EconNews Roundup

TURKSTAT has released the latest seasonality/ working days adjusted October Industrial Production and 3Q GDP data.

Economic summary of the year, to which I would also add the never-ending IMF saga.

The national minimum wage (as opposed to regional) is one of the craziest results of statist and centrist policymaking.

This will be the last EconNews Roundup of the year; see you next year:)

It seems you can fool some people sometimes, but...

it seems you can also fool all people all the time. At least that's what I have got the latest IMF rumors.

Following Econ tzar Babacan's comments on the possibility of a deal with the IMF, where the tzar actually did not say anything we did not already know, rumors spread that PM Erdogan had disclosed the government and the Fund had come to an agreement at an internal AKP meeting last night.

The tax hikes announced today only spiced things up, as they were seen as the government's efforts to bring the fiscal books agreeable to the Fund, even though it was clear from the 2010 budget figures that tax rises were on the way, as I had argued in this week's Hurriyet column.

To sum up, developments of the past 24 hours, did not add much new to our information sphere on the IMF front. But Turkish assets surged nevertheless, with the benchmark rallying 75bp in the course of about 24 hours, before settling at (and closing the year at) 8.9%.

By stating boldly that the markets are being fooled again, I realize that I might be able to eat my words. But followers of the never-ending IMF-Turkey saga have seen this exact ploy play out at least a dozen times in the past couple of years.

If there is indeed a deal this time around, fine. In fact, I'll be happier than most, as I have one of the gloomiest scenarios for 2010 and believe that an agreement will be extremely beneficial for the Turkish economy.

But all I'm saying is that we have been fooled before many times, especially when Turkish assets don't seem to be performing well. I don't want throw baseless accusations and causation is not correlation, but if you just take the statistician's point of view the negative correlation between IMF-deal rumors and negative Turkish asset correlation in the previous two weeks will be jaw-dropping. I promise I'll provide some numbers if I decide to take this issue in my Hurriyet column next week.

Some holiday humor

Word is spreading that there is an economist called Emre Velideli who worked with Bernanke at Princeton.

You'd say someone reversed my last name, except that I have nothing to do with Princeton, other than having visited my friends there a couple of times and my "Hahvahd sucks, Princeton doesn't matter" t-shirt.

In fact, Refet Gurkaynak of Bilkent did indeed work with Bernanke at Princeton, but I have no idea how I got mixed up with him, while at the same time managing to get my last name reversed.

Having said that, it would have been really hilarious if there were an economist called Emre Velideli who had worked with Bernanke at Princeton:)...
Sent by BlackBerry Internet Service from Turkcell

EconNews Roundup

Extensive interview with Isbank CEO Ersin Ozince. Note that a simple financial programming exercise reveals that with the tight liquidity I project for 2010, the 15% target is quite challenging, although I am only speaking for the overall sector; I wouldn't know if Ozince plans to pull rabbits out of his had; after all, as I had discussed before, state banks have responded quite differently from private banks on the credit front this year. Also interesting are comments that banks make money when interest rates are moving down but not when they are stable or on upwards trends. As I was arguing a couple of days ago, my retail banker friend is quite happy with my interest rate projection for next year. Anyway, as I mentioned on Monday, I'll come back to this in a couple of weeks.

In a similar fashion, TSKB hopeful for Turkey as well.

Turkish economists continue their interest in the Familiar Mediterranean Disease...

Weekly Hurriyet Column: Year of easing comes to an end

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. I was too tired to come up with a cheesy title this time around. As for the article, one interesting follow-up question from a reader was on the impact of my scenario on banks: It was banking on rate cuts this year, and with that trend reversed, the obvious conclusion is that 2010 will be tougher for the banks.

It may well be, but the answer is not so obvious. For one thing, it is obvious that it won't be the bonds that are will be the driving force of bank profits, but retail. In fact, a senior retail banker friend is crossing her fingers for my scenario to materialize, as it will mean more profits for her group. As for the banks' balance sheets (and the bonds that they carry) a closer look and anecdotal evidence reveal that banks have been successful in shifting some of their load to variable-rates and inflation linkers, so they will not be as vulnerable as commonly expected to the rate hikes.

On the other hand, contrary to common wisdom, I expect credit to stall: Tight liquidity, heavy Treasury redemption schedule crowding out lending and increasing NPLs will be the key characteristics on the credit front, aggravated by some legal factors. But you will have to wait until either the next column or the one after that for the full story on that...


By keeping rates on hold at the last Monetary Policy Committee, or MPC, meeting two weeks ago, the Central Bank, or CBT, officially brought its year of easing to an end.

While the Bank is signaling its intention to hold the policy rate at the current rate of 6.50 percent for a long time, no one is buying. According to the CBT’s bimonthly survey, the policy rate is expected to be 8 percent in a year. A 1-1.50 rate hike is also penciled in most analyst reports, with rate hikes starting in the last quarter. The markets are even less kind, with cross currency swaps or benchmark bonds pricing in a tightening of 2-2.5 percent over the course of next year.

To be able to decide who is right, one first needs to understand how the CBT was able to cut rates much more than envisaged by anyone. For starters, arguing that the Bank just hopped on the global easing bandwagon would not explain why the CBT managed to decrease rates more than most other major Central Banks.

The major factor seems to have been the deep recession, which not only decreased inflationary pressures directly, but also reduced exchange rate pass-through to prices, which had been a major nuisance for the Bank in the past. The CBT was also definitely helped by unexpected (and unexplained) foreign currency inflows, which kept lira depreciation relatively contained after the Lehman collapse. With the economy starting to recover and the so-called UFOs, or unexplained financing objects having stabilized, it will be an entirely different ballgame next year.

Moreover, CBT’s key justification for holding rates, the large output gap, could be tested on two fronts in 2010. First, the latest data paint a mixed picture on the speed and strength of the Turkish recovery. While this is definitely not my base-case scenario, a pick-up quicker than as foreseen by the Central Bank would mean that inflationary pressures could be building up earlier than expected.

In fact, even with a slow recovery, the economy could be heating up unexpectedly if the country’s output gap turns out to be less than the Bank’s estimates. Some recent Fed and IMF papers argue that deep contractions lower potential output, and the sticky unemployment rate offers some early alarm bells that this could be the case for Turkey as well.

To make matters worse, as Central Banks around the world, especially Turkey’s peers, start to tighten, keeping rates on hold will be increasingly difficult for the CBT, as it could not only create pressure on the lira but also hurt the Bank’s credibility.

Speaking of credibility, the Bank is likely to face an uphill battle managing expectations next year. Rather than being supportive of monetary policy, fiscal policy, with the heavy redemption schedule early in the year, is likely to add to inflationary pressures.

While the government has not disclosed much, doing the math from the budget figures reveals administrative price and excise tax hikes are in the pipeline. This, coupled with base effects, means that inflation will be climbing in the first half of the year, which could also destabilize inflation expectations.

Last but definitely not the least, although most commentators ignored it, the lax medium-term inflation target, as outlined (but not fully justified) in the latest Monetary and Exchange Rate Policy report, could turn out to be a real obstacle to anchoring expectations.

The Central Bank will certainly try to postpone the rate hikes as long as possible. But I doubt that they will be able hold on until the last quarter, and may begin hiking rates as early as the second quarter.

Then, we’ll see who is right on the amount of the tightening, but I am putting my money on the markets this time around.

EconNews Roundup

Standard Unlu has revealed its forecasts for next year. Although it is not in the article, they expect the Central Bank to start hiking up the policy rate in the second quarter, which is earlier than consensus expectations but in line with the view of your friendly neighborhood economist's outlook. This is, BTW, the topic of next week's column.

A new regional survey says that Turkey is supposed to be the first country to overcome the crisis in the region. I have yet to see the study, so no comment for now...

...But in the meantime, two thirds of Turkish companies were in hiring freeze during the crisis. So if this and the former study are both right, these Turks must be crazy- or maybe, we are talking about a jobless and joyless recovery...

On Turkish Regional Unemployment

TURKSTAT just released employment statistics by province for the very first time, as summarized very neatly in the Hurriyet Daily News. I could devote pages and pages to discussing the statistics, but I think the single most important observation could be summarized by comparing Northeastern and Southeastern Turkey, with the former having high participation rates and low unemployment and the latter vice versa.

It is interesting to note that both regions are characterized by poverty, but in NE, poverty has been working in favor of the region's unemployment statistics, as a huge migration has taken place to the nation's large urban centers, especially to Istanbul. Whereas there has been migration to the metropolitan areas from SE as well, there has been also considerable migration from the villages to the region's towns and cities as a result of the armed conflict with PKK, aggravating poverty and unemployment in the region. It should also be noted that agriculture is the main culprit behind NE's high labor force participation, as everyone works in the fields and gets subsistence living. It is tough to get the same effect from livestock, SE's bread and butter. It is also tough to raise livestock in the middle of armed conflict, I should say.

I should stop here because this piece is becoming a tad bit too political for my taste; besides, I don't want to be an Ergenekon casualty:) But all this has made me remember a nice little anecdote: While we were visiting him for the World Bank Higher Education Report, a prominent labor market economist (whose name I can't reveal, as I have not asked for his permission) told us (me, a couple of World Bank officials and a couple of other consultants) that he had tried to work with the same surveys these unemployment statistics are coming from some time ago, but TURKSTAT had offered him the surveys without the city codes. When he inquired why, he was given the following response: "If you calculate unemployment rates by province, the results may cause separatism." I guess the idea was that higher unemployment rates in the East and Southeast (as if we didn't know) would cause unrest and cause separatism.

Well, times have changed, now it seems TURKSTAT is advocating separatism itself:) A small side effect of AKP's demokratik acilim perhaps:). But given my response to the data, maybe TURKSTAT was right after all:)...

If this all sounds funny, note that, around the same time, an expert at the State Planning Organization was against planting trees in the SE because terrorists could hide in them. Then, this will all seem tragi-comic.

BTW, my own travails with TURKSTAT warrant a separate blog entry (or several), but all that will have to wait for now...

Weekly Hurriyet Column: Familiar Mediterranean Disease

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. For a change, I am giving up the usual cheesy movie reference in favor of a cheesy medical reference. As for the article itself, Gillian Tett reports that now banks are starting to worry about sovereign risk. As for Greece, its budget cut process has begun. And I argue in my piece, despite Greek claims their austerity measure is better than Ireland's, the latter seems to be doing a better job in swallowing the pills. Now that I have vindicated myself, on to the article:


The Greek fiscal tragedy next door entered a new phase last week when Prime Minister Papandreou announced the government’s austerity measures, which markets did not buy.

The PM’s speech, involving flashy phrases reeking of symbolism such as “the country must change or sink” or “we must embrace Spartan austerity”, was reminiscent of King Leonidas egging his 300 Spartans on to battle at Thermopylae. Equally encouraging was his admittance that the country’s woes go far beyond public finances.

Even if you dismiss his emphasis on corruption as an attempt to build consensus for unpopular reforms, competitiveness and higher education are two areas begging for reform. Compared to its counterpart across the Aegean, the Turkish Statistical Institute looks like a pillar of integrity, which has led Finance Minister Papaconstantinou to set up an independent statistics agency. Then, why did markets shrug off these gallant efforts and S&P downgrade Greece, following in Fitch’s footsteps?

For one thing, there is a tilt towards rosy estimates of revenue increases and new revenue streams rather than expenditure cuts in the government’s plan. As for the cuts, and most of the measures for that matter, there is worryingly little detail. And despite the PM’s assurances of pay freezes and decreases in allowances for civil servants, there is still talk of public-sector wage hikes in 2010. To add insult to injury, Greece seems to be suffering from lack of credibility.

But Greece is not alone. Italy, Spain and Portugal face a challenging year ahead as well. A case that has been off the markets’ radar for now has been Portugal. With the 2010 budget deliberations finalized in January and with a high rollover program for next year, it is conceivable that Portugal will be the second member of the PIGS to feel debt pains.

Another case of market ignorance, approaching delusion, is Turkey, with the latest budget figures declared positive by almost all the foreign outfits. With the sharp rise in yields earlier in the week having offered tempting buying opportunities, I would have claimed they were simply talking positions were I not such a good-mannered gentleman. While a couple of quick calls to bond traders did confirm large foreign names on the buy side, I’ll just wait for the official statistics.

To move from the trees to the forest, as Barclays Capital highlights in a recent note, the IMF, OECD and European Commission have identified that successful fiscal consolidation depends upon current expenditure cuts as opposed to revenue increases, including social spending, sometimes accompanied with a fiscal rule or multi-year target.

In practice, as BarCap notes, this implies that civil servant wage and social benefits cuts as well as pension reforms are key elements of successful fiscal adjustment. On the other hand, adjustments that would rely solely on duty hikes, indirect tax increases, fiscal fraud measures, or “savings” without any specification are unlikely to qualify as rigorous.

When you look at fiscal consolidation efforts through these lenses, it becomes clear that Latvia, Hungary and Romania are on the right path. And despite Papaconstantinou’s claim to the Financial Times that the Greek deficit reduction plan was more aggressive than Ireland’s, the latter surely wins more check based on the criteria above.

And this is also exactly where the 2010 Turkish budget gets it all wrong with its knockoff fiscal measures and over-optimistic revenue projections. Moody’s recently warned that 2010 could be the year of sovereign risk if developed countries could not get the timing of exit strategies right.

If that happens, Turkey could easily find itself at the PIGS’ tails.

Interesting Picks

In the same of revitalizing my popular interesting picks, although I still have not been able to return to tracking the blogosphere yet:

Interesting distinction between liquidity and monetary policy- a distinction our Central Bank has not willing to do. And perhaps rightly so: As I note in my weekly column (have mentioned repeatedly ever since the bond-buying business came up), the risk that its liquidity measures will be perceived as fiscal accomodation or debt monetization are much higher in Turkey, although they are by no means negligible in the developed countries either.

A few hours after I posted on the need for fiscal consolidation in Greece, Portugal and Turkey, Greeks announced their consolidation plans, which seem to far from satisfactory.

EconNews Roundup

I have been struggling between the desire to do a daily news summary on the Turkish economy and the absence of enough items in English to do a daily. I decided to "solve" the issue by reporting on items on the Turkish economy besides the news such as research and policy papers. I also plan to revitalize the international version soon, which I will continue to call "Interesting Picks". So no more "Interesting Picks Turkey", which are now integrated into "EconNews Roundup". So, here it goes:

A new Central Bank paper on durable goods price dynamics; the surprising result is that FX does not play an as large role as I would have expected (in Turkish only).

In my piece on Portugal yesterday, I compared how Portugal, and Greece for that matter, resemble Turkey in their knockoff fiscal measures. As loyal readers would know, lack of a credible fiscal consolidation is one of the recurring themes in my Daily News columns. Mary Stokes of RGE has managed to squeeze all my arguments and more into a well-written piece: There is even a reference to your friendly neighborhood economist (fee-based service).

Simulation to help prevent future crises- with some Turkish help...

When the latest statistics are released, we are likely to see that unemployment is on the rise, at least for seasonal reasons.

IMF emphasizes social security and informal economy key issues that need to be tackled.

The surprise rise in industrial production (from last week); for my take on this, see my latest column.

Weekly Hurriyet Column: Box of bittersweet chocolates

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. As you can see, I could only last two weeks without a cheesy movie reference of a title, and this one is one of my all time favorites.


As a great American philosopher once said, life is like a box of chocolates; you never know what you are gonna get. That’s certainly true for Economics, as I found out after last Thursday’s busy agenda.

While third quarter growth came in slightly better than expected, consumer demand is still weak despite all the tax incentives. And although its rate of contraction is decreasing, private investment remains low notwithstanding the encouraging upward crawl in machinery investment. Without a significant improvement in consumer confidence, capacity utilization or the uncertain outlook, it is not realistic to expect strong investment spending.

Moreover, revisions to the first two quarters have decreased the unexplained gap between the manufacturing component of GDP and industrial production. As third quarter manufacturing is also out of whack with the quarter’s production figures, I would not be surprised to see the third quarter growth figures revised down when final quarter data are released.

Speaking of inconsistencies, November capacity utilization was a wake-up call to those rejoicing over Tuesday’s surprisingly strong October industrial production reading. It is nevertheless a welcome development that manufacturers are becoming more positive on domestic demand. So are the CNBC-E consumption indices for November, which are creeping up. In sum, the latest real sector data, while all but rule out the dreaded W recovery, do not offer more than a very gradual revival.

As for the main events of the day, the Treasury and the Central Bank noted, in their annual Financing and Monetary Programs, that their baseline scenario is one without an IMF program. But even a casual look at the Financing Program reveals exactly why the IMF program would be a good idea. With lira rollover ratio at over 100 percent, fiscal dominance could be a drag on growth.

In this sense, the continuation of loan growth, to which Central Bank President Durmus Yilmaz alluded during the press conference for the Monetary Program, is a bane disguised as a boon. Crowding out has not been a real issue so far, as loan demand has remained weak. Thursday’s weekly lending data hint that potential borrowers will hit Chinese walls early in the year, when the Treasury’s redemption schedule is the heaviest.

Another case for the IMF could be built from the balance of payments. While Thursday’s surprisingly large October current account surplus will likely be revised downwards, as has been the case for the last three months, traces of the challenging external outlook can be seen in the capital account.

The weak FDI and portfolio flows, corporate deleveraging and normalization in net errors & omissions all seem to scream that, contrary to what many –including Fitch- claim, external financing will be challenging next year. The dismal capital outflow outlook also supports the tight liquidity argument, as it is not realistic to expect a large monetary expansion, and therefore an increase in financial sector’s debt absorption capacity, without an increase in net foreign assets.

In this sense, the Central Bank’s insistence that its bond-buying has nothing to do with the liquidity shortage is truly remarkable and equally understandable, as it would be disastrous if its actions were seen as fiscal accommodation. Although the Bank has deserted the earlier collateral argument in favor of technical reasons, Yimaz spent a lot of time at the press briefing talking about the liquidity squeeze, which he expects to materialize later in the year than I foresee.

It appears that Thursday’s box of chocolates was a mixture. While most commentators have tasted the sweet ones, I have been blessed with the bitter.

Next up, Portugal?

Surprisingly, it has not been Spain that got the most spillover from Greece's woes, but its neighbor in the Iberian peninsula famous for its sweet wine and most overrated football player. In fact, according to Nomura, this isn't a surprise, as they note:

Recall the Socialist government was returned to power in the September elections and promptly revised its 2009 budget deficit forecast to 8.0% from 5.9%. While much lower than the revisions that occurred in Greece, the situations do have clear similarities. And with 2010 budget deliberations not due to be finalized until January, we expect this to come much more into focus. We also see Portugal as one of the higher-risk credits on the score of rollover burdens, with a higher proportion of its debt to be recycled over in the coming year.

The graphs below are from the same research note and summarize not only Portuguese bonds' relative underperformance, but also note that the future looks challenging as well.

I don't want to relate everything to Turkey, but when I also think about Ireland and Latvia, whose bond markets have been doing relatively well of late, I tend to think that it is after all, mostly fiscal, as the IMF stands for. After all, Spain and Latvia have managed a fairly bit of fiscal consolidation. According to a recent research note from Barcap:

The IMF, the OECD and the European Commission have identified that successful fiscal consolidation depends upon current expenditure cuts as opposed to revenue increases, including social spending, sometimes accompanied with a fiscal rule or multi-annual target. In practice, this implies that civil servant wage cuts, social benefits cuts and pension reforms are key elements for a successful fiscal adjustment. Adjustments that would rely exclusively on duty rises, indirect tax increases, or fiscal fraud measures or “savings” without any specification are unlikely to qualify as rigorous.

When you look at Ireland and Latvia, you see that they have engaged in the right kind of fiscal consolidation, as this is exactly what they have been doing. And this is also where the 2010 Turkish budget gets it all wrong!

I think I have found the topic for next week's column already:)....

All missing columns posted, finally:)

I just posted the last missing December column, the one from last week. In fact, I even managed to squeeze in a news summary in the process.

As I had already posted the missing November columns yesterday, the blog is officially up-to-date. And I intend to keep it that way this time around:)

EconNews Roundup

I think that Turkish banking will become a barrier to the recovery, rather than for the crisis, as I argue in tomorrow's column, but in any case...

I also summarize my take on the 2009 Treasury Financing and Central Bank Monetary Policy programs at my column.

One of the byproducts of these programs was that we now know that both the Treasury and the Central Bank have a sans-IMF baseline scenario- also in my column tomorrow.

TUSIAD is right to note that uncertainty and unemployment are likely to be two of the biggest challenges of the Turkish economy in the near term. As I discuss in tomorrow's column, both are also key factors affecting private investment spending.

Enough shameless self-promotion: A recent survey on changing consumer opinions/behavior during the crisis.

A jargon-buster (thanks to David and Michael for reminding me this great term) on ratings. You can see my take on the ratings upgrade at last week's column, which assumes a basic knowledge about ratings, so this piece is kind of prerequisite on my column:)...

Missing November columns posted

I finally managed to post (and archive) the three missing columns from November (9th, 16th, 23rd; all at the respective dates). If you have already read them, the final one includes a lot of additional footage, so you might want to have another look at that.

To make sure those who are seeing these columns for the first time do not feel intimidated by the large flow of articles, I'll wait a day or so before I post the missing December articles.

Until then...

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: Despite Fitch’s sales pitch, Moody on Turkey

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. I was able to come up with a second sans-movie reference cheesy title in a row:) As for the article, although I did try to assume readers might not be familiar with CDSs, I was not able to build from ground zero, i.e. sovereign ratings due to space constraints, meaning I had to assume that readers are familiar with ratings. Luckily, a recent article from the Daily News summarizes neatly all you need to know about ratings. So it is a nice complement to my column...


No sooner had the ink dried on my claims that Turkey’s fiscal position was being judged too favorably that Fitch upgraded the country’s long-term foreign currency rating two notches up, bringing it to just below investment grade.

It is not often that one’s writings get refuted so quickly, so I had to take a look at the rating agency’s press release. Unsurprisingly, the country’s resilience to the financial crisis as well as its strong credit fundamentals and debt tolerance were at the forefront. After all, a rating, whether for a company or a country, reflects ability to service debts.

More surprisingly, Fitch also mentioned the country’s downwardly mobile trio of inflation, current account deficit and interest rates as well as its strong banking sector and ability to survive without an IMF bailout. It is true that the trio is on the fall, but all for the wrong reasons.

As I reported earlier, statistical analyses reveal that at least half of the fall in inflation is due to global developments, while the ultra-low demand, which has stripped firms of their pricing power, has kept domestic components of inflation tame. In contrast, it was a challenge to keep inflation at single digits even with very high real rates before the crisis.

Similarly, the Central Bank just hopped on the global rate reduction bandwagon, taking advantage of the fact that domestic foreign currency positions’ buffer role against a scramble for foreign currency. One needs only to remember 2006, when a sudden dry-up of portfolio flows and sharp exchange rate depreciation led the Bank to hike rates 4 percent.

As for the current account deficit, it has fallen because the economy has been contracting, and there is not much of a financing requirement as before. For the better or the worse, Turkey’s current account deficit is a structural phenomenon, as the Central Bank papers I outlined two weeks ago show. Although Fitch notes the exchange has adjusted to a more competitive level, price-fixing is hardly the long-term solution to the deficit.

In fact, even if you take Fitch’s arguments at face value, you also have to weigh in the empty half of the glass, and this is where the country’s dismal growth performance comes in. Thursday’s third quarter growth release will secure Turkey’s place among countries most affected by the crisis. Moreover, leading indicators such as purchasing managers and real sector confidence indices are hinting to a slow recovery.

While a rating agency will not be too worried about staggering growth, unless there is a growth collapse, it will even care less about unemployment. For a country of Turkey’s demographics, next year’s expected 3-4 percent growth rate will not be enough to bring unemployment down.

Then, the billion-dollar question is, with elections looming, how far the government can resist to fiscal expansion. But even without such scenario analysis, the fiscal position is in dire straits as it is. With another year of more than 100 percent rollover on the horizon, a tough year awaits Fitch’s mighty Turkish banks as well as their borrowers who will be scrambling for credit.

To its credit, Fitch does mention its worries over the public finances. In fact, while it is true that Turkey has not needed an emergency bailout, the inability (or unwillingness) to reach a deal with the Fund reflects precisely such concerns. And it is also why Moody’s had signaled earlier that it wanted to wait for evidence on fiscal tightening, although at the end, it and S&P will probably have to follow suit and upgrade Turkey by one notch.

But it may pay to be moody on Turkey for now, at least until Thursday, which might be judgment day for the economy’s fate next year.

Weekly Hurriyet Column: Greece stuffed on turkey day

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. As you can see, I am quite capable of coming up with cheesy titles without any movie references:). Also note that the copy editors caught FeneVbahce and corrected it, to my dismay:). But as long as Azize continues with the whining, fenev will always be fenev:)...


Two remarkable events marked Wednesday night, as Americans were getting prepared for the annual stuffed turkey with cranberry sauce feast.

First, your friendly neighborhood economist’s team Besiktas beat Manchester United 1-0 at Old Trafford after a 3-0 easy home win over Istanbul archrivals Fenevbahce over the weekend. Around the same time and (almost) equally noteworthy, Turkish credit default swaps, or CDSs, at just below 200 basis points, traded flat with Greece’s for the first time ever.

CDSs are derivatives that insure against losses stemming from a credit event. In the context of a country, this translates into a contract that protects against a bond default by that country. A spread of 200 basis points means that it costs 200,000 dollars to insure 10 million dollars of debt.

It then follows that CDSs are an indicator of the market's current perception of sovereign risk. Moreover, it is quite straightforward, after assuming an expected recovery rate, to quantify that risk by calculating the default probability implied by the spread. A 20 percent recovery rate, the market convention for the quotation of many CDS contracts, yields an annual default probability of 2.1 percent for a 200 basis points spread.

This may not seem much, but it is complete catastrophe, to paraphrase Nikos Kazantzakis’ Zorba, if you consider that Greek CDSs were at 5 basis points merely a couple of years ago. In fact, the recent equalization with Turkey owes much more to the upward trajectory of Greek CDSs than to a downward move by their Turkish counterparts, which, despite having moved down from early-year highs of around 500 basis points rapidly during the great spring liquidity flush, have nevertheless been hovering around 200 basis points since mid-summer.

It is important to note that such an interpretation is a little bit simplistic. For one thing, the CDS market, despite its sheer size, is rather illiquid, and according to data from Depository Trust and Clearing Corporation, a clearing house for over-the-counter derivatives, Greek CDSs have been particularly illiquid recently, which means that prices can swing wildly on low volumes.

Even if you adjust for liquidity, you have to remember that CDS spreads also depend on global factors. For example, in my previous life as a bank economist, I and my coauthor Ilker Domac found out that US interest rates and global risk appetite weigh much more on Turkish CDSs than domestic developments. In fact, sovereign CDSs tend to move together a lot although country-specific factors do affect long-run trends and structural breaks.

The sharp rise in Greek CDSs in the last few days owes mostly to Dubai World’s six-month debt standstill. But this still does not tell us why Greece responded to the Dubai jitters more than its peers in the EU, or even Turkey. According to Financial Times’ Gillian Tett, the answer lies in what she coins as the perception of tail risks. Such black swans, as I like to call them, in homage to Nassim Nicholas Taleb, have been off the charts for some time, and Tett is right to note that Greek CDSs have acted as a painful wake-up call.

But unlike Tett and Royal Bank of Scotland’s Tim Ash, whose comments appeared in the special Bayram Edition of this paper, and despite my flashy title, I do not think Turkey compares that favorably with Greece fiscally. It is true that as Ash notes, Turkey’s absolute numbers look much better, but I have been arguing for a long time that simple debt to GDP ratios do not make much sense.

Unfortunately, Turkey’s fiscal position and its implications are harder to decipher than Greece’s, which partly explains the favorable view. This is where I will pick up next week.

Weekly Hurriyet Column: Cry, the beloved country

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. Two weeks of non-cheesy titles were more than enough for me, so I returned with a vengeance: A movie reference that can double as a literary reference. As for the column, I was originally planning to devote the column solely to the two papers, but I was really disturbed by the lack of an intellectual debating platform, so I had to digress a bit and talk about broader issues. Besides, I wanted to wait for the complete papers to do a fair evaluation. Speaking of which, the Central Bank's only fault at this process was not to publish these papers on the day of the conference. I understand their concerns, but the critiques should understand that a CBT working paper should not bind CBT policy, the same way as an IMF working paper would not bind the Fund. The Fund has policy papers for that purpose, and the CBT has documents such as Inflation Reports or annual Monetary Policy Reports. These are the documents that tie CBT policy.

As for the papers, I already have one of the them, which I plan to read carefully in the next couple of days (mid-December). But from the presentations and reviewer comments, it seemed to me that they are far from perfect. For example, as Kamil Yilmaz of Koc University noted, the first paper could be showing scale economy-related specialization and high prevalence of intra-industry trade in developed countries. Or as Cevdet Akcay of Yapi Kredi Investment noted, lack of production of intermediate and investment goods should not lead us to dismiss price-related issues. After all, the reason those goods are not produced might be because they are simply too costly to do so. But then again, the exchange rate is only one of the many factors that affect production cost. I could go on and on. But the point is that the critiques do not mention these points, choosing instead to hide behind old hats such as the imaginary high interest-low exchange rate policy... Anyway, just read and decide for yourselves:


I would have never thought that a couple of working papers in a conference would steal the Economics agenda of a country for a good couple of days.

But when the country in question is Turkey, and the papers are by researchers from the Central Bank, the institution everyone loves to hate, on one of the most, if not most, polarized economic debates, explaining the country’s growing trade deficit, anything is possible. The conference, Structural Transformation in Foreign Trade: Global Dynamics and the Turkish Economy, consisted of presentations of two yet-unpublished Central Bank papers as well as a panel discussion on world trade and Turkish economy in the aftermath of the global crisis.

The first paper attempts to place the trade deficit in the context of global developments. By separating sectors into intermediate and final goods, the authors show that the increased import requirement of exports, deemed as the gangrene of Turkish industry, is not a development specific to Turkey at all. It seems that vertical integration and global supply chains have led firms in developing countries more dependent on imports of intermediate goods for exports. But this does not explain why Turkey has the highest intermediate goods imports for a unit of exports.

This is where the second paper comes in: Asking 145 firms why they import intermediate and investment goods, the authors stumble upon the surprising result that insufficient domestic production of these goods and the need for high-quality products come out at top. These results were unsurprisingly not well-received by exporters and the government, who have long been accusing the strong lira.

While it is difficult to do a complete evaluation without reading the papers, the need to move beyond the exchange rate towards more comprehensive discussions is clear. But even at a more basic level, I have yet to grasp why running a trade deficit is inherently evil. After all, as Martin Wolf noted during my interview with him for this paper at the IMF-World Bank Conference, capital should be flowing to where it has most use and help shift growth towards consumption.

Similarly, I do not understand why the benefits of a strong lira are not put to the table as well. For example, I have yet to see a discussion, with the possible exception of a couple of thoughtful pieces I referred to in my discussion of the structure of Turkish private savings last month, how much the exchange rate has contributed to what I deem, in homage to New York Times columnist Thomas Friedman, the democratization of consumption, by boosting the purchasing power of the country’s burgeoning middle class.

It is no coincidence that it is the labor-intensive sectors that are hurt most by the strong lira, according to the Central Bank survey, who do all the whining. This suits the government just fine, as putting the blame on the exchange rate sways attention from the real issues, the structural problems such as innovation, infrastructure, human capital, and the institutional set-up that the two papers are pointing to. To give just one example, Rauf Gonenc highlighted during the panel discussion that Turkey has the most rigid labor market among OECD countries.

But then again, we live in a country where the so-called experts criticize an imaginary high interest-low exchange rate policy and support the obsolete industrial policy of handpicking sectors by the government, arguments that surfaced not only in last week’s conference but also in the competitiveness conference I wrote about last week. If we cannot get the basic concepts right, what hope is there for scientific policy discussion?

All this leads to my own whining: Cry, the beloved country...

Weekly Hurriyet Column: Competitiveness for a way out

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. Another week without a cheesy movie title... Other than that, I do not have much to add to this column, except that I somehow did not like this article. I have no idea what's wrong, and I think I hit a couple of important points, but they all somehow did not fir together well. Anyway, if you know what's wrong with this column, please let me know...


I have to renege on my promise to write on Turkey’s 2010 budget in favor of a convention I attended on Friday, which is much more relevant for Turkey’s long-run prospects.

The Competitiveness Congress, organized jointly by the Federation of Industrial Associations, or SEDEFED and the TUSIAD-Sabanci University Competitiveness Forum, or REF, has been held annually since 2005. This year’s conference, titled Way out the Crisis: Competitiveness, consisted of the presentation of a report on Turkey’s position in the latest World Economic Forum, or WEF, Global Competitiveness Report and introduction of a new database to compare the country’s competitiveness with 48 peers using standard international trade competitiveness indices, in addition to a couple of panels.

The authors of The WEF Global Competitiveness Report 2009-2010: An Evaluation for Turkey have to be commended for undertaking the tedious task of looking at almost all the possible combinations of Turkey’s rankings in different competitiveness indicators and benchmark countries. The result is a comprehensive laundry list of Turkey’s comparative strengths and weaknesses, but not much more.

The problem with such lists is that they give no sense of binding constraints. In other words, given that the government needs to prioritize with its limited resources, it should know where it will get the biggest bang for the buck in the shortest time. Luckily, Fusun Ulengin, the principal author of the report, did mention where she thinks the binding constraints lie: Human capital, especially education & women’s participation, and innovation were also highlighted in the panel discussion following her presentation.

Incidentally, both areas have already been underlined in recent World Bank labor market and education reports as well as the Bank’s Investment Climate Assessment, which precisely tried to identify the private sector’s binding constraints. While it might be self-assuring to reinvent the wheel now and then, we have to go a step further with policy recommendations. Without a prescription, you’ll just have to cross your fingers that the binding constraints just disappear by themselves.

But even then, I would doubt that the government would be willing to swallow the pills, as it is anything but a hypochondriac. Or at least, that’s the impression I got from Competition Board’s chief advisor Erdal Turkkan during his question-cloaked criticism of the report. His putting the blame for Turkey’s mediocre competitiveness to lack of perfect competition, while not supported by WEF data, could be deemed valid to a certain degree. It could also be forgiven as a reflection of the institution he is affiliated with.

It is also easy, at least as an economist, to sympathize, and even concur, with his criticism of panelist recommendations that the government should support certain sectors- the so-called Asian model, which was applauded and studied as a role model, until the Asian crisis exposed the inefficiencies of such managed industrial policy. It is therefore a twist of fate that another crisis has put the Asian framework back in vogue globally, and the panelists have just been following this international fad.

On the other hand, Turkkan’s criticism that such rankings look at the macro environment without considering sectors and firms is definitely valid. In response, Fusun Ulengin has dislosed that they are holding discussions to measure competitiveness at the sectoral level, which I am looking forward to.

But Turkkan is missing the subtle point of these rankings: Once governments provide the cultivating ground for competitiveness with the right environment and incentives, competitiveness will flourish.

Weekly Hurriyet Column: Jobless and joyless recovery

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. For a change, there is no cheesy movie reference this time around. As for the column, the unemployment data that were disclosed a week after my column revealed that I had in fact been too optimistic on the timing of the turnaround in unemployment, which did not wait for year-end to get started...


The debate on the shape of global recovery has been going on unabated for some time, with everyone choosing their favorite letter, leading some to declare, more than three decades after the Fab 4, that all you need is LUV.

This scenario of an L-shaped recovery for Europe, U for the United States, and V for emerging markets is definitely plausible. But more importantly, recent data, while definitely not strong enough to justify markets’ performance, have made it less likely for a W-play. In fact, last week’s October Purchasing Managers Indices, or PMIs, are suggesting a gradual recovery in major developed countries irrespective of the shape of recovery.

While markets tend to give much more weight to PMIs as a leading indicator than proven by empirics, if they’ll be taken at face value, the only country defying trend is Turkey, where the index has been slowly creeping down after registering sharp rises in the second quarter, hinting that the recovery has been losing pace. Unfortunately, the Turkish PMI has been not only consistent with the Central Bank’s own real sector confidence index, but also confirmed by actual data.

However, a glimmer of hope has come recently from trade statistics. Not only there is a considerable increase in imports of consumption goods in the September figures, preliminary October data from Turkish Exporters Association has shown the first yearly post-Lehman rise in exports. Even more importantly, imports contracted less than exports for the first time since trade dried up after the Lehman collapse, a strong indicator that things are going back to normal.

But these positive signs should not lead to overjubilation: For one thing, the increase in consumption imports is mainly in autos, as consumers scrambled to take advantage of the expiring tax reductions. As for the improvement in preliminary exports, the rise looks less impressive once you notice the low base. In this sense, this week’s data releases will help to clear up the picture a lot.

Friday’s September trade indices will provide a better indicator on the normalization in trade, whereas today’s September industrial production and Wednesday’s October capacity utilization figures will show if the stir in imports has spilled over to domestic production. Tuesday’s CNBC-e consumption indices for October, on the other hand, will reveal the health of the consumer.

Even if all of these data confirm the Turkish recovery, a jobless recovery is bound to be joyless. In fact, I see the recent employment statistics, which have been showing seasonally-adjusted unemployment falling for two consecutive periods, as misleading. For one thing, the decrease in unemployment is partly due to the decrease in the rate of extra workers entering the labor force.

This added-worker effect, which was boosting unemployment earlier in the year, is likely to stay unemployment-friendly in the next release on November 16 and even for a couple of months more, after when it could reverse without strong growth. A shift out of agriculture, which has been seeing bloated employment figures for the past year due to the crisis, will only add insult to injury.

Interestingly enough, the employment side of the Turkish crisis has got little attention from the government so far. Despite having the highest unemployment rate in the G-20, Turkey is one of the eight countries in the group that does not have any labor measures in its 2009 fiscal stimulus program, according to a recent report from the IMF. With elections looming, I wonder how long this can go on.

In fact, the unemployment picture is yet another reason why the 2010 budget looks detached from reality. This is where I will pick up next week.

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…