absence of Turkish think-tanks in the Meetings was a shame. This is partly because EPRI is the only real Economics think-tank in the country, which highlights the level of the intellectual policy debate. Another casual observation was the lack of Turkish presence in key events without celebrity speakers, two of which I have covered in previous columns. The quality of questions by the Turks, covering the whole range from the shoe incident to sector-specific requests and the standard anti-IMF rhetoric, was equally appalling.

The IMF and EU dilemmas

Another small detail I noticed was the relative lack of interest in the host country. This is perhaps understandable, as most of the attendees had more pressing issues in their minds, and the Turkish delegation did not help either, but I saw this as the only positive Turkey development of the Meetings. After all, you are usually at the table in the Meetings because you are in trouble, and next to Latvia, Ukraine or the financial sector, even Turkey looks OK. The one issue that came up repeatedly was the possibility of an IMF-Turkey deal. While I will cover the issue in detail on Monday, the general opinion was that while an agreement is not necessary, it will probably be beneficial.

Another topic relevant to Turkey was the EC’s response to crisis-stricken countries in Eastern Europe and the Baltics. While attendees were positive on the level of support to EU members like Latvia, Ukraine vice PM Hryhoriy Nemyria, LSE professor Willem Buiter and others were extremely critical of the EC’s ignorance of their troubled neighbors to the East. Even with Latvia, evidence on the EC success is mixed, as the Fund had to take as given the constraint of the pegged exchange rate. Buiter thought letting the exchange rate go would not have worked, as the real and nominal exchange rates are independent in small open economies, but I think that accelerating adoption of the euro at a depreciated exchange rate would have addressed his concerns. The Fund would probably agree with me, although they would never criticize the EC publicly. The lesson for Turkey is that the EU could not and should not replace the Fund as an Economics anchor.

The Meetings definitely put Istanbul on the map for a week, but I doubt Turkey made the most out of it…

Daily Hurriyet Column: Impressions from the Meetings

The unedited version of my fifth column covering The Meetings is below; you can read the final version at the Daily News web site. And for once, there is no cheesy title. As for the article itself: After a couple of strictly off-the-record conversations with IMF staff and what the Fund's top brass has been saying recently, I am now more confident that very profound changes are line up at the Fund. 2010 should be a year of Fund watching.


Now that the IMF-WB Meetings are almost over, it is time to summarize my impressions from the seminars I attended as well as interviews and casual chats with the attendees.

The Istanbul Consensus

An Istanbul consensus has emerged, but at the least expected of places: The economics outlook. Independent of the shape, almost all attendees expected a slow US recovery. They were more bearish on other developed countries and more on emerging markets, especially Asia. There was also agreement that the woes of the financial system are far from over. I could say that the views in IMF’s WEO and GFSR reports accurately reflect the median attendee opinion.

Most attendees did not see inflation as a threat in the short-run; if anything, a few voiced deflation worries. But there was serious concern on the timing of monetary and fiscal exit strategies. The nightmare scenario is that inability or unwillingness to unwind at the right time could lead to inflation and a rise in long-term yields in the US, leading to yet another recessionary spiral. Martin Wolf, Financial Times Chief Economics Commentator declared that in this scenario, the dollar would collapse, and he was not the only one. However, this doomsday is still far away; no one expects these issues to be a problem before 2011. Finally, I have not yet met anyone who thinks that markets are reflecting fundamentals, but there is unsurprisingly huge divergence of opinion on the timing or amount of the correction.

The Supervitory Challenge

The attendees were less sure on the direction of regulation and supervision. This was one most controversial and discussed issues, precisely because the attendees were aware of the challenges. For one thing, the implicit financial sector guarantees have been made explicit during the past year. Moreover, finance is too large, powerful and smart: Without more efficient regulation and supervision, there is the risk that officials will be captured by the sector or end up chasing their own tails rather than the tail risks they are supposed to look out for. There is also the risk of overregulation, which would kill off all the beneficiary aspects of finance without touching the real issues.

Then, there is the problem that everybody loves credit, especially politicians. And Chuck Prince was actually right: You have to dance as long as the music is playing. So if a party-crasher comes out waving flags, she’d better be right! Therefore, you need stronger and more independent central banks, but actually, the trend is towards the opposite direction in most countries. In any case, giving policymakers more targets than instruments will be not only politically, but also technically feasible. Finally, one of the main lessons of the crisis is the danger of contagion from international financial linkages, so a national agency might not be able to identify all risks.

There is then an unequivocal demand for an independent body that can monitor the world economy not be afraid to raise flags when required, but there can be no supply of this service at the national level because of political and technical constraints. I know I am in the minority, but that’s why I see life ahead for the IMF-FSB initiative that I outlined yesterday.

In fact, while it was already beefed up in the past year, the Fund is surely emerging even stronger compared to a week ago. I am sure many disregarded Dominique Strauss-Kahn’s comments that “these would be the meetings we would tell our children about” as PR, but an interview with Lorenzo Giorgianni of the Strategy, Policy and Review Department of the Fund and a few informal chats have convinced me to give the benefit of doubt to the self-described socialist managing director. In fact, I would not be surprised to see profound changes in a couple of years in not only the instruments and workings of the Fund, but also its building blocks that could go as far as changes to the Articles of Agreement.

This is all good news: If anything, the Fund is turning to its roots: Keynes’ main ideas in the process leading to the Bretton Woods was the creation of an international reserve currency, the Bancor, and a lender of last resort. Although even high-ranking Chinese officials were frank to admit that we are very far away from the former, the latter might be much closer than we think.

What does all this mean for Turkey? What were the main issues that came up regarding the Turkish economy? This is where I will pick up tomorrow, the last in my week-long daily coverage of the Meetings.

Daily Hurriyet Column: The Dark Knight of crisis prevention

The unedited version of my third column covering The Meetings is below; you can read the final version at the Daily News web site. As you can see, the cheesy titles are continuing unabated. As for the article, another issue I did not spell out explicitly in the article is the familiar carrot and stick problem. Suppose the IMF went to Turkey and said "Look, we see such and such vulnerabilities in the financial sector and the financing of the current account". The Turkish authorities may say, "Wow, we had no idea, we'll take precautions right away" and really do something, or they say the same thing and do nothing. And there is nothing the Fund can do about it... One way to enforce the carrot would be for the Fund not to reveal the actual vulnerabilities it finds (too much of a fire problem), but how disclose which countries are reacting to its findings more than, say 50%, but I am just thinking aloud at this stage.


The IMF has not only been tying to be more responsive to crisis-stricken countries, as I outlined in my weekend column, it has also been charged, along with the recently-beefed up Financial Stability Board (FSB), to identify vulnerabilities, warn of risks and prioritize policy recommendations. The two institutions were mandated to collaborate in conducting aptly-named early warning exercises (EWE) back in April, and the long-awaited initiative was unveiled at an undersubscribed seminar Sunday afternoon.

There is not much point in going over the details of the different mechanisms set in place. Suffice it to say that I have found the framework not a step, but rather a whole flight of stairs over the ill-fated early warning system (EWS) models of the nineties, which did a great job in predicting past crises but a very poor one in forecasting future ones. Not only the framework is much more sophisticated, it also takes into consideration the critiques of the likes of Nassim Nicholas Taleb, not only by concentrating on tail risks, i.e. Black Swans, and comovement of assets during crises, but also by adopting a more heuristic approach through making use of more qualitative indicators such as consultations with academics, market participants and policymakers. In fact, the Fund stresses that this is not an exercise in timing of crises, but one of alternative scenario analysis.

Since the whole philosophy of the exercise has changed, it is not much of an argument to declare the efforts pointless based on the Fund’s past forecasting performance. As Jeffrey Frankel of Harvard University recently noted, the crisis has already caused profound changes (and is likely to result in even more) in Macroeconomics thinking, so if anything, the IMF-FSB initiative should be applauded for being one of the early adopters.

But this does not mean that the EWE will be able to prevent all the crises all the time. Even if you have the perfect set-up, you just have to live with the fact that crises, by their nature, are unpredictable. The EWE efforts seem to have gone to great pains in incorporating lessons from the ongoing crisis, but the next major global turmoil will probably be entirely different in nature. But even if we end up getting an analogous crisis, it won’t be a walk in the park, as Jean-Pierre Landau from the Banque de France eloquently put:

First, there is the problem of signal extraction. The reason many could not see the crisis coming is the same reason Americans did not see Pearl Harbor coming despite all the indications. The signals that look so obvious in retrospect come bundled with a lot of clutter that make jumping to conclusions difficult. Moreover, even if the EWE extracts the right signals, whether to prick a bubble now or later is in fact a social welfare decision. I would not be surprised if an elected government would try to delay the adjustment as much as possible.

Then, there are the political issues: Even if the duo makes the right call, it will be very tough for a democratically-elected government to stop when the music is still playing. At the extreme, one can argue that the initiative may not have a viable future: For one thing, as the normal returns and the EWE starts raising false alarms, the exercise will lose its value added, as Peter Garber related from his own experience devising similar models at Deutsche Bank. While the framework can be adjusted to minimize erroneous whistleblowing, a major missed crisis will lead to the duo’s demise. Moreover, policymakers can never know for sure if there would have been a crisis if they had not heeded IMF-FSB’s advice, as Martin Wolf noted. They might see the nonoccurrence of crises not as the EWE working but proof that the exercise has outlived its use.

There is also the matter of communication: Economists have been aware of self-fulfilling crises and multiple equilibria for the past two decades. Simply put, the only thing worse than shouting “Fire!” in a crowded movie theater when the curtain is burning is to scream at the first sign of smoke, when in fact it is only the projectionist cooking. If you choose little or no communication, then you run the risk of losing credibility for lack of transparency and being accused of not having changed.

All these concerns are valid, but at the end of the day, someone needs to do this dirty work, and barring the operational glitches they too are aware of (after all, this is a work in progress), the IMF-FSB is in the best position to be the silent guardian, watchful guard that the world needs right now. In short, a dark knight…

Daily Hurriyet Column: Financial Center dreaming

The unedited version of my third column covering The Meetings is below; you can read the final version at the Daily News web site.

And some confessions: While writing the column, I called up my friend Kaan Sariaydin to get his opinions on the issue as a market participant. It turns out that he has spent a lot of time thinking about it, and over the course of the next hour, he shared such valuable input with me that I offered to have a joint article. All the technical details in the second part of the article are from Kaan, and due to space constraints, I could use only a small portion of what he gave me. I also have to thank the editor-in-chief of Hurriyet Daily News, David Judson, for suggesting I write on this. My journalistic instincts are nowhere near as developed as his, as I had no idea I would get so many congratulatory remarks for the article.

BTW, the news items in the Turkish papers that appeared on Monday and Tuesday confirmed my gut feeling that the valiant efforts of the Turkish authorities would not be taken seriously by the attendees. Istanbul traffic was humorously cited as the biggest obstacle to Istanbul's, or rather the Turkish government's, aspirations; a joke that came up during my interview with Martin Wolf as well.

Economics tsar Babacan disclosed the strategy and action plan (SAP) to make a financial center out of Istanbul to great fanfare on Friday. We would like to dissect the plan on its preparation and content.

It is obvious that a lot of work has gone into the plan, for which the State Planning Organization (SPO) deserves praise. Seven broad areas have been determined: Enhancing legal infrastructure, increasing financial products and services, developing a simple and effective tax system, improving the regulatory and supervisory framework, augmenting infrastructure and boosting human capital. An organizational structure to monitor this workplan as well as to promote the city has been added in as well. All in all, 23 priorities have been revealed, along with 71 action plans to carry out these priorities.

We have yet to figure out how the seven main areas were determined. While they all make sense, it seems too much like a laundry list to us. In essence, the SAP has fallen into the Washington consensus trap: The World Bank and IMF had long been advocating a long list of reforms without identifying the binding constraints. Realization of this mistake has led to the Investment Climate Assessment framework in the Bank and focused conditionality in the Fund.

As for the actual determination of the priorities and actions, as one of us has been involved in a couple of such exercises with SPO, we are not that sure that, despite the best of intentions, they reflect responses to binding constraints. In such work groups, it is usually the loudest, not the wisest, who gets her ideas in. Another issue is benchmarking: Unless you are planning to tap into Martian or lunar colony funds, you’ll be competing with other centers, so you need to know how you compare to the competition. We believe this to be one of the fundamental deficiencies of the report. Without knowing binding constraints and relative performance, you wouldn’t know what you are getting for your buck.

But it is really the content that worries us. For one thing, to have a finance center, you need, well, financing. To start, the institutional investor base and institutional funds are still marginal in Turkey. With public placement low and most of what is out there grabbed by foreigners, there is not much of a domestic participation in the game. This leaves domestic financial institutions with very low placing power. The low free floating rate and corporate governance problems limit M&A activity, one of the symptoms of a well-functioning capitalist market. Despite great efforts from the ISE, there is no small or mid-cap market. Without much of project financing and venture capital companies, there is no real venture capital.

When you get into the nitty gritty stuff, it gets uglier. Just to give a few examples, it is impossible to hedge your delta by short-selling in the current set-up. Collateral usage of third parties is prohibited. The market maker is banned from offering a lower price to a big customer, and as a result, all the big deals go through New York or London. We could go on and on…

Does the SAP address these issues? Yes and no. The government could argue that one or more of the 23 priorities or the 71 action plans touch on these issues. For example, when you get the bottom of it, the binding constraints in the selective examples we have given seem to be concentrated in the institutional, legal and regulatory frameworks. So the government could point to the relevant sections of the report, some of which could get part of the job done, at least in theory, while others are just too vague to mean anything.

Of course, we could be wrong, but all this reeks of another case of opium to the masses.

Daily Hurriyet Column: Lorenzo’s Oil heats EMs

The unedited version of my second column covering The Meetings is below; you can read the final version at the Daily News web site. And yes, I think I reached the apex of the cheesy titles with this one, but Lorenzo, to whom I showed the title to make sure he wouldn't be offended, liked it, so all is well:)

Coming to more serious stuff, Lorenzo told me more on the Latvian FX issue after the seminar, but I am not getting it here because as they say, what happens in the Meetings stays at the Meetings. We hope to do an interview with him tomorrow; if that materializes, I'll refer you to that interview.


Coinciding with the latest stint in the tragicomic efforts of the government to create a financial center out of Istanbul, one of the seminars in the meetings likely to have a lasting influence did not get the attention it deserved.

A Brave New Fund

One of the beneficiaries of the crisis has been the International Monetary Fund. Its existence questioned before the crisis, it has since then seen its influence grow virtually by the day. Recently, it was asked to help the G-20 with its analysis of how national or regional policy frameworks fit together at the Pittsburgh Summit. As noble as these and other initiatives may be, without some power to enforce its writ and, if necessary, wrath, I am not sure how this and other similar mechanisms will work out.

In the short run, the Fund will still be evaluated on its usual area of fame, how it helps out crisis-stricken countries. The Fund has been zealous in this area as well: While getting its resources tripled following the April G-20 Summit in London, it conducted a major overhaul of its lending policies. Of course, we would need to know if deed has indeed followed word, and a new paper by the Emerging Markets Division of the Strategy and Review Department, under the supervision of Lorenzo Giorgianni, who presented the paper at yesterday’s seminar, does exactly that.

Aptly named Review of Recent Crisis Programs, the paper evaluates the most recent 15 Stand-By Arrangements, in comparison to non-crisis countries in the current episode and past crises in terms of program design, fiscal policy, monetary & exchange rate policy, financial sector policies and crisis recovery.

The results are striking: Program countries have usually fared much better than crisis-stricken countries during previous episodes of turmoil and not much worse than non-program countries. For example, output losses have been comparable to non-program countries, once you account for differences in initial conditions, and external balance adjustments more modest relative to the past. Perhaps most importantly, sharp moves in interest & exchange rates and banking crises, ghosts of crises past, have been largely avoided. What has worked the magic?

For one thing, IMF support has been rapid and frontloaded, as well as being directed to the funding needs of the private and public sectors, rather than simply deposited in Central Bank coffers as in the past. Program ownership has been ensured by working with the full range of exchange rate regimes, enacting capital controls where necessary and working with institutional constraints such as the EU. Conditionality has been more focused than in the past, with the Fund opting for fewer conditions essential to the success of a program rather than a comprehensive laundry list.

With the adequate financing pouring in, there has been much more room for an expansionary policy stance, and the Fund has been glad to oblige. It used to be Mostly Fiscal, but fiscal policy has been more accommodative than in the past, keeping in mind medium-term sustainability. In fact, there is not much of a difference in fiscal stance between program and non-program countries once controlling for initial conditions. The same has been true of monetary policy, with program countries easing monetary policy, albeit to a lesser degree than non-program countries.

What about Latvia?

One striking feature of the report is that Latvia and Iceland emerge as exceptions to the rule, glitches in an otherwise-perfect track record. Iceland’s case is special, as it was hit with a major banking crisis before the global turmoil began. But the woes of Latvia beg for further scrutiny, and there are hints sprinkled throughout the report.

When you add everything up, it seems that Latvia’s plight had much to do with its pegged exchange rate, as its room to maneuver was severely limited. With prices (the exchange rate) unable to adjust, it was the quantities (GDP) that took the burden of adjustment. The report summarizes the immediate economic costs of abandoning the peg, referring to country reports for the benefits. I am not sure costs would have outweighed benefits if only economic costs were considered.

Latvia’s troubles bring to mind important questions: Is the EU the right economic anchor? Where does the jurisdiction of the IMF end and that of the EU start? The euro area has been deemed a success story, as the sovereign spreads of the lax Mediterraneans have been shielded by the stoic brother up north. Look further east, and the Latvians are sighing with envy.

(Sort of) liveblogging from seminar Financial Crisis and the Poor

The moderator, Nik Gowing from BBC, is doing an excellent job moderating- going from speaker to speaker and engaging them in follow-up questions, almost like an interview, so I will jot down few notes rather than the standard detailed liveblogging:

-3 out of 4 families cutting expenditures in Turkey- from a survey- probably the same survey as used in the ECA meeting.
- document from WB on LICs, presented to G-20, was taken as basis for discussion- must read in the next few days!
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Liveblogging from seminar Fiscal Policy During Crisis and Recovery

SF:
Praised Fund's need for fiscal expansion- would have been as deep if not so good intellectual work.
Q. Does debt threaten macho and fiscal stability?
A: very country specific. UK, US, JP debt gdp ratios projected scary! But EM projections in G-20 likely decline in long run.
Q. How get them down?
A. Fund proposed many rules. WWII good example, but some differences. There will have to tax inc., bigger red in spending. In EM, problem much much smaller. Consolidation will req. Delicate mix of exit from fis. And mon. Policy. Doug XXXX has nice ppt on multipliers, and mon. Pol. Makes a big difference in effectiveness of fiscal policy.
Coordination Issue: was essential when world facing collapse when faced with son of great depression:) it is not as critical now as less than a year ago (I need to expand on that).
Then, he discussed Israel: lesson: we were in strong position when crisis began. Not that fiscal policy doesn't matter but how you go in determines how rapidly you go out. I hope Fund goes to help put fiscal houses in order...

CANADA MOF:
We have boring fin system, was criticism, now compliment.
Will discuss how we got fiscal sustain ability.
Do budget annually on January
Moved quickly from surplus to deficit: reduce taxes, spending for job losing people, workshare programs.
Our lesson: 70sa we had deficit spending and public debt, accepted by public until noticed that tax money was going to interest.
Discipline and we had balance budgets. They use private sector forecasts for growth- has brought credibility to projections, now changing because hardly a consensus.
Use it or lose it policy to funding to regions,Temp measures to unemployed: half of deficit. For two years then we depend on growth, if growth less, we cut spending.
I encourage you to contain spending (advice to PM).

RWANDA minister or economic planning:
Not many notes as a result of massacre of Shakespearian and my own Inonu-like hearing problems. sorry:(....
What to do with limited needs?

Alejandro (MEXICO, ex-IMF)
I will talk about general fiscal policy, exit strategies and Mexico.
Key Idea in stimulis frameworks to concentrate on hardest-hit. Put this in programs right now so to be ready for next crisis.
Calculate steady state debt dynamics- measure fiscal adjustment, how we'll reach new steady state. Put adjustment ASAP. Optimal design. Frontload these because 1. political will to sustain these, sooner we cut, better 2. Credibility effects for LR adjustments. 3. Uncertainty of adjustment will effect private sector decisions. So accelerate design and discussion of programs- exit strategies. Mexico: severely hit by recession, gdp contraction like TR (keske bizde de boyel adam olsaydi). We were liq,but had solvency issues. We face fiscal problem associated with decline production of oil. So we have temporary and permanent shocks. Transitory will be done with deficit and nonrecurrent revenues. Permanent by increase in non-oil revenues, so increase income tax. We protect anti-poverty and infrastructure problems to compensate effects of recession.

Q: PM complaining about CBT independence. Gov does MTFR, fiscal rule? Is priority fiscal rule or creating jobs. Questioner CHP MP, I think.
A.SF:I don't follow Turkey closely anymore. Current priority is to get out of recession.

Q. What policies should be used by G-20?
A. Canada: coordination.

Q: what about exit? Are there objective criteria for exit.
A. Canada: when is when we see recovery for sure- sustained growth for a couple of quarters before implement exit strategy. Mexico: country-specific, need to balance out.
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Liveblogging: WB ECA Press Briefing

PLH is ECA VP Philippe Le Houreou. I'll is chief economist for the region.

PLH: Tough times. Global loosening of mon fis policy. Signs of recovery. Families under stress as breadwinner lose jobs+ food and oil price hikes made hh go deep in pockets. U going up, poverty growing. Danger is weak and jobless recovery. Financing needs highest in ECA by widest margin.
1. Clean up banking
2. Improve business climate
3. Make public exp. Efficient
4. Continue inv. In infrastructure.
I will share this message with Fin Min in next few days.

IL:
Bad news- crisis not close to over in ECA, esp. For workers and families but also true for gov. Working with smaller budgets.
- good news for businesses: IP stopped falling mid-year but external debt usd 350bn due.
- bad news for families: U, poverty- stress tests bad
- tough times for gov: fiscal def from 1.5-5.5; stress tests show pension def rising to 5-6 percent GDP.

1.
IP stopped contracting in Q2. Interest rates come down for gov and firms but still twice before crisis.
Business regulations better! (TR bir bok yapmadi burada)
But huge debt obligations due
So mixed news for firms

2.
Bad news for hh
Poverty rising throughout region
Numbers do not tell you how worse people become
Surveys in TR and Montenegro says people use access to utilities
Rising job losses: TR one of hardest hit- in TR doubled. (Rise in registered u)
ISKUR data used for TR
Incomes in TR falling
Reg U tip in iceberg: survey from june: self-employed especially hard
Income losses+ fuel+ finance: difficult to pay bills
HH hit fin, product, labor markets!
HH stress tests show distress:
1. Many poor hh insolvent before crisis (find graph for Turkey).
2. XXX
3. If public many used , it should be targeted at poor hh

3. GOV:
- countries making small progress in fiscal until crisis. Em changed 2008, 2009 for rest. This year all deficits.
Most countries did not save in goof times
- asked to do more with less!
- social assistance for needy
- soc second for elderly
Social assistance programs good in region and well-targeted (compare graphs for TR).
- reforms needed for social second, but possible: adjust pensions to COLAs, improves a lot! Increase retirement age, even more (purple line)

Messages:
Good news for firms, no good shoots for workers!!!
Tighter money ahead (lowe growth, higher deficit)- smaller deficits for government.
So need fiscal consolidation, not indis. cuts. More efficiency of spending. But not easy, so we are helping out.
Last slide shows how they are helping out.

QUESTIONS:
Q. Speed up reforms says reports. Are they doing well?
A. Difficult to generalize, but look at Doing Business report, region doing well. Risk is reforms stopping, don't forget EE convergence was mainly due to private. debt inflows. Now none so make sure there is rollover.

Q. Is EC doing well?
A. Yes, and coordination mechanism working as well.

Q. Can you talk about Baltics?
Baltics hit but they got demand inc. With inflows from Scandinavian, so important that these banks do not withdraw. IL: these are very small economies, so they needed to integrate markets. They did very well before crises, are giving back gains, but not all. On EU: I think done well in helping integrate markets, institutions. Q is whether this integration can continue. Key is strong institutions. Anecdote: german consumers bought cars in poland, this is well designed program, not national.
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Where are we in the crisis?

Dr. Doom, aka Nouriel Roubini, is giving a speech in his beautiful city of birth. Here is me live blogging from the beautiful "river" of Bosphorus, to quote Axl Rose:

I'll give my current outlook. 6 questions:

1. Current Outlook: shape of the recovery: V, U (like me), W.
2. ROW. Bottoming out- light at the end of the tunnel in Asia? Can china and EM be new locomotive.
3. Financial institutions in the US.
4. Whether inflation or deflation?
5. Exit strategies from monetary and fiscal stimulus. If too soon, back to recession, if too long and monetize deficits, uppppps....
6. What's been happening in mkts since March? How much of recovery by fundamentals? How much too quick, too fast?

1.
1st observation: first we had freefall. Fall last year PM that had been in denial looked at freefall and decided to act with full force. Different degrees but most did. That stopped free fall, in Q2 rate of decrease. Close to bottom now. What is shape of recovery:
US: anemic, well before potential. Why? Job condition awful. Compared to january better, but still high compared to previous recession. Firms cuts hours, reduction wages etc, so impact on con. Bad
2nd obs: this was a credit of excessive debt, leverage. Develeraging is not occurring right now- massive releveraging of public sector.
5 reasons why recovery weak:
1. Consumer in trouble- it makes much of gdp.
2. Financial system still in trouble. Also destruction of shadow banking- SIVs, securitization, delevearing by priv. Eq, hedge funds.
3. Corporate sector: we have with so much debt they are lucky the don't shut down. Even others will not do much cap reasons because there is glut of capacity and because there won't be rapid growth in profitability.
4. We need fiscals stimulis. But large deficits crowd out private sector.
5. In last decade, we had imbalances.

Other advanced:
I am more worried because:
1. Potential growth lower
2. Productivity will not improve by much.
EM:
More bullish because;
1. Did not have as much leverage
2. Good financial systems.
3. Potential growth rate higher. Already
Recovery in some.
4. Have room for countercyclical policy.
But could they be locomotive of growth? No. China not big enough!
Could they fully de couple? No. There is already some decoupling, but if growth weak in main, they won't go to rates before.
Turkey:
Was a sound econ. at eve of crisis. Corporate sector stopped capex. Reversal of capital flows. But since banking sector robust, no baling crises like other EM.
Prospects for TR: 1.since open econ. If eurozone robust, good for TR
2. Fiscal consolidation very important. Is the mt fiscal sustainability OK? IMF will be + for investors-confidence. Does not need IMF money, but signalling effects will be important.
TR will also do reforms, taxation reforms, flexibility in labor markets, liabilities in social security and healthcare. You need to diversify exports.

INFLATiOn DEFLATION: in short ruin deflation because 1.firms do nor have much pricing power. 2. Slack in labor markets. Slack in good and labor markets imply deflation. We have deflation today in many countries. In world more def than inf pressure. Wall of liq: not inflationary because lack of velocity. This liq go to assets, but not to goods. But next year inf risk because 1. If mon deficits, expected inflation could get out of control 2. Wall of money chasing commodities. 3. Usd main currency of carry trade, could lead to inf because of FX, through inverse relationship with comm. prices

V. EXIT STRATEGY; 2 edged shitty stick:)!!! If you don't if difficult to inc taxes, the bond mkt vigilantes will be worried- 8:52:18 PM bond yields inc- stagflation! Very narrow and razor-edged. Double dip risk is here.

VI. ASSET MKTS: Rally since march. Some warranted by fundamentals. Because L was being priced; that tail risk has been reduced by mon fis easing and backstopping of fin. Sector. There is now light at end of tunnel. 3. Risk aversion lower, so moving to more risky assets. Why do I worry about relapse? If recovery weak, 3 reasons for mkt correction in risky assets.
1. If U rather V, will be worse than expected.
2. Surprise on downside on earnings and profits. If rec anemic, quantity not growing, curring prices, so revenue anemic. Better results because slashing costs, but can't go on forever.
3. If high U, weakness of fin system bigger. Real estate prices lower, credit card losses.

CONCLUSION: either V shaped recovery or markets adjust (something's gotta give).If I am right, after new year, weaker than expected, than commodity prices, stocks, credit will correct. EM risky because money rushing to EM- they increased more than developed. But will not be as in March.

ED: so the light at the end of the tunnel is the train!

Q: where will liq. Go to?
A: still very easy, O rate, sharp increase in money. Chinese bank credit one third went to real estate, commodity. IN my view, USD70 too high for oil. USD 100 next year will have same impact next year as USD 145 last year.

Q: what would happen to USD?
A: this is long-run; will be gradual process if us does not fix econ and fiscal, if uses inflation tax to fix debt problem. But a gradual fall of dollar is necessary. Most of usd adjustment can not be EUR YEN. Others, and this is necessary and beneficial.

Taylan: Q: are you concerned it will be business as usual now assets have rallied?
A: definitely. Agency problems, etc. G20 list has to be immediate sooner than later. More liq, more cap, less lev, imposing higher cap charger in sys important fin inst, broader cooperation in regulation. If you are too large and interconnected you have to be supervised. G20 agreed we'll see if implemented. Definitely risk of complacency.
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EconNews Roundup

CBT: Slowing down?

The shoe incident: Part Deux

The IMF's GFSR and WEO, and the IMF talking Turkey.

The same-old tangent and IMF debates.

The bigwigs talk: While Zoellick sees slow recovery, DSK urges regulation.

The unresistable fall of Turkish exports.

My Notes on IMF Managing Director Dominique Strauss-Kahn Press Briefing

Again, mostly for my archiving purposes, but the real thing is on the IMF site. Feel free to email me with questions. As for my impressions of him, I had never understood why he is often termed ebullient or jovial. But he is indeed quite a likable chap. Anyway, I believe that he was the right person at the right time for the Fund. I mean, I doubt that the IMF would have benefited as much from the crisis under a different leadership. I am planning to elaborate on this issue in my last Daily column on Wednesday or Thursday, before I again resort to the Daily schedule....


DSK remarks: is worried about unemployment a lot. 1.We have to make sure exit strategy is too early. He is happy fin. Min. Arer aware of this. 2. We have to make sure financial sector fixed. 3. We have had econ. cooperation in the last few months. In Pittsburgh, we got very firm will form economic cooperation.

3 principles which I will elaborate later in the day:
1. We need sustained econ. Cooperation., same with all IMF members as in Pittsburg.
2. We absolutely ned to improve financial stability- means better supervision and regulation.
3. IMF itself: we need stable financial mon. System for IMF to be lender of lasr resort. Imbalances come from reserves- very costly- which was at the founders of IMF (ED: this is related to FCL). How can we provide credibility and legitimacy to IMF for being lender of last resort? This was in the minds of the institution.
This is necessary for peace and democracy!!!
This won't be solved in a couple of days, but this meeting will be the starting point of new IMF- you can tell your grandchildren one day.

Q: what about Tobin tax?
A: very old idea. I don't think it will work for technical reasons- difficult to implement.But we will prepare a report on some modified version. Lipsky: we need to look more broadly than deposit insurance.

Q: IMF has been unable to discipline largest member.
A: 65 years you are right, 65 days no. It was possible because we were right. If what we say is true, we can the convince. That's what happened with stimulus.

Q: you said IMF will be machinery for Implementing G-20. How will you deal with FX?
A: 2 points. 1.cooperation is also about imbalances. I was impressed by collective problem solving. We need to solve q together.2. G-2O understands that connections between countries is complicated.

Q: Serbia
A: we no longer advocate same program everywhere. We need to adapt programs. But fiscal deficits is a common factor in all countries.

My Notes on World Bank President Zoellick Press Briefing

I am not sure what good this will do, but I am posting it anyway, as I might have to refer to it in a column:


Meeting comes at very important point after G-20- to make sure poor countries are heard this is G-186!

It is important G-20 support developing countries.

Q. Are you getting money from rich countries? What is money runs out?
A: For IBRD, we came to crisis well-capitalized.

Q. Biggest challenge for global, Turkish economy.
Global: fall into complacency. Referred to IMF WEO. Cycle of recovery: stimulus spending in us comes in 2009 2010- will there be spillover from public to private sector. There will be differences: china will face challenge because high credit growth. You are getting signs of inf. In east asia. If they wait for us, inflation risk, if they don't, will have capital rushing in. Trade and protectionism risk as well.
Turkey: MTEP loolks sound to us. Issue with jobs and employment. We reposnded by focusing on SMEs.

Q:
A:Trade: opportunities for south south trade.
How can we help trade facilitation?- we work on that.

Q: U is growing. What is WB point of view?
A: I agree. U will continue to go up, slow in down. We got lessons from 97 crisis that it is important to focus on safety net support.

Daily Hurriyet Column: Seven years in slump

Hurriyet Daily News asked me to write daily rather than weekly during the meetings, which I gladly obliged. The unedited version of my fist column is below; you can read the final version at the Daily News web site. As you can see, I managed yet another cheesy title; I wonder I'll be able to keep it up for a week:) Anyway, enjoy:


As an unofficial kickoff to the IMF-World Bank Annual Meetings in Istanbul, the IMF disclosed the main chapters of its Global Financial Stability Report (GFSR) and World Economic Outlook (WEO) on Wednesday and Thursday.

Main takes from the GFSR…

First, the Fund notes that credit supply has been retracting faster than demand, leading to credit constraints. While this mechanism is likely to play out somewhat differently in Turkey, with the credit demand expected to increase as the economy recovers, the result will be similar, as the private sector is likely to hit credit constraints in 2010.

In the Turkish context, with the private sector lending crowded out by banks' appetite for Treasuries, a consequence of the high rollover ratios, it remains to be seen if the Central Bank will start buying Treasuries to unclog credit markets directly, as rate cuts have had limited impact on market rates so far. While the Fund recommends continued support from Central Banks to alleviate credit constraints, I wonder how they would feel about quantitative easing a la Turca, as the risk that such policy will be perceived as fiscal accommodation or debt monetization hangs like a sword of Damocles.

Second, IMF analysis suggests that there is a risk that the high fiscal deficits could lead to a rise in long-term interest rates. As Turkish Treasuries are more responsive than usually believed to core market long-term rates, such a bear steepener would create upward pressure on Turkish rates, forcing the Central Bank to abandon its on-hold policy earlier than expected, in effect changing the lead-lag relationship between the benchmark and the policy rate.

Third, the report notes that Turkey's largest risk is in external debt refinancing needs, with the bulk coming from corporate rollovers. The Fund’s analysis of contributions to changes in emerging market (EM) sovereign external spreads is also worth a look: Increased risk appetite accounts for most of the decline in spreads in the second quarter. I doubt the picture has changed much since then, and it is safe to claim that a retraction in risk appetite is probably the single largest risk to EM assets at the moment.

And the WEO…

IMF Chief Economist Olivier Blanchard’s take on the so-called recovery was one of the most sound sum-ups of the current situation I have heard. While he did not say it in exactly this manner, Blanchard highlighted the difference between rates and levels, whether it be debt or GDP: While consumers are deleveraging and banks getting rids of toxic assets, levels are still too high to support a quick recovery.

And a very slow recovery it will be, if history could be any guide. According to the Fund’s estimates in the analytical chapters of the WEO, GDP/capita declines by about 10 percent of its pre-crisis trend after a crisis, failing to rebound seven years after the crisis.

As is the norm with such meetings, where carefully-prepared texts are read without changing a single punctuation mark, the most interesting insights came in the Q&A session that followed. For example, Blanchard remarked that a fiscal rule, without the necessary structural reforms to accompany, would not amount to much. His comments should ring bells in those introducing black-box fiscal rules, while at the same time fiercely resisting much-needed reforms.

As for the Turkey forecasts, the Fund’s projection of 6.5 percent contraction this year and a recovery of 3.7 percent in the next are almost identical to my own estimates. More interesting is the Fund’s take on the Great Turkish Contraction: Jörg Decressin, chief of the World Economic Studies Division, surprised me by attributing the large decline in Turkish growth in the first half of the year to the larger cyclicality of the economy, due to the greater share of manufacturing in GDP.

While this is a valid point, I doubt it would be enough to explain the large contraction. I maintain my view that with its healthy & unleveraged financial sector and growth not led by exports, Turkey was in a position to be one of the countries that the crisis could really pass tangent to, but ended up as one of the worst effected, mainly due to bad policy management.

Perhaps most interestingly, the Central Bank’s credibility problem has now spread to the IMF: While the Fund’s average inflation projection of 6.2 percent is line with the Bank’s end-year forecast, the Fund sees inflation heading north next year, in contrast to the Bank’s expectation of lower inflation.

IMF/WB Meetings Coverage

Thanks to my Hurriyet columns, I am following the meetings in Istanbul. For the meetings, I'll be writing a daily column (rather than my usual weekly), the first of which appeared in Daily News today. I'll be posting those columns here. In addition, I will be doing some live blogging and some summary points of the meeting that I'll attend- the first one is coming shortly.

A step in the right direction for GDP reporting

To my surprise, TURSTAT started releasing working day and seasonally adjusted GDP, going back to 1998. I know I have quite a few readers interested in growth, so I am happy to provide qoq growth numbers.

The wd and sa numbers are from TURKSTAT, whereas the trend numbers come from my friends at Turkey Data Monitor, who just apply a Hodrick-Prescott filter on the working-day and seasonally-adjusted series. You might also be wondering if the wd adjustment makes a big difference, so here are the yoy figures for the regular and wd series:

As you can see, there are only three quarters where there is a significant difference between the two series. That's why economists usually account for wd in Industrial Production, but not in GDP.

Thanks to TURKSTAT for this nice surprise, but it'd be better if such surprises were announced beforehand. Now, let's hope that they will release the GDP figures in a more timely manner.

My initial take on the GFSR

The IMF disclosed the Global Financial Stability Report this morning, with your friendly neighborhood economist present with a brand-new press badge (thanks to friends who helped facilitate the process) that arrived just an hour and a half before the meeting:)

Anyway, there is no way I could compete with the mighty FT with my one-person outfit, which sent an email update as the meeting was in progress, but where I could provide some value added is on the Turkey implications of the report:

First, the Fund notes that as credit supply has been retracting faster than demand, leading to credit constraints. While this mechanism is likely to play out somewhat differently in Turkey (my own metrics suggest there is not much pent-up demand right now), with the credit demand expected to increase as the economy recovers, the private sector is nevertheless likely to hit credit constraints hard in 2010 as well. The Fund recommends continued support from Central Banks to alleviate these constraints. In the Turkish context, with the private sector lending being crowded out by banks' appetite for Treasuries, an expected consequence of rollover rations of over 100%, it remains to be seen where the Central will start buying Treasuries to unclog credit markets directly, as direct rate cuts have so far had limited impact on market rates.

Second, IMF analysis suggests that there is a risk that the high fiscal deficits could lead to a rise in long-term interest rates, at least of history is any guide. This is risk for Turkish rates that is not discussed a lot. As Turkish Treasuries are more responsive to core market long-term rates than short-term rates, such a bear steepener would create an upward pressure on Turkish rates, forcing the Central Bank abandon its announced (but not believed) policy of on-hold policy, in effect changing the causality relationship between the benchmark and the policy rate.

As for the Turkey findings, the report notes that Turkey's largest risk is in external debt refinancing needs in 2010, with the bulk coming from corporate rollovers. However, Figure 1.19, contributions to changes in EM sovereign external spreads, should hang on the wall of all EM policymakers: The analysis shows that increased risk appetite accounts for most of the decline in spreads in the second quarter. I doubt the picture has changed since then, and it is safe to claim to a retraction of risk appetite is probably the single largest risk to EM assets at the moment.

Weekly Hurriyet Column: Great expectations, greater disappointments

With the hustle and bustle of the IMF/WB Annnual Meetings, it took me for days to finally post this week's column. Below is the unedited version; you can read the final version at the Daily News website. There is the usual cheesy reference, this time from literature, although it has been adapted to the silver screen numerous times.

As for the column, I am skipping the usual discussion, as I had already discussed most of the issues before the column got published, thanks to illuminating comments from Mary Stokes. But now that I think about it, I look like a fool stating that the modest expenditure cuts of 2011 do not look realistic in an election year: Maybe, 2011 is not the election year, 2010 is!!!


After a delay of roughly three months, the government disclosed the medium-term economic program (MTEP) nearly two weeks ago.

Having been late to the game, even my own rather lax standards, due to the Eid publishing break last week, I will only briefly summarize the main tenets of the program before trying to offer some value added.

The MTEP in brief…

There is mutual agreement that the strong point of the program is the realistic projections. While I find the 2010 unemployment and inflation forecasts a bit too optimistic for my taste, the rest are in line with the economic scenario I have been sketching since early in the year. In fact, the government managed to take my number of the devil projections a step further by forecasting the deficit at 6.6 percent of GDP.

But as many analysts have already noted, the fiscal side of the program does not lie on firm foundations. For one thing, almost all of the mediocre fiscal adjustment next year, which incidentally falls short of securing debt sustainability, is coming from robust revenue growth stemming mainly from the expected economic recovery. Moreover, even the modest expenditure cuts of 2011 do not look realistic in an election year.

…And the fiscal rule

In fact, the only thing that has kept sound economists even mildly optimistic is the mention of the implementation a fiscal rule sometime in 2011. Although the details are still sketchy, it seems that the government has in mind a cyclically-adjusted fiscal rule, as Turkish daily Referans went ahead and published a formula based on debt sustainability.

Such a rule that adjusts the fiscal position for the economic cycle could make sense for Germany, to which Economics tsar Babacan alluded during the unveiling of the MTEP, but I doubt it’d be the appropriate rule for Turkey, especially if it overlooks the composition of the budget. In other words, numerical policy rules do not make sense for a country with a poor fiscal track record like Turkey if they are not accompanied by procedural rules such as a cap on non-interest expenditures.

Even if the government manages to come up with the right rule for Turkey, implementation will be a huge challenge. Unless the rule is hammered into the constitution, there will always be the risk that it will share the destiny of the ill-fated borrowing limits in the fiscal control law, being cropped or even nullified with subsequent laws.

The biggest danger of the fiscal rule lies in the false hope that it will be the answer to ensuring fiscal credibility. One useful analogy is with inflation targeting: After lots of trials and errors, it is now well-understood that inflation targeting per se or even attaining the inflation targets does not make a central bank credible, with the Central Bank of Turkey being a case in point.

In fact, one general misconception about fiscal rules is the assumption that they automatically deliver fiscal credibility. Without an independent and authoritative budget monitor or fiscal council, it wouldn’t be a big surprise if the Turkish fiscal rule, even after being ironclad in the constitution, would not gain much ground.

In any case, fiscal policy experts have repeatedly been pointing at lack of full transparency and shenanigans in public accounts, which do not bode well for the implementation of a fiscal rule. So, at the end of the day, maybe fiscal policy independency for Turkey should not go beyond being an academic curiosity, especially after the PM has disclosed his distaste for central bank independency in admirable frankness.

Or, if the government is just providing opium to the masses with hopes of an IMF deal and a fiscal rule, it should also be ready for the withdrawal to come.

On tomorrow's Hurriyet column

This is a first: I am commenting on a column of mine before it has appeared in the blog or in Hurriyet Daily News:)...

Mary Stokes, one of my few loyal readers:), has left a comment on my post "Weekly Hurriyet Column: Happy Ramadan/Eid" about the fiscal rule, which is what tomorrow's column is about:

"Regarding a fiscal rule in Turkey, I think it's interesting to look at what is happening in Poland right now where legal safeguards kick in when public debt-to-GDP breaches a certain level.For me, Poland's example highlights that having a fiscal rule is not a panacea for solving the problem of fiscal deterioration. While there are many positives to the legal safeguards in Poland (eg increased investor confidence, less maneuver room for a spend-happy government), it appears to me that having the fiscal rule has also led to a number of smoke and mirrors tricks to get public finances into line.Plus, Poland will need to tighten fiscally at a time when unemployment is still rising.So I personally will reserve judgment on the fiscal rule until we learn more....the devil's in the details, as they say. I look forward to reading your coming article!"

I was going to wait until I got home to reply, but I liked what she was saying so much that I had to respond right away, on my Bberry- so apologies for the bad formatting.

Anyway, as you'll see tomorrow, I am more or less in line with Mary's line of thought. Other examples that could be relevant for Turkey are Hungary, Sweden, Chile (obviously, we do not have the equivalent of their copper, but theirs is a fine example of a fine-tailored rule for the specifics of a country rather than copycating) or the US, the latter for the CBO- I doubt the CBO would work in Turkey in copied in its entirety, but some parts of it are admirable.

Another point Mary raises is that we have to simply wait and see. I handed in my column an hour before she wrote, and now I think about it, I've been a bit too judgemental and unfair to the government. After all, this is something they are still working on, as Econ. Minister Babacan noted. We'll just have to wait for the devil:)

Anyway, thanks a lot Mary; great comments and highly-appreciated...
Sent by BlackBerry Internet Service from Turkcell

EconNews Roundup

SMEs in tourism areas hit by the crisis hard, reports Daily News Antalya representative. Note that while anecdotal, the piece implicitly contradicts the so-called research findings I was reporting on Wednesday, highlighting that it is really difficult to determine whether it is the SMEs or large guys affected more from the crisis.

The quick road to riches: Start up a mutual fund firm and invest in Turkey. I guess after March, you could have invested anywhere and would still have got extraordinary returns, but Turkey has been one of the high-fliers in terms of equities.

CBT President Yilmaz is the Central Banker of the year. I wonder who was voting- maybe Turkish banks and bond traders? The funnier thing is that this comes amidst the PM expressing his disdain for Central Bank independence in sheer frankness. BTW, maybe it is my memory playing tricks on me, but wasn't Gazi Ercel receiving similar awards in 2000 for the rapid inflation reduction in the tablita program at the time, before it all went bust with the constitutional (literally) crisis of 2000. Wasn't the same true in 2006 when failure to appoint a new governor following the applauded tenure of Sureyya Serdengecti coincided with a small EM bust. To be clear: I am in no way holding the CBT presidents of the time for the mishaps (there wasn't one in 2006 anyway), but there is an interesting correlation here, if not causation:)

New Kid on the Block

In addition to the weekly columns and special analytical pieces, I also work towards improving the Econ. section of the paper as an external (and sometimes internal) consultant. One of my short-term goals is to find quality columnists; for some time, I have been trying to get someone with significant markets experience. This is for my own benefit as well; once we have someone who concentrates on markets, I can turn on to more hard core Economics stuff I am more interested in rather than having to deal with currencies, rates and the like, issues on which I get a lot of reader (but not much writer!) interest.

I finally persuaded my friend Kaan to write a column for the paper, which appeared last week. It is a thoughtful piece on the current euphoria that should serve as a harsh wake-up call. I share thoughts with Kaan a lot and he is one of the few people that convince me that I am not insane in thinking we are living in yet another bubble, albeit a much smaller one than the one in 20o6. So I highly recommend his piece.

I am not sure Kaan will turn this into a regular weekly piece (I am sure the editorial would love him to, I am not sure he has the time), but I hope so, as I've found a guy who will more or less say what I would have said, and I don't have to lift a finger:)....

EconNews Roundup

Interesting take on the G20 meetings although I would not call it a crash course in global economics- it is was too specific to be that. In any case, I have been seeing some papers lately that relate the global supply chains as the primary reason why the supposed decoupling did not happen. Basically, the idea is that, using the examples in the article, if Lenovo suffers India, Mexico, Poland and China suffer; if Apple sells less Ipods, companies in South Korea, Taiwan, Singapore and Japan feel the strains...

Dr. Doom comes to Istanbul.

IMF rumblings

I am currently in the brainstorming process for an article on the IMF that will feature in a special supplement, to be prepared jointly with Daily News, Hurriyet and Referans and distributed the weekend before the meetings.

I am thinking about devoting some part of the article to misconceptions about the IMF, and a natural extension would be misconceptions on the IMF-Turkey saga. I don't know if these will feature in the piece at the end of the day, but just to set the record straight, I will address two important misconceptions:

First, the fact that I favor an IMF deal does not mean that I believe Turkey will sink without the IMF. It sure will not. It is just that an sans-program will surely be more costly than with program, especially given that there is a revamped leaner and meaner IMF out there (this is one my key themes for the column, so I won't give out any more spoilers). This is a point Econ tzar Babacan has emphasized a few times recently as well. When I say more costly, I am not only thinking about borrowed money and opportunity cost of holding reserves (wait for the column for more on these) but also the external financing and credibility.

Second, maybe it is just me but I just do not understand how Turkey could do without the IMF program if fiscal discipline was sustained. Sure, if the markets buy it, from a government (or rather PM) who has a really bad track record, facing elections in a year or two- and therefore is completely time inconsistent in terms of fiscal policy. In fact, I doubt whether the markets would even buy a constitutional fiscal rule after the PM's latest candid remarks on his appetite for Central Bank independency. Anyway, the fiscal side of the Medium-Term Economic Program has gone tangent to sustaining fiscal discipline, to use the PM's own economic phrasebook, so this argument is just academic...

EconNews Roundup

A recent study finds that job losses vary a lot by size of firm and region: I am wrestling with two newspaper columns, a PowerPoint, a project proposal and two syllabi, so I had to read through the article rather quickly. While I admire the ingenuity of looking at Social Security data, I have to say it is tough to jump to definite conclusions such as industry has shed more labor or bigger firms have adopted the crisis better later on after struggling at first. The truth is that there are huge inter-region differences, and you don't know if there are sectoral or size effects going on.

Foundations and cash cows, Turkey's latest cash cows, swimming in liquidity.

Letter to the Blogger:)

Gul, to whom I was asking to take notice in the past few blogs, responded this morning:

It turns out there are two search engines/archives in the system, one for the old web site and one for the new web site (the Daily News web site was recently totally revamped).

In fact, as Gul pointed out, a search with my name in the new archive brings up all my recent articles, even the special columns.

This solves the mystery of the missing of columns once and for all. However, I frequent the Daily News web site more than the average user, so if I am being misled, probably others are as well. Hopefully, both archives are to be integrated soon.

EconNews Roundup

Here's the wrap-up of the main Economics items just before the Bayram:

Another news item I would love to be able to quantify- just boils the academic blood in my veins, or rather whatever is left of it. Interestingly enough, such cases demonstrate how a poor approximation, at least for developing countries, the permanent income hypothesis is.

Once you taste the tax-break sweets, it is tough to let go. I believe the industry does not make a strong case, as they do not support their claims with hard facts.

What do we get out of the long-awaited Medium-Term Economic Program (MTEP)? Some controversy, better credit outlook, and uncertain IMF prospects.

While the world is locked in the US-China trade dispute, a smaller one is going on between Turkey and Indonesia.

Last but not the least, the latest CBT rate cut.

Housecleaning done!

It took me the better part of the day (OK, I was doing other things as well, like working on two bomber Hurriyet articles and a couple of syllabi), but at the end, I am done with housecleaning:

I archived the last four weekly columns as well as a special analytical piece, along with the usual accompanying commentary, and even managed to squeeze in a post or two on growth.

Starting tomorrow, it will be business as usual with the blog, hopefully...

More on Turkish 2Q GDP

One of the most interesting recent developments in Turkish GDP data has been the growing disconnect between industrial production and GDP (and GDP's industry component):

Given Turkey's past blunders with data (BTW, having spent time at TURKSTAT, I stand firm behind my lines over six months ago that the institute is really dismal), the media was like sharks smelling blood, adorning their Economics pages with headlines accusing TURKSTAT os mismeasurement and claiming a sharp revision was on the way.

What made the whole scene tragic in a comic way was an IMF report welcoming improvement in the quality of Turkey's reporting of macro data, which came out around the time of the release of the 2Q GDP data.

The truth, however, may be much less exciting: It might as well be that at least part of the discrepancy is explained by firms cutting down on their usage of intermediate inputs, at least relatively more than industrial production:

I would never, even in my wildest dreams, think of myself defending TURKSTAT. But here I am...

The case of the missing links solved

I had been complaining that my Hurriyet columns were not put in the Hurriyet Daily News web site. It turns out they have been; I stumbled upon them while looking at my latest column. However, for some weird reason, they do not show up when I do a search with my last name or just search with the title of the column. I guess there is something wrong with the search engine.

Anyway, I found out my August 31 and August 24 columns, which I were not able to link to before.

So the message for Gul is: Disregard the previous messages, the columns are there. But you need to get the search engine fixed...

On Turkish 2Q GDP

Anil, one of my few loyal readers, wanted to know how the 2Q growth figure compared to LR growth rates. As I always say, a picture is worth more than a thousand words:

In fact, you get even more insight from looking at the longer run:

Two points are in order: First, the slump of the last two quarters does not fare well in historically. Second, in the Turkish growth story, it's all about volatility. Here's a country that has a potential to grow 5-6% a year even without the much touted-for structural reforms, and manages that for a few years, only to lose all the gains in a year or two when a crisis hits. In fact, this point could be better illustrated with the the growth history of the country since the republic:

The second point leads me the comment from Eren, another loyal reader, who thought the 3.5% growth rate in Medium-Term Economic Program is not very realistic. I happen to have a similar forecast for 2010, and it is mainly because of the weak 2009 base. This also validates Anil's point that comparing to the previous year does not make sense, especially when there are huge swings, i.e. structural shifts in Econspeak. In such cases, it might be better to look at seasonally adjusted quarterly changes:

What do I get out of this? You don't need to be an economist for asking smart Economics questions. Thanks, Anil! Thanks, Eren!

Another house cleaning about to start

As loyal readers have noted, I have fallen behind in blogging.

Since Besiktas has spoiled the mood for the Bayram, I decided to use the calm news-free period to put the blog back in order.

In the next couple of hours, I'll first archive the Hurriyet columns for the past few weeks. Then, I'll go on to a couple of posts I had promised to my loyal readers Eren and Anil on growth.

Weekly Hurriyet Column: Happy Ramadan/Eid

As the newspaper did not come out today (due to the Ramadan/Eid holiday, a Turkish journalism tradition that used to be observed by all the papers until recently), there will not be a column for this week.

Next week's column will be devoted to the fiscal part of the Medium-Term Economic Program (MTEP), especially the much-talked-about fiscal rule.

Weekly Hurriyet Column: Life as a house (expert)

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. As usual, there is the cheesy movie reference, another underrated favorite of mine.

As for the column, the topic was admittedly outside my area of expertise, but given the number of questions from readers and friends on the subject, I felt I had to delve in. My friend Eren was one of the first who made me think about the topic, so I emailed him the article as soon as I had finished writing it. He thought I did a quite good job until I started talking on house prices, after which he found my style a bit wordy and my recommendation without a definite conclusion. Below is my reply to him (unfortunately in Turkish), where I discuss how I had come up with my recommendations. Anyway, Eren is right that I do not offer definite conclusions on house prices, and for good reason, as I explain below. But if my good old friend Cagatay, who is a competent real estate development manager and equally incompetent skier and sailor, gets down to work, as he promised to, I'll have something more to say soon, as we are planning on doing some research with the Garanti data.

Neyse yazdiklarina da hak veriyorum; bence de ilk yarida iyi bildigim seyleri guzel yazdim da is hem iyi bilmedigim hem de cok iyi data olmayan seylere gelince cuvalladim galiba.....Bir de tabii biraz daha vakit olsa o Garanti verisinden daha somut seyler cikabilirdi; simdi real estateci bir arkadasla onun uzrerinde biraz calismayi planliyoruz, bakalim ne cikacak.

Wordy oldugu konusunda da hak veriyorum. Bazen (mesela gecen ve evelsi hafta) cok quantitative yapiyorum da bu sefer 2 saatlik bir analizin uzerine ev fiyatlari su tarihe kadar % su kadar inecek diye cok somut ve yaniltici birsey demek istemedim. Cagatay'la calismamizdan o tip bir sonuc (her ne kadar accurate olmasa da) cikar ama onun icin en az 10 saat filan datayla ugrasmam lazim. Bu arada gercekten big picture heryerde ayni, 2007 sonrasinda fiyatlar 2008 basi peak etmis ama veri dogruysa inanilmaz semtler arasi farkliliklar var, hem de yakin yerlerde bile.... Cok sasirtici....

Sonuc olarak bence asil refinance edelim mi etmeyelim mi sorusuna net bir cevap verdim de ev alalim mi almayalim mi konusunda cok acik ve net konusmadim. Ama aslinda onun da mantigi refinace ile ayni; biraz bekle ama cok bekleme. Ama iste faizlerden fiyata etki ne kadar lag ile gelir ve de ekonomide zayiflik ev fiyatlarini dusurur mu, bu iki opposing effect nasil play out eder analizsiz kestirmedigim icin orada refinancingde oldugu kadar kesin konusamadim. Ama su gercek ki benim senaryomda en safe bet house investment; ona da elimination usulu ulastim; simdi faizler artacaksa bonda girmek zaten delilik; buyume stock positive ama cok yavas olacak ve de stock da da kurda da cok volatilite gelecek. Geriye de altin ve gayrimenkul kaldi yani.

Anyway, I've already chatted too much; here's the column:


I tend to rise to the bait when I get too many questions on a specific topic, with the latest example being housing prospects.

Of course, the main driver of the interest is the recent fall in home credit rates, and as most of the inquirers are thinking about refinancing their loans rather than buying a house, they are wondering if rates have further downside scope. To answer this question, we need to start with where it all began, the banks’ bank.

I have been arguing for a long time that the Central Bank’s (CBT) extensive monetary easing would not lead to an as large fall in market rates, and it hasn’t. One big exception has been the bond market, where knowing a continual easing is on the way, banks have pursued a gold rush into bonds, pushing yields into single-digit territory. Perversely, this mechanism has clogged the market for rates that really matter, i.e. loan rates, albeit to a lesser degree than commonly thought, as there is not much demand for credit.

The recent thawing in housing credit is due to this process ending rather than the monetary transmission mechanism’s wheels finally starting to turn. The CBT is likely to end its easing cycle towards the end of the year, and banks, knowing this, have started looking into alternatives. With the lowest potential for NPLs, housing credit is a sure bet.

It is then the very same mechanism holding back lending that has given the recent boost to housing credit. Seen in this way, it becomes clear that home loan rates have limited further room to go down until the end of the year, with the global environment, Central Bank policy and Treasury borrowing schedule, with light redemptions, all supportive. But I would not wait much longer: With the Treasury entering dangerous waters, as I outlined last week, and the economy picking up, the upwards potential for rates is high in 2010.

A simple question such as “is this a good time to buy a home?” is even more deviously complex. A coarse comparison with other countries reveals that Turkish median house price to disposable income ratio, at around six, is higher than many, but given Turkey’s demographics and the small detail that the comparison group is yet to emerge from a major housing slump, such benchmarking does not make much sense. Historical comparisons are difficult as well due to lack of data.

Using Garanti Mortgage’s price data from 2007 for the largest six cities reveals that house prices look quite reasonable compared to peaks of early last year, when looked at as simple time series or price-rental ratios. However, given that house prices are quite sticky and usually lag behind other asset prices or even economic data, there might be further downward potential. On the other hand, the key is again not to wait too long, as the lower rates will start biting into prices through pent-up demand sooner rather than later.

Complicating this analysis is lack of data on quantities, without which it is impossible to discern demand and supply affects. But available data does not point to any sudden shifts in either in the near term. Another issue is the remarkable intra-city differences, some of which hint at attractive regional opportunities.

Looking at the big picture, a house also seems like a good investment- if you share the rather gloomy economic outlook I have been outlining for the past few weeks. With the economy to recover slowly, debt worries on the way and inflation and rates poised upwards, albeit not significantly, gold and real estate look like safe bets with decent returns for a risk-averse investor with a medium-term outlook.

For gold, you also need to have a position on the global economy. If you can’t handle that, all you have is bricks.

Weekly Hurriyet Column: The year of living dangerously

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. First, I have to apologize for yet another cheesy movie reference, but this one is one of Peter Weir's underrated classics, as he is better known for Master and Commander or Dead Poets Society.

As for the column below, there have been important developments in the two weeks since I wrote this column. First, the government disclosed the Medium-Term Economic Program. As I discussed in the preface to last week's column, while the macro projections are realistic and consistent, the fiscal framework lacks bite. For one thing, almost all of the mediocre fiscal adjustment, which incidentally falls short of securing debt sustainability, is coming from robust revenue growth stemming mainly from the expected economic recovery. Moreover, this limited adjustment is not enough to ensure debt sustainability. As for the fiscal rule, I am devoting the last column of the month to that, so stay tuned.

Another theme of the column is the 2010 redemptions schedule. The Treasury got the burden off the heavy January and February with a couple of swap auctions just before the Bayram. This made sense, as market conditions were rather suitable, and unsurprisingly demand was strong.


After going over my growth and inflation forecasts last week, it is time to broaden my horizon to fiscal policy.

Fiscal policy has been off the markets’ radar for some time for a number of reasons: For one thing, the government has been able to put almost everyone in a “see no evil, hear no evil” mode with its inaction. Not only waiting for the Medium-Term Fiscal Framework (MTFF), which should have been out early summer, has started to look more and more like Samuel Beckett’s famous play, the Ministry of Finance has yet to release the July and August budget data.

There are in fact three distinctively different rationales for the unresponsiveness. One group, which I aptly term the wait-and-see guys, is just waiting for the MTFF and a concrete conclusion on the never-ending IMF saga. It is safe to assume that the government will be more punctual than Godot, but even if it isn’t, these guys will not be as patient as Vladimir and Estragon. In fact, the October IMF-World Bank annual meetings in Istanbul has emerged as a consensus deadline for both.

To give the ostriches some credit, some had been vocal with their criticism of fiscal policy for a long time. However, they too have been quiet as of late, after being burnt by their earlier calls. After all, despite the sharp budget deterioration and increase in the monthly domestic borrowing, the Treasury has been successful in rolling over debt. A case-in-point is August, where the Treasury breezed past record-level redemptions with a rollover ratio of over 100 percent and historically low benchmark rates, consequentially quieting the burnt-by-the-Treasury camp for a while.

In fact, there is a third group, which I coin the optimists, who see these easing conditions as permanent and hail them as signs of normalization of the Turkish economy. However, this argument is not supported by facts. In fact, the return of global risk appetite, full Central Bank (CBT) support and the country’s large output gap explain much of the recent fall in rates. Therefore, just as I do not see benchmark rates going below 9 percent in a sustainable manner, I see no reason to believe that the ultra-low rates are the new normal. With the output gap closing and CBT hiking rates next year, market rates are likely to head north again.

As for the high debt rollovers, with ample liquidity, not much other use for their money and a high capacity for debt absorption, banks were behind the Treasury success story. Moreover, as foreigners got out, they have been able increase their share of the bond market significantly for the past year, a process that has left the big players with a lot of market power. To top all of this, contrary to the consensus view, the crowding out has not been as large as real sector representatives claim, mainly because of a lack of demand for credit.

Without a credible fiscal framework, this fairytale will not last much longer. With the deficit set to hit 66.6 billion liras at year-end, gross central government debt will make nearly one half of GDP. As a result of the short maturity of the debt, 2010 will be tougher, as my projected 170 billion liras of redemptions are evenly distributed after a heavy first couple of months, increasing the chance of an accident somewhere down the road. In all likelihood, debt sustainability will enter markets’ radar sooner or later. Moreover, as the economy begins to stir, crowding out will start to bite.

Barring a positive surprise, I will remain convinced that 2010 will be the year of living dangerously for Turkey. Then, 2011 could be the year where things fall apart, with the government unwilling to undertake a much-needed expenditures adjustment before the elections.

Weekly Hurriyet Column: The devil wears a headscarf

Below is the unedited version of my column for this week. You should be able read the final version at the Daily News website, but again, I could not find it (Gul, I am thinking about disclosing your email and cell number so that my loyal readers can take it up with you), so if you can, please email me the link:)

Note that the government's own projections in the Medium-Term Economic Program (MTEP), which were released two weeks after I wrote this column, are more or less in line with mine, with the important exception of inflation, which I outline below in great detail. In fact, with the government projecting a budget deficit of 6.6% of GDP, it has taken my "number of the devil" pun further, so now noone can accuse me of non-PC behavior...

Unfortunately, despite the sound forecasts, the MTEP is far from quelling the devil, mainly from the weakness of its fiscal framework. I will detail what I mean in the preface to next week's column, which deals with the fiscal framework.


While updating his key economic forecasts in June, your friendly neighborhood economist stumbled upon an interesting observation.

Turkey’s holy trinity of economic forecasts was yielding the number of the beast, with my 2009 growth and budget deficit forecasts coming at -6.66 percent and 66.6 billion liras and end-year inflation expectation at 6.66 percent. After more than two months and a plethora of new data releases, it is time to go over these projections again. I take on growth and inflation today, leaving fiscal policy to next week.

The dismal first quarter GDP figures and the more recent data have, if anything, confirmed my dismal growth outlook. While it is true that private consumption and investment have bottomed out, media and economists alike seem to have been misled by the fiscal stimuli in the second quarter. With the consumption, real sector and confidence indices all having fallen recently, all we can hope for at this point is a tame W, with a small inflection point.

In the perennial optimist’s Turkish economy story, much ado is being made about nothing, i.e. Turkey’s much-hyped-about non-leveraged consumers and well-capitalized banks. However, the former will not splurge and the latter not lend unless a coherent economic framework is in place, as the latest data attest to. Even then, tighter external financing and a permanently-higher unemployment plateau will slow the speed of the recovery. I see yearly growth contraction at around 8 percent in the second quarter, hopefully with some positive surprises from housing and agriculture, and somewhat less in the third. Then, a modest positive growth in the last quarter will take us to a yearly figure of around 6.5 percent.

Unlike my growth outlook, my inflation projections need some updating, as it now seems that the country’s large output gap is here to stay for a while. Moreover, the effects of the considerable slackness in the economy, lower oil prices and the tax cuts have been larger than I had envisaged. As a result, I now see end-year inflation at 6-6.5 percent, which is still above market expectations of just below 6 percent. However, I believe I have only miscalculated the speed of the wagon, not its direction. I still see inflation heading uphill from here- in contrast to the Central Bank’s (CBT) downhill projection.

For one thing, the fiscal disarray, which I will outline in next week’s column, is bound to lead to a sharp pass-through from the higher oil prices in the coming months. Moreover, I believe that the recent weakening of the link between inflation and exchange rates is, contrary to what many economists claim, only temporary. Another misconception is attributing the recent taming of durable goods inflation solely to the output gap without acknowledging the contribution from tax cuts and inventory drawdowns, which are already over.

Once producers get some pricing power, probably during the last quarter of the year, exchange rate pass-through will return with a vengeance. Further complicating this gloomy picture are inflation expectations, which have proved to be quite sticky. The devastating effect expectations could have on services inflation over the medium-run is overlooked by many economists, partly owing to the CBT’s downplaying of this mechanism. As a result, I see inflation heading north rather than south in 2010. All this means that despite CBT’s assurances in its latest Inflation Report, policy rates will probably have to be moderately hiked next year.

My number of the beast forecasts have not changed by much. But at least we have just the right government to quell the devil; hopefully, it will be with the much-awaited economic framework.

Speacial Hurriyet column: An industrious look at industrial enterprises

In addition for the weekly columns, I also do special analysis pieces from Hurriyet from time to time. I wanted to do an analytical piece on the Istanbul Chamber of Commerce (ISO) Top 500 Industrial Enterprises survey when it came out in July, but then decided to wait on for the second-500 list to be able to work with more data. I did the analysis with Ahmet Asarkaya, a very able ex-student from my teaching days at Izmir, who now happens to work in Turkey Data Monitor.

Anyway, as is the norm, below is the unedited version; you can read the final version at the Daily News website. One big difference between the two is that since the editors decided it, unlike my weekly would not be an opinion piece, the first person narrative had to be transformed to third person.

I am big fan of of the maxim "a picture is worth more than a thousand words", so below are the figures that go with the piece; the paper could only publish the second one due to space limitations.

Last but not the least, I learned by chance that ISO only publishes some of the data they collect; in fact, they get detailed balance sheet info, which would make their data the best panel data on Turkish companies. I am in talks with them to use the data for research, and if they agree, I and Ahmet plan to do more, especially interesting panel regressions. So you'll probably hear more on ISO data from me soon.




On Wednesday, Istanbul Chamber of Commerce released the results of its Turkey’s Next Top 500 Industrial Enterprises 2008 Survey.

The survey and its big brother covering the first 500 firms, which was made public a month ago, make up one of the best panel datasets of Turkish firms, so we had always been a bit disappointed by the indifference of academics and media alike towards them. While we have yet to see serious academic work making use of the surveys, the crisis has brought unprecedented media attention. Late to the game, we would like to highlight some of the uncharted results and dispel some chronic myths.

One of the recurring themes of the data is that big is beautiful. The top 200 firms are more than five times more productive (in terms of value added per worker) and profitable (as measured by return on assets, or ROA) than the bottom 200. More surprisingly, these much-publicized findings seem to be a result of aggregation more than anything. There is hardly any correlation between size and productivity or profitability, and whatever there is completely disappears once you account for sectoral differences.

Big is not only beautiful, it is also lean and mean: While the main take of the survey by the press, that Turkish industry has been devastated by the crisis, is unfortunately true, as depicted by the record decrease in profits (16.5%) and increase in losses (150.4%), larger firms have been able to relatively shield themselves (at least compared to their smaller counterparts), not only in this crisis, but also in the 2001-2002 episode. To illustrate, while the top 200 saw its profit margin decline by 2.6% from 2007 to 2008, the same figure is 3.7% for the bottom 200.

The dismal state of the smaller firms would be a just cause for concern, as they are arguably much more representative of the country’s small and medium-sized enterprises (SMEs) than the powerhouses in the top 500. But interestingly enough, it is the middle-pack that is displaying the largest declines in some negative performance scales. This surprising result is actually in line with previous findings, notably in the World Bank Investment Climate Assessment Survey of 2005, which found out that middle-sized lack the muscles of the behemoths and the flexibility of the SMEs. Then, maybe, big is beautiful, only if you are big enough.

One group that should have been affected disproportionately from the crisis is exporters: After all, with Turkey’s main export markets hit hard by the crisis and export volumes having registered sharp falls after the first quarter of 2008, one would expect exporters to be utterly devastated by the crisis. In fact, they are anything but, at least the ones on the ISO list, who have been able to maintain their ROAs and actually increase their profit margins. While deeper analysis is needed, we suspect a selection bias is going on, with the ISO list featuring crème de la crème of the exporters; the ones that have been able to rapidly shift their markets.

In a similar fashion, foreign-owned firms, as defined by non-domestics owning more than 50% of the firm, have been able to shield themselves better from the crisis as well. In general, these firms are also more productive than their domestic-own counterparts. But correlation should not be confused with causation: It could also be that better-managed firms attract foreign capital. However, a closer look leads us to partially reject this hypothesis, as foreign-owned firms are not that different from their domestic counterparts before they are acquired. Foreigners do not work their magic immediately, either: We found no difference in terms of profitability and productivity in the couple of years before and after a firm is acquired. The benefits seem to come later on.

There are nevertheless important sectoral differences as well. For one thing, all but two sectors (mining and electricity/energy) have seen their profit margin and ROA fall from 2007 to 2008, with the sharpest falls being in paper products (which include the newspapers to our dismay), textiles and food & tobacco. The latter is one hell of a surprise, as it has been touted in the media as rather unscathed from the crisis.

One important disclaimer of all this analysis is the timeframe of the survey. Since last year, we have seen a record-level growth collapse in the first quarter. But we have also witnessed temporary stimulus measures in certain sectors resulting in a likely quarter-on-quarter positive growth in the second quarter. It will be interesting to see how these factors have played out in the top-1000 industrial enterprises this year.

One of the authors of this study painted a rather contrarian view of the tourism sector in this paper titled For whom the bells toll? some time ago. He now completely regrets for having already used this title, which belongs more with industry. Compared to industry, tourism is in one great party.